The Importance of Diversity on Corporate Boards

This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.

If there is one area where I would like to see improvement in the corporate governance world, it has to be at the corporate board level. While companies are expanding internal compliance programs, companies fail to take a hard look at their own corporate board performance beyond rote and well-established self-assessment models.

Corporate boards have to be held accountable for their performance and commitment to compliance.  If you see a company faltering in the compliance sphere, much of the problem can be attributed to board-level failures to exercise proper oversight and monitoring functions.

Given the talent level of board members, you would expect to see greater effort to train and improve board members on how to exercise proper governance strategies. Instead, we have seen little change at the board level, steadfast legal protections that impose lax standards for performance and an unwillingness to replace old strategies with much-needed new approaches.

One area where we have seen little improvement in the United States is diversity of corporate boards. A number of other countries have adopted gender diversity requirements for corporate boards. In the United States, however, nominating committees continue to operate without any requirements except shareholder demands and public opinion.

The SEC is currently drafting regulations requiring that companies disclose the diversity of their respective corporate boards.  The proposal is still pending.  The SEC tentatively concluded that disclosure of such diversity figures would facilitate greater scrutiny of the issue by key stakeholders.

To support diversity requirements, researchers and commentators have cited conflicting studies. Some studies show that diverse boards improve overall corporate management and financial performance. Other studies do not confirm such a causation link.

One study on the positive side (here) found that companies with a higher level of racial diversity in the boardroom, defined by the number of minority directors and their degree of experience and influence over corporate initiatives, typically implemented stronger governance mechanisms and pursued more breakthrough product improvements. For a review of some of the inconclusive studies, read here.

Defining the benefits of board diversity is important. If the goal is to establish improved financial performance, studies should be designed to isolate this factor. On the other hand, if the goal is to improve corporate governance decision-making or enhance a the company’s reputational value by its commitment to diversity, then diversity at the board level may be an important focus.

From my perspective, diversity is important for a board, even if there is no causal financial performance link. A board should reflect the diversity of its senior management, its employees, its shareholders and its community. Diversity brings competing perspectives and is an important protection against groupthink at the board level. In this regard, diversity of board members ensures that decision-making perspectives are enhanced.

Diversity is also important to reflect a changing customer base and to promote employee morale. Multi-racial representation at the board level ensures that employees identify with board members who may provide an important perspective on certain issues and encourage consideration of additional viewpoints.

The United States has been reluctant to regulate board membership, focusing only on issues of independence and conflict of interest. Even in this area, government regulation and mandates have been fairly modest, especially in comparison to the European Union and other countries.