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Over the last two decades, the proportion of female CEOs in S&P 500 firms has increased from less than one percent to five percent

Diversity, Equity, and Inclusion

5 strategies to rejuvenate momentum towards boardroom diversity

Published 25 January 2024 in Diversity, Equity, and Inclusion • 6 min read

As companies grapple with economic uncertainties, the progress towards more inclusive boards is slowing down. Broadening the talent search and investing in training programs are crucial for redressing the slide.

In recent years, there has been a noticeable shift in the composition of corporate boards, with more women and minority candidates assuming pivotal roles. However, as businesses grapple with economic uncertainties, the momentum towards more inclusive boards is slowing down, necessitating the implementation of proactive strategies to maintain progress.

One significant concern is the reversion to the familiar pattern of appointing new board members who are former CEOs and CFOs, leading to a smaller pool of women and minorities. Several destabilizing events, including the devastating Israel-Hamas conflict and Russia-Ukraine war, coupled with high inflation, have contributed to a decline in boardroom diversity in some major economies.

A new report from the executive search firm Heidrick & Struggles exposed the trend in the US for declining board enrolments. Last year, the percentage of new board seats in Fortune 500 firms filled by women dropped from 45% to 40%, while seats for racial or ethnic minorities decreased from 41% to 34%. Simultaneously, there was a surge in the number of ex-CEOs and ex-CFOs taking up board positions.

The situation is not unique to the US. The UK, for instance, witnessed a significant drop in the proportion of female and minority ethnic candidates appointed as non-executive directors by large listed companies. According to recent data from headhunter Spencer Stuart, last year, the percentage of non-executive positions occupied by women declined from 60% to 51%. Moreover, individuals from ethnic minority backgrounds represented 15% of non-executive board appointments, the lowest percentage since 2020.

The paradox of success

Ironically, corporations have, in some ways, become victims of their own success. The declining diversity on boards can be partly attributed to the considerable strides made in recent years. This progress was largely propelled by gender quotas, reporting requirements, and voluntary targets.

For example, numerous companies strived to achieve the goal set by the UK government-commissioned Parker Review. It aimed to have a minimum of one minority ethnic director in FTSE 100 companies by the end of 2021 and in FTSE 250 companies by the end of 2024. However, with most companies achieving this target, the momentum has now slowed.

An additional problem is that economic uncertainty or financial distress can lead companies to postpone or cancel board appointments to conserve resources until the financial situation stabilizes. This leaves less room for new, more diverse directors to come in.

Moreover, during periods of uncertainty, board appointments are often made to address specific skills gaps. The need for expertise in areas such as technology and cybersecurity is crucial to safeguarding companies against data breaches. Unfortunately, these industries grapple with a lack of racial and ethnic diversity and gender imbalance, further compounding the issue of homogenous corporate boards.

“Economic uncertainty or financial distress can lead companies to postpone or cancel board appointments to conserve resources until the financial situation stabilizes. This leaves less room for new, more diverse directors to come in.”
This decline in boardroom diversity has several potential consequences. One of the most significant is the lack of role models from underrepresented groups who offer visible proof that individuals with diverse backgrounds can succeed and flourish within an organization. Additionally, role models often serve as mentors or sources of guidance for others within the company, providing invaluable insights, advice, and support. To safeguard and rejuvenate the momentum towards boardroom diversity during uncertain times, companies can adopt five proactive strategies.

1.     Diversify the talent search

First, companies should proactively search for new talent beyond traditional corporate roles. Industry conferences and events can be valuable platforms for identifying diverse individuals interested in board positions. This requires understanding what would attract minority candidates to boardrooms in the first place. Board positions, while often well-compensated, may not always be considered attractive because board members can be held personally liable for actions or decisions made on behalf of the company. Therefore, serving on a board should be rewarding beyond financial compensation. Companies must strive to make board roles fulfilling and worthwhile for potential candidates. This can be achieved by communicating how your company is honoring its legal duties. Moreover, leaders and other board members can outline the results achieved so far as well as the goals for the future.

2.     Expand networks beyond company borders

It’s also important to establish networks that extend beyond the confines of the company itself. External candidates can play a crucial role in improving diversity within corporate boards. That is because outside directors are less likely to have conflicts of interest, and more likely to bring a new and unbiased lens relative to inside directors. Outside members may have more objective decision-making processes and more creative solutions to a myriad of business problems. But while these candidates can make significant contributions to diversity in the boardroom, an inclusive and thorough nomination and selection process should identify the most suitable individuals for board appointments, regardless of their internal or external status.

3.     Avoid tokenistic appointments

Indeed, one pitfall for companies to avoid is making the wrong appointments. Some companies might make tokenistic hires, adding minority candidates to the board who are not necessarily the most qualified. Another pitfall is cronyism, which can result in unqualified individuals holding positions of influence within the board, leading to potentially poor decision-making or oversight.
Companies that boast diverse boards are often found in industries where there is a higher propensity for diversity at all levels of the workforce, such as the health and pharmaceutical sectors
To mitigate these problems, companies should prioritize transparency, accountability, and best practices in corporate governance, selecting board members based on their qualifications, experience, and ability to serve the best interests of the company and its shareholders.

4.     Invest in training programs for rising stars

To reap these rewards and cultivate a pipeline of diverse board members, companies can create training programs designed to groom rising stars from diverse backgrounds. These programs, whether run internally or externally, equip future board members with the skills, knowledge, and experience required to serve effectively on corporate boards. In particular, participants learn to identify and assess legal, operational, and strategic risks and develop strategies for risk mitigation. Moreover, given the limited number of C-suite positions currently held by minority candidates, companies should expand their recruitment efforts beyond traditional corporate roles, such as CEO and CFO. Academics from law or business schools, for example, can make excellent board members. They often bring deep expertise in specific fields, analytical skills, independence, and objectivity but a lack of practical experience and time commitments can be potential drawbacks. It’s essential for both the academic and the company to assess the fit.

5.     Choose the right business partners

Additionally, companies that boast diverse boards are often found in industries where there is a higher propensity for diversity at all levels of the workforce, such as the health and pharmaceutical sectors. This inclusivity ripples through their supply chains, benefiting suppliers, buyers, existing rivals, potential rivals, and various stakeholders. However, women and minority-owned firms will need to use “soft power”, or subtle persuasion, to manage relationships with larger partners. Therefore, choosing business partners wisely can play a pivotal role in fostering diversity. Finally, corporations have the power to use their voice to advocate for positive change. When celebrities and politicians endorse diversity, it draws attention to the issue and catalyzes progress. This will be crucial, as maintaining and furthering diversity on corporate boards is not only a matter of ethical responsibility but also a smart business decision. Research shows that more diverse boards can lead to better decision-making, increased innovation, and improved overall performance, ultimately contributing to the company’s competitive advantage and long-term success.

Authors

Siri Terjesen

Siri Terjesen

Associate Dean, Phil Smith Professor, & Madden Center Executive Director

Siri Terjesen, Associate Dean, Phil Smith Professor and Madden Center Executive Director at Florida Atlantic University, holds a Ph.D. in Entrepreneurship & Strategy (Cranfield University) and a rich academic background. Her impactful research, comprising over 65 articles, 23 chapters, and awards for teaching excellence, reflects her significant contributions. Beyond academia, she excelled as a management consultant and international ultradistance runner.

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