Jump Start Diversity at The Highest Level - The Board

Jump Start Diversity at The Highest Level – The Board

by Crystal E. Ashby and Justina Victor

The Executive Leadership Council’s Institute for Leadership Development & Research aims to strengthen the talent pipeline of black leaders, providing toprate leadership programs that focus on individual growth at different career levels.

DDIVERSITY HELPS ORGANIZATIONS reap unmistakable competitive advantages. Everything from increases in innovation to financial performance to building confidence in a brand has been linked to diversity gains. And it’s clear that the closer a company’s leadership gets to diversity goals, the more in-touch with its own market it gets. Diversity helps companies stay ahead of changing trends, too. It turns out that the companies with the most diverse leadership are the most agile and best able to adapt to new pressures like severe talent shortages and new technologies that change the way business is done.

So why does the U.S. still lag on the global stage when it comes to diversity at the highest levels of corporate leadership? And how can U.S. businesses change practices that keep underrepresented groups out of the C-suite? The answers to these questions may be just beginning to emerge. But one thing is clear: for the U.S. to maintain a competitive edge in the global economy, the nation’s leading corporations must respond to mounting investor, legislative, and public pressure to jump-start diversity at the highest level – the boardroom.

On this stage, the question of black leadership – who will lead and how – is timelier and more essential than ever. Current events underscore the societal role board leaders play in keeping public interests accountable to race issues with the power of private business behind them. And black directors wield economic influence at the highest levels – shaping the CRYSTAL E. ASHBY is the interim President and CEO of The Executive Leadership Council JUSTINA VICTOR is a senior research manager of The Executive Leadership Council

policies that guide how companies create opportunities for diversity in the workforce, how their buying power supports minority-owned small businesses, and how young black executives are trained and prepared to step into new leadership positions.

The good news: corporate board diversity has made promising gains

Recent studies paint a picture of diversity and, specifically, black representation, or lack thereof, in America’s corporate boardrooms. It’s clear that the benefits of diversity are overwhelmingly positive. And the good news is that corporate board diversity is at an all-time high. Also clear is that collective gains for women and minorities have been minimal in recent years.

The slow rate of change in the board room – as illustrated by the low gains – is out of step with the mounting economic and societal pressure for diversity.

The need to implement new strategies and policies and overcome obstacles to the boardroom is a clear mandate for current, aspiring, and veteran black business leaders. Here we examine two studies that illustrate where blacks are gaining board seats, where they are not, and how we may influence the rate of board diversity gains by looking at global successes for other minority groups, like women. The Missing Pieces Report lays out a comprehensive baseline for diversity in Fortune 100 and 500 companies. Global Board Diversity Analysis focuses globally on women. The study provides a good overall picture of how the U.S. ranks globally on board diversity by gender and may have broader lessons on how all minority groups can successfully add board seats.

Despite progress on diversity levels, the percentage of total board seats held by blacks and other minority groups is still low.

In 2018, just over 16 percent of all board seats in the Fortune 500 were held by minorities, including blacks, Asian/Pacific Islanders and Hispanics/Latino(a)s. 1

Black board members make up the largest minority group by race on the Fortune 500. Across the Fortune 100, they hold 136 board seats which represent 11.1 percent of all the board seats by race and ethnicity (compared to 54 seats and 4.4 percent for Hispanics/Latinos and 46 seats or 3.8 percent for Asian/Pacific Islanders). 2

The Missing Pieces Report: The 2018 Board Diveristy Census of Women and Minorities on Fortune 500 Boards, is a multiyear study published by Alliance for Board Diversity, collaborating with Deloitte for the 2018 Census. The Executive Leadership Council participated in the study as an Alliance Member. The 2018 Global Board Diversity Tracker is published yearly by Egon Zehnder, a firm that tracks gender diversity in boardrooms around the globe to explore why some countries are able to transform their boards to better represent the society around them. The study evaluates board data fron 1,610 public companies with market caps above seven billion euros in 44 different countries as of May 2018.

Across the Fortune 500, black executives hold 486 seats, representative of 8.6 percent of the total (compared to 213 seats and 3.8 percent for Hispanics/Latinos and 209 seats or 3.6 percent for Asian/Pacific Islanders). 3

Low turnover and lack of board experience are U.S.-specific problems that keep women, especially black women, out of the boardroom.

Although there have been overall gains in board diversity, on the global scale, progress remains very slow, aggravated by low annual turnover on boards in the U.S. 4

Boards continue to look for past board experience in new hires. Yet it’s a Catch-22 [by gender] because the female pool of candidates with past board experience falls so far short of the male pool, women who meet the current criteria are in great demand. 5

Black board members are the most likely to serve on multiple boards and, globally, more women than men hold more than one board position.

Black board members are more likely than any other group to occupy more than one seat, with the highest rate of individuals serving on multiple boards. This indicates that, rather than expanding the pool of black candidates for board membership, companies are pursuing the same individuals for these coveted seats. 1

According to Global Board Diversity Analysis (GBDA) research, 13 percent of women versus 10 percent of men hold multiple board positions globally within the group of 1,491 of the largest traded companies studied. 4

Black women and men within the Fortune 500 are seeing progressive growth.

Black board members see progress in securing and holding Fortune 500 board seats, consistent with overall representation of diversity in the Fortune 500 where 57.4 percent of boards have greater than 30 percent board diversity. 1

By gender, black women gained the most board seats within the Fortune 500, where they’ve added 32 new seats since 2016. Black men in the Fortune 500 gained 26 seats since 2016. 1

For women, and perhaps all minority groups, “critical mass” – three or more board members – is required for transformative change.

For gender diversity to have meaningful impact at the board level, representation by three or more women is required to reach the tipping point for change, according to diversity research on Fortune 500 companies published in Harvard Business Review in 2006. 6 The U.S. is far from reaching this “critical mass” despite being an early pioneer of diversity globally. 4

Achieving critical mass has been a result of consistent and coordinated action over a relatively short time. Globally, countries which have instituted ambitious board diversity quotas – meaning the government has mandated that they achieve a target percentage or risk legislative consequences – have experienced quick transformation in recent years. While effective, quotas are not the only successful solution, diversity gains can also be realized through concerted top-down efforts. 4

Despite stagnation, corporate diversity challenges on gender are becoming more common, perhaps opening the door for similar challenges on race.

“We are energized to learn that African American women are one of the two largest growing groups on boards as they represent an untapped leadership potential that corporations need to embrace,” said Skip Spriggs, former President and CEO of The Executive Leadership Council. “Learning that African Americans still hold the highest board recycle rates of all demographic groups is disappointing. This is not a talent issue, but an access issue since a wide pool of qualified African American candidates across all industries exists. Boards must cast a wider net and consider these experienced and skilled candidates for open board seats.”

Board stagnation creates diversity stagnation

According to the Missing Pieces Report, minority men and women have experienced only small gains since the Alliance for Board Diversity first started tracking Fortune 500 board diversity in 2010, up from 12.8 percent in 2010 to 16.1 percent in 2018. The total number of board seats increased during this time; there were 5,670 total board seats in the Fortune 500 in 2018, compared to 5,463 in 2010.

One hard-to-measure, but compelling reason for this stagnation may be as simple as “the way Americans think about board directorships,” said Carol Singleton Slade in an interview with Fortune magazine. 7 She leads Board Consulting Practice in the U.S. and also a member of Egon Zehnder’s Executive Management Committee. “There’s a cultural mindset in the U.S. that if you exit a board, it’s a sign of failure. There’s a lot of ego tied up in tenure on boards.”

Such anecdotal evidence is encouraging. Suggesting that increasing diversity is as simple as increasing turnover seems a straightforward answer to accelerating diversity in the boardroom. But there are several barriers unique to the U.S. when it comes to taking measures, like imposing term limits for board seats, that might create more fluidity.

Three Barriers to Fluidity: 1. Age and Tenure First, in countries where board term limits have worked to advance diversity, directors tend to be younger (in their mid-50) with a shorter average tenure (close to six years) than their U.S. counterparts, according

to the Financial Times, which published an August 2016 investigation using data from advisory group ISS Analytics, U.S. board members are on average more than a decade older (around age 63) with a tenure that is also close to a decade long (at 8.5 years) 8 .

These demographics could be shaping the American idea that board membership is a career capstone, rather than a stop along the way, and may be limiting the willingness of American boards to increase their turnover to create positive diversity growth rates.

2. Unstructured Removal Processes

Another dynamic – a reluctance to remove underperforming or ineffective directors – is limiting board turnover, according to a study conducted by the Rock Center for Corporate Governance at Stanford University and The Miles Group. 9

The group’s 2016 survey: Board of Director Evaluation and Effectiveness found that only 65 percent of boards have a process for removing ineffective directors, and 35 percent do not. In fact, for most companies the removal process is haphazard and dissatisfaction with it is high. Just under half of those surveyed (48 percent) believed their boards should have term limits to facilitate turnover. 10

3. Perceived Lack of Experience

Finally, while boards continue to cite a lack of prior board experience as a barrier to finding new, qualified directors, 4 evidence is emerging that minority groups, specifically women, may have different ideas about where to look for new talent.

According to the PricewaterhouseCoopers PwC 2016 Annual Corporate Directors Survey, a debate over whether there is a sufficient pool of qualified diverse board candidates to fill new board positions may represent a gender divide. “Virtually all female directors say there are sufficient numbers of such people, while only about two-thirds of male directors say the same. A contributing factor cited by some is a lack of diversity in the C-suite, where many boards look for potential director candidates.” 11

Boards tend to look for current or former CEOs as potential board directors. Within the C-suite, only five percent of S&P 500 CEOs are female, 12 and less than one percent of the Fortune 500 CEOs are black. 13 This under-representation of blacks and women limits the pool so boards need to look outside the traditional structure for new board talent. PwC

found that most board members don’t look beyond the boardroom for new directors. 11 Diverse talent exist below the CEO level, large nonprofits, academia, and military.

Nevertheless, boards are beginning to respond to changing dynamics, such as pressure from investors and calls for diversity, to use new methods for finding new directors. In 2016, directors surveyed by PwC said that investor pressure led to board composition changes, with 34 percent adding a younger board member, 46 percent adding a diverse board member and 61 percent choosing a new board member for a specific skill set. 11

PROBLEM: ■ Slow Turnover ■ Narrow perceived talent pool for new board hires

SOLUTION: ■ Use term limits to accelerate turnover ■ Look at succession planning as a catalyst for change ■ Reconsider prior board experience as a prerequisite for candidacy

“Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.” — Larry Fink, CEO, BlackRock

The benefits of minority representation on boards are well-established, but it may not be simple economic pressure that propels U.S. corporate leadership into a new age of rapid change when it comes to diversity. A combination of activist corporate governance and a renewed focus on succession planning may do more to dismantle the barriers to diversity than ever before.

In a January 2017 feature story, The New York Times asserts that “Corporate governance is playing a growing role within the broader ecosystem of corporate America.” 14 Along with that governance, the

article illustrates, comes a renewed challenge to corporations from their shareholders: address issues of diversity and the pay gap, and do something about the prevalence of old networks in the boardroom that result in “too much group think.”

Indeed, PwC’s 2016 annual corporate director’s survey found that “investors are also a factor in corporate governance changes. They are pushing for changes to board composition and capital allocation strategy— and are often getting their way.” 11

Disruptive technologies are also changing the business landscape, and demand for tech-savvy leaders could be a new driver for diversity. In the ABD/Deloitte report – Missing Pieces Report: Industry View, technology, media, and telecommunications (42 percent of companies within that industry) lead industries having boards with greater than 40 percent diversity followed by life sciences and health care (38 percent of companies within that industry).

In a 2017 study, Accenture examines women’s representation on the boards of more than 500 Forbes Global 2000 companies and finds that for women, technology experience is a steppingstone to the corporate boardroom. 15

Meanwhile the Korn Ferry Institute, the research arm of the recruiting and leadership development firm Korn Ferry, recommends that boards embrace the succession process as a best practice, putting in place a framework for identifying “diversity executives who are up-and-coming and several years away from being exposed to board opportunities.” 16

While pressures from investors, governance groups and even sitting directors shape the boardroom from within, several broader, external trends lay the groundwork for positive change.

Drivers of Improvement:

Awareness is growing of the importance of diversity on performance.

Pharmaceutical and financial services, two of the largest economic sectors with the broadest reach lead the DiversityInc. Top 50 Companies for Diversity list in 2019, continuing a multi-year trend. 17

High profile companies are displaying a commitment to diversity.

Minority directors comprise 24 percent of the boards of companies listed on the DiversityInc list of Top 10 and Top 50 companies, according to the DiversityInc Top 50 Companies for Diversity list, a survey of over 1,800 companies ranking them according to their commitment to diversity. 18

Shifting demographics are broadening the array of talent available to staff boards.

According to the 2010 census, United States’ diversity is growing. Hispanic and Asian populations have grown considerably due to higher levels of immigration. The black population totaled 38.9 million and represented 13 percent of the total population. 19

The number of minority-owned firms are growing.

According to findings from the U.S. Census Bureau’s 2016 Annual Survey of Entrepreneurs, the number of minority-owned firms in the United States increased by 5.9 percent in 2016, to a total of 1,054,575 from 996,248 in 2015. Those firms are also growing, employing 8.7 million workers, with a total annual payroll of $280 billion, and tallying $1.3 trillion in total annual receipts. 20

Sarbanes-Oxley emphasizes merit-based board selection.

The 2002 law imposing stringent new regulations for independent directors outlined new credentials and required candidates to demonstrate proof of experience, education, focus, and board leadership skills. Making board leadership a regulated, formal affair shifts the focus from acquiring star personalities to acquiring star performers, a move that may be helping to level the playing field. 21

“The increase in boardroom diversity is encouraging and these changes have been linked to greater innovation, better financial outcomes, and increased transparency by Fortune 500 companies.” — Linda Akutagawa, chair for the Alliance for Board Diversity and president and CEO, LEAP (Leadership Education for Asian Pacifics)

Variety in ethnicity, age, gender, and especially experience and training is essential to help companies prevent the kind of groupthink, unchallenged consensus, and self-confirming bias that threaten performance.

As boards move away from the traditional pool of potential directors and begin to look in new places for leadership talent, corporations can take a direct role in creating the conditions necessary to accelerate diversity.

Organizations can take several actions to promote more diversity on their corporate boards:

1. Signal that they value diversity

A study cited by the Harvard Business Review found that company mindsets influence how they attract potential leaders from underrepresented groups. Companies that signaled that they had a growth mindset, or one focused on the development of abilities and talents are more trusted than companies with a fixed mindset, or one that communicates more rigid ideas about ability. 22

2. Rethink board composition

One way to create more diverse boards is to throw out the idea that CEOs and CFOs are the optimal board members. 4 Just 22 percent of the 2019 DiversityInc Top 10, and 22 percent of the DiversityInc Top 50 companies boast diverse senior management (Black, Latinos or Asians). And for all U.S. companies, their representation is only 15 percent. 17 These numbers illustrate the need to look beyond the highest levels of the C-suite for diverse talent.

3. Create a sustainable pipeline

As economic, societal and technological pressures push boards to look beyond traditional pools for new talent, developing diverse, boardroom - ready executives will become an essential part of long-term corporate stability. Boards globally need to start bridging the gap by applying their vision for diversity to middle and senior executive roles. Some do this by focusing on diversity in the C-suite, occasionally applying targets and linking CEO pay to diversity metrics. 4

4. Broaden their ideas around diversity

Narrow perspectives on diversity may be limiting for companies facing a critical need to broaden their ideas and understanding of the diversity discussion and how it fits in today’s complex business environment. Adopting wholistic goals for diversity, encompassing age, gender, race, and experience – will accelerate change faster than a focus on one demographic or group – by helping an organization break down the environment that limits diversity in the boardroom. 4

Notes:

1 – The Alliance for Board Diversity (ABD), Deloitte. (2018, February): The Missing Pieces Report. https://elcinstitute.org/elc/pages/RD2 2 – Ibid 3 – Ibid 4 – Egon Zehnder. (2019, February). 2018 Global Board Diversity Tracker. Retrieved from https://www.egonzehnder.com/global-board-diversity-tracker 5 – Ibid 6 – How Many Women Do Boards Need? https://hbr.org/2006/12/how-many-women-do-boards-need 7 – “1 Big Reason There Are So Few Women on U.S. Corporate Boards? Directors’ Egos,” Fortune Magazine (February, 2017). http://fortune.com/2017/02/08/board-diversity-men-ego-tenure/ 8 – “US board composition: male, stale and frail?,” Financial Times (August, 2016). https://ig.ft.com/sites/us-board-diversity/?mhq5j=e5 9 – The Rock Center for Corporate Governance at Stanford University and The Miles Group. (November 2016). 2016 Board of Directors Evaluation and Effectiveness. https://www.gsb.stanford.edu/faculty-research/ publications/2016-survey-board-director-evaluation-effectiveness 10 – Ibid 11 – PricewaterhouseCoopers. (October 2016). PwC 2016 Annual Corporate Directors Survey. https://www. pwc.com/us/en/corporate-governance/annual-corporate-directors-survey/assets/pwc-2016-annual-corporate- -directors--survey.pdf 12 – “Women CEOs of the S&P 500,” Catalyst. https://www.catalyst.org/research/women-ceos-of-thesp-500/ 13 – The Executive Leadership Council 14 – “A Rare Corner of Finance Where Women Dominate,” The New York Times. January, 2017. https://www. nytimes.com/2017/01/16/business/dealbook/women-corporate-governance-shareholders.html?mcubz=3 15 – Accenture. (2017). Tech Experience: Women’s Stepping Stone to the Corporate Boardroom? https:// www.accenture.com/t20170412T174533Z__w__/us-en/_acnmedia/PDF-29/Accenture-Tech-ExperienceWomens-Stepping-Stone-Corporate-Boardroom.pdf 16 – Korn Ferry Institute. (June 2017). Advance Planning: Long-Term Board Succession Gets Serious. https:// www.kornferry.com/institute/advance-planning-long-term-board-succession-gets-serious 17 – DiversityInc. (2019). The 2019 DiversityInc Top 50 Companies for Diversity. https://www.diversityinc.com/facts-figures/ 18 – Ibid 19 – The United States Census. 2010 Census. Retrieved from https://www.census.gov/newsroom/releases/ archives/2010_census/cb11-cn125.html 20 – The United States Census. 2016 Annual Survey of Entrepreneurs. https://factfinder.census.gov/faces/nav/ jsf/pages/searchresults.xhtml?refresh=t 21 – “How to Become a Corporate Board Member,” Forbes. August 2013. https://www.forbes.com/sites/ dorieclark/2012/08/13/how-to-become-a-corporate-board-member/#a9f89ca39710 22 – “How to Signal That Your Company Cares About Diversity,” Harvard Business Review. December 2013. Retrieved from https://hbr.org/2015/12/make-your-company-more-appealing-to-more-employees