Is representation of diversity on company boards impacting business performance?

Globally, there has been an increased focus on legislation to increase women representation in corporate boards. In the latest, the state of California has made it mandatory for all publicly traded companies to have at least one female director by 2020. We do not have to look overseas for examples - in India, SEBI made it mandatory for every company to have at least one woman director.

Now that this trend is shaping up globally, the question remains - what is its impact. Is representation of diversity in corporate boards sufficient to improve business performance? We refer to a recent research conducted by the academia from the Wharton School to answer this question.

About the research

Stephanie Creary, Mary-Hunter McDonnell, Sakshi Ghai and Jared Scruggs of the Wharton School of the University of Pennsylvania conducted in-depth interviews with 19 board members who hold board seats in a combined 47 corporations. The objective of the interviews was to understand how boards were benefiting from diversity.

Key findings of the research

The key findings of their research can be classified into the following points:

Give equal importance to social and professional diversity

Social diversity implies diversity on multiple aspects of demographics - Including sex, race, ethnicity, age. Professional diversity implies diversity of ideas and thoughts. Interviewees suggested that organizations were making progress on both these aspects. The research also found that there is an increased emphasis on promoting professional diversity by trying to recruit people from different professional backgrounds, i.e. not CEOs or Chairpersons.

“If you think my only value is the fact that I am a female, I can’t add value to your board,” said one of the interviewees.

At the same time, some female board members expressed concerns on being approached to be board members as a part of the “tick in the box” strategy. Some corporate boards would only reach out to them because they had to fill the quota of women representatives on their board and be compliant. “If you think my only value is the fact that I am a female, I can’t add value to your board,” said one of the interviewees.

Abandon tokenism 

The researchers also found that diversity in boardrooms is perceived more as a compliance question than an innovation question. The objective is to be compliant to the law, and corporate boards do not always realize the business benefits of having a diverse board. Hence the approach has been to find the most easily available candidates and fill the necessary positions. “I think that there’s so much conversation right now about adding more females to boards and everyone feels like, ‘Okay if we have ten board members, we should recruit three women.’ But I think we need to make sure they have the right skills. Idea diversity is also important,” said one of the interviewees. 

In India, after women representation in boards was made mandatory, there was an uptick in women representatives, but as a study pointed out - 25% of the women appointees are family members of company owners. Such an action may increase gender representation, but would not contribute to diversity’s benefits to the business. 

Change the recruitment approach of board members

The in-depth interviews revealed that the recruitment approach commonly used in  corporate boards is to reach out to the people accessible first. “Oh! we have an opening? Who do we know?” says one of the participants of the study explaining the most common interview approach. The challenge with this approach is two-fold:

• It reduces chances of diversity of thought and ideas as it is common to have like-minded people in your network. This would imply that the boardroom discussions won’t have a lot of diverse opinions emerging. This defeats the idea of diversity.
• It increases the chances of unconscious bias in decision-making when recruiting people to fill up board positions because in case of a ‘who-do-I-know-best’ recruitment strategy, the people with better personal relationship with the hiring manager are more likely to be considered. 

The best practice that some corporations have adopted include transforming their recruitment approach for board members. Explaining a unique strategy that one of her company’s boards is using, an interviewee explained, “a process of assessment where you periodically look at the skill sets that you would ideally want on the board, given the business it’s in, and then the skill sets you have, and you identify any missing. That gives you an opening to say, ‘Oh, okay, we need to look for somebody who understands manufacturing abroad.’ So, as long as we are going to go look for somebody, let’s use it as an opportunity to build some diversity.” This makes the process meritorious, and eliminates multiple possibilities of unconscious bias in candidate selection. What this approach also does is strengthen diversity of thought. 

The recruitment approach commonly used in corporate boards is to reach out to the most easily accessible people first

Turn egalitarian from hierarchical

The research suggests that making diverse boards effective would require them to have a more egalitarian culture - “one that elevates different voices, integrates contrasting insights, and welcomes conversations about diversity.” It is onto the CEO to create a culture of openness where all the board members feel comfortable to voice their honest opinions - this promotes inclusion - people from diverse backgrounds feel psychologically safe to share their diverse ideas. The board leader also needs to ensure the quieter members speak up - give them a chance to express themselves, seek their opinion, and eventually make them feel valued and comfortable.

As an organization, just having women on boards won’t be enough to benefit the business. Take the next step and make the most of it. Remember, just having diversity won’t yield business benefits, it is the boardroom culture that determines how well can a diverse board discharge their duties.

Note: The interviewee quotes have been taken from the article published by the researchers in the Harvard Business Review.