Board composition is a fundamental area that greatly concerns investors, both private and public. Board diversity has been a hot topic for several years. Supporters believe a diverse board significantly reduces blind spots and biases.
Every board takes its own journey and evolves in a different way. The composition of the board is something investors are particularly interested in and they want to know how boards and nomination committees are thinking about the composition of the board; the experience and qualities that they would add to the board, and exactly how they would acquire this. It might be that your board fails to reflect adequate diversity, however, if investors believe this impairs your effectiveness, then they’ll act on that. There has been a surge in shareholder resolutions against companies that fail to adequately diversify their boards, as seen here by the shareholder resolution against retailer Urban Outfitters.
Board directors are in strong demand and the requirements placed upon them is rising, so meeting the board’s professional needs as well as achieving composition which reflects full diversity can be incredibly complex for nomination committees. Here we define diversity as a good balance of skills, genders, age, ethnicities, experience and psychological types. Diversity brings in more insights and opportunities. In a Forbes article on diverse boards, research from Ya-Wen Yang at Wake Forest University School of Business was featured (here). Yang and her colleagues looked at more than 2,000 publicly traded companies over a 13-year period. The research stated that corporations with more diverse boards of directors were less prone to take disproportionate risks and more likely to pay dividends to stockholders than firms with largely homogenous boards.
Policy Exchange encourages nomination committees and executive search companies to look outside the pool of traditional candidates. Appointment adverts should also encourage those who may not be traditional candidates to apply. For boards using executive search specialists, it is very crucial to request service providers to actively search for candidates with diverse backgrounds rather than using existing pools of candidates and companies must challenge executive search firms to demonstrate they have the knowledge and processes to deliver this diversity, as many do not.
Board refreshment is a critical function of the nomination committee and they should pay particular attention to board tenures, both at the individual level and in aggregation. Liftstream recently examined more closely the impact board refreshment could have on gender diversity and looked at the divergence occurring between the biggest companies and the small-medium businesses. Nomination Committees in our experience need external support to ensure they are purposefully addressing diversity as part of their broader activities to deliver board refreshment.
We have published research papers on the topic of diversity, as well as sector-wide engagement to tackle this issue, which we’d be pleased to share with you. Diversity can be a challenging issue, but we recommend it is tackled now.