MCC: Let’s talk about how to define diversity when it comes to board directors. How has the definition evolved?
Bew: The definition of diversity is becoming more comprehensive. Demographic diversity in terms of gender, race, ethnicity or age is usually what first comes to mind. In addition to those factors, directors are thinking about other dimensions that help broaden the range of perspectives in the boardroom: for example, an individual’s talents or skill set, meaning his or her experiences in business, as a volunteer or in other leadership roles. So, the definition incorporates both components: demographics and experience.
MCC: What is the board’s role in diversity initiatives?
Bew: It comes down to the fact that diversity of talent and skill sets, both in the boardroom and in different levels of company leadership, will help the organization keep pace with the competitive environment. Directors have roles to play on both counts: The nominating and governance committee, for example, is responsible for ensuring that the roster of directors is best suited to the task of advancing the company’s strategic direction, and that process includes paying attention to diversity of both demographics and experience. Boards also oversee what management is doing in terms of talent and leadership development activities. Does the company have a strong and appropriately diverse human-capital strategy with multiyear talent pipelines across multiple levels of the organization?
MCC: What are some effective practices for recruiting and retaining diverse board members?
Bew: Successful boards are finding ways to cast a wide net for director talent. They’re looking beyond the typical specs for a director – things like CEO or CFO experience – and starting to look at rising stars who are perhaps divisional or regional leaders of large companies. Especially these days, many boards want folks who have run overseas business units to get a global perspective, or they’re looking at leaders of large nonprofits or individuals with a military background. The common elements are the ability to cope with complexity and change, to lead people and to be comfortable operating on a national or global scale. These individuals may not have prior public company board service, but that shouldn’t be a deal breaker because most boards already have plenty of experienced directors who can be great mentors for newer directors.
In terms of retention, for any new director – not just the diverse candidate – it’s important to have a well-developed on-boarding program and create a path to success for new directors, especially with nontraditional candidates who may be newer to the boardroom. In fact, we’ve heard from a few long-tenured directors about an interesting practice that involves matching up a new and particularly nontraditional board candidate with a highly experienced director. The two directors will go to conferences or a director education program, experience the program together and then discuss their impressions afterwards, essentially in real time over dinner or breakfast the next day. We think this approach is very interesting.
MCC: A lack of board turnover is often referenced as an obstacle to recruiting new and diverse boards. What are some approaches that can help create more turnover?
Bew: NACD’s Blue Ribbon Commission Report, entitled “The Diverse Board: Moving From Interest to Action,” makes recommendations on this issue, the main one relating to tenure-limiting mechanisms, such as age limits or term limits for directors. Other examples are policies that require directors to resign if their professional status changes. The BRC report recommends that boards review their tenure-limiting mechanisms to see if they’re still fit for purpose or if they need to be updated.
Another approach is to use the assessment and evaluation process to identify skills gaps on the board inform director succession planning. At NACD, we’re also seeing an increased emphasis on individual director evaluations. According to our most recent director survey, 42 percent of public company boards are using them. That’s still less than half, but the number has been growing, and we anticipate it will to continue to rise.
MCC: What are some of the risks of not pursuing a diverse culture on boards and within corporations? Have you noted any red flags that companies should be on the watch for?
Bew: The answer to the first question really comes down to business risk and its flipside: opportunity. In the U.S., we’re seeing a rise in what some commentators are calling the “majority minority” economy, and we are tracking this trend in conjunction with our Directorship 2020 Initiative, which is looking at global mega-trends, with demographics being one of them.
Let me explain. Census data predicts that by 2050 there will be no single racial or ethnic majority population in the U.S. Add to that the massive buying power minorities currently have – an estimated $3 trillion a year. Latinos account for nearly half of the increase in U.S. consumer spending growth and Asians for about 20 percent of that growth. African Americans alone have about $1 trillion of buying power according to some studies, and they start their own businesses at a much higher rate than the national average. Age demographics is another driver of change: according to some studies, retiring baby boomers could account for about 40 percent of Americans leaving the workforce in the coming years.
These trends will have a massive impact on the makeup of the corporate employee base and customer base. Of course, other major global markets, such as Asia, are experiencing their own demographic shifts with similarly-huge implications. So the broad answer is that a company’s ability to remain competitive will depend on how well they can anticipate and take advantage of all these trends, and again, there’s both an opportunity and a risk there.
As far as red flags are concerned, board turnover is definitely one metric. How frequently are vacancies coming up on your board? That’s something that we track at NACD in our annual governance surveys. Just to give you some context, in 2007, less than half of boards told us that they had added or replaced a director in the preceding year, but by 2014, that number had risen to nearly two-thirds, and 31 percent told us that they had replaced or added at least two directors. So it would be a red flag if a board were to look at its own vacancies and see few or no opportunities coming up to change its composition.
Another indicator is the organization’s leadership pipeline and what that looks like. The board can ask management to report on the demographics of high-potential candidates. Is the company having success in attracting, retaining and developing a truly diverse pool of next-generation leaders, and if not, why not? And here I’ll refer to another of NACD’s Blue Ribbon Commission Reports, this one on the board’s role in talent development oversight. The report recommends that boards engage more deeply in understanding what management is thinking with respect to future generations of company leadership. This engagement involves asking questions that go beyond board leadership and target succession planning for the CEO and the C-suite.
MCC: You lead NACD’s multi-stakeholder initiatives, including dialogues with institutional investors. What questions are investors asking directors about boardroom diversity?
Bew: Investors are focusing on a set of issues that are being placed, these days, under the umbrella of “board refresh” practices. We’ve discussed many of them: board composition, director tenure, board evaluation processes, the skill sets of individual directors and more. As one investor told us, these are observable indicators that can help shareholders get a feel for the board’s culture and the company’s priorities. Investors want to see evidence that directors are taking a strategic approach to decisions about board composition and succession planning, including the diversity component. In fact, to help answer those questions, many boards are starting to use the proxy statements to provide additional details to investors on these issues.
MCC: How is success in diversity measured at the board level? Do you see corporations moving towards self-initiated quotas?
Bew: Success will look different for each board depending on its starting point and particular objectives. Having said that, from a very broad standpoint, we’ve seen some positive indicators, again based on our annual governance survey data. Between 2007 and 2014, there’s been a 10 percent increase in the proportion of boards with minority directors based on ethnic or racial background and a 12 percent increase in female directors.
We don’t hear much about self-initiated board quotas, though it has taken hold in some countries. Many different groups and initiatives are working to raise awareness and drive action in diversity efforts. Some focus on women, while others focus on specific ethnic or minority groups. Some are more industry based, others are regional. There are national and global groups. We’re seeing more and more directors as well as investors and other stakeholders get involved in these groups.
MCC: How does NACD incorporate “diversity in the boardroom” into its educational programs?
Bew: When we published the BRC on The Diverse Board in 2012, we said that boards have an important role and a responsibility in diversifying their own membership and in making sure that management does the same with the company’s leadership and workforce – all in order to stay competitive. That report served the purpose of putting the proverbial stake in the ground, but since then, we’ve found that diversity initiatives need to be an ongoing conversation.
In terms of director education, our Director Professionalism and Master Class programs both have modules that focus on board composition and building the 21st century board, and diversity issues are discussed in detail. And there is similar programming at NACD’s local chapter level.
I already mentioned NACD’s Directorship 2020 Initiative which focuses on raising director awareness about seven major global forces, or mega-trends, that affect companies of all sizes and industries everywhere. Demographic change is one of those seven forces: we are looking at what boards need to know about how that change is transforming the corporate workforce and consumer base. Finally, we will convene a symposium on diversity this year in conjunction with our annual Global Board Leaders' Summit in September.
MCC: What is your best advice for boards looking to become more diverse?
Bew: It really goes back to the idea of casting a wider net. Nominating and governance committees can require that a minimum number of nontraditional or diverse candidates be considered in the next director search. Search firms are definitely there to help, and boards should be demanding customers as far as that goes. We certainly encourage it in the boards we work with on director searches. Boards also need to hold up a mirror to their own culture. If there’s low tolerance for different or dissenting points of view in the boardroom, or if individuals with nontraditional backgrounds aren’t made to feel like they’re truly part of the boardroom team, then it’s going to be very challenging for a board to move past a simple verbal commitment in support of diversity to making real change happen.
Published June 3, 2015.
