What is the impact of board diversity on corporate performance?

Companies worldwide are increasingly recognizing the importance of having a diverse board of directors. It is the practice of having people from different backgrounds, with varying experiences, perspectives, and skills on company boards.  Board diversity means having members who represent gender, ethnicity, nationality, age, education, and professional backgrounds. Having a diverse board is a sign of a company’s commitment to inclusivity and social responsibility. The objective of this article is to explore the impact of board diversity on corporate performance.

Understanding board diversity

Corporate boards comprise of experienced executives, politicians, and independent experts who provide advisory and governance services to a company. Board diversity is all about ensuring that people from different backgrounds are represented in these positions. Some of the attributes that define board diversity include:

• Gender diversity – This refers to the presence of both men and women on a company board.
• Ethnic and racial diversity – This refers to the presence of individuals from various ethnic and racial backgrounds on a board.
• Geographic diversity – This refers to the presence of individuals from different geographic regions on a board.
• Professional diversity – This refers to the presence of people with different professions and skills on a board.
• Educational diversity – This refers to the presence of individuals with varying educational backgrounds such as degrees in law, accounting, marketing, and others.

The benefits of board diversity

Board diversity is critical to corporate success for several reasons. Let us examine a few benefits.

1. Enhanced decision making
   Diversity in the boardroom provides the opportunity for greater intellectual diversity. When a board comprises of people with diverse experiences, perspectives, and expertise, it is more likely to consider various options, anticipate problems, and foster innovation. Diverse backgrounds and viewpoints contribute to a more dynamic and informed decision-making process.
2. Improved company performance
   Diverse boards enhance the credibility of the company and, thus, its overall performance. Companies that have diverse boards tend to perform better than those with less diverse boards. According to the findings from the McKinsey & Company’s study, companies with gender diversity on their executive teams were 21% more likely to experience above-average profitability. Another study by Credit Suisse found that in 2019, the Index of top European firms with more than 10% women in leadership roles outperformed companies with lower numbers of women in senior positions.
3. Better reputation and brand image
   Companies that have diverse boards are perceived positively by stakeholders. Investors view companies that have diverse boardrooms as socially responsible and ethical. This improves the company’s reputation and brand image and also attracts potential hires and customers.
4. Diversity supports compliance with regulations and legal standards
   Board diversity is often mandated by legal and regulatory requirements. For instance, under the Dodd-Frank Act, publicly traded companies are required to disclose data on board diversity. UK companies are required to annually report on the gender balance of their board, while many countries have provisions that require companies to have a specified minimum standard of diversity.

In addition to the legal aspects of diversity, financial institutions are starting to place more emphasis on the diversity of boards as part of their investment analysis. For instance, some asset managers are using Environmental, Social, and Governance (ESG) criteria to screen companies for investment portfolios.

Challenges to board diversity

Despite the proven benefits of board diversity, several challenges can hinder progress. Here are some of them:

1. Limited candidate pools
   Companies looking to bring more diversity to their boards can face a scarcity of qualified minority candidates. Many minority groups have limited representation in senior executive and professional roles, which can limit the number of suitable candidates for board positions.
2. The old boys’ network
   An old boys’ network is a social system where people in influential positions look to appoint those from their social or professional circles, regardless of their merit or qualifications. This can lead to a lack of diversity on boards and other senior positions and hinder diversity progress.
3. Resistance to change
   Old habits die hard, and the resistance or reluctance to change can hamper diversity efforts. Some people believe that the current status quo is sufficient and that there is no need to change it.

How organizations can increase board diversity

Organizations that aim to increase board diversity can take the following steps:

1. Review governance policies and practices
   The organization should review its governance policies and practices, assessing whether they foster diversity and inclusivity. The governance process should begin by looking at the current board’s composition and identifying areas to improve.
2. Expand the candidate pool
   Organizations that want to increase board diversity should broaden the pool of potential candidates. This can be achieved by seeking candidates from a broader range of backgrounds, using executive search firms targeting diverse candidates, and engaging with schools, universities, and professional organizations that foster diversity.
3. Educate and sensitize current board members
   Current board members can become advocates for diversity if they are knowledgeable in the subject of diversity and its benefits. Training can be provided to enlighten them about different cultures, races, religions, and other types of diversity, as well as to challenge unconscious bias and mindsets that may hinder progress.
4. Lead by example
   Organizations can lead by example, publicizing their commitment to board diversity, setting targets, tracking progress, and holding themselves accountable for achieving their diversity goals.
5. Create a diverse recruitment process
   A diverse recruitment process helps attract candidates from a broader range of backgrounds and viewpoints. Recruitment processes should be reviewed and analyzed to identify and eliminate gendered language and other biases in job postings. Also, interview panels should be diverse and represent various backgrounds.

Conclusion

Diversity enhances performance, drives growth, improves decision-making and enhances a company’s reputation. Board diversity is essential for the success of every modern company. It is also the right thing to do from an ethical and moral standpoint. The benefits of a diverse board do not come overnight, but with determination, commitment, education, and openness, they can be achieved. Corporate governance should be structured to support, encourage, and celebrate the value of diversity and inclusivity. Enhancing board diversity is not only the responsibility of the company but of all stakeholders, including investors, civil society, and governments.