The U.S. stock exchange has won approval for a new rule that requires corporate boards to become more diverse. Now companies must implement that–and go beyond the numerical requirements and box-checking to create a thoughtful, purposeful solution.
After nearly a year of review, the U.S. Securities and Exchange Commission has approved a proposal from Nasdaq to enhance diversity and inclusion in company board rooms. The U.S.-based stock exchange will now require all listed companies to disclose board-level diversity using a standard template, to have at least two directors from underrepresented groups, “including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+,” or explain why they do not.
Although some disagree with the move, the arguments for advancing diversity and inclusion are now well-established. The question now is how companies can implement Nasdaq’s new guidelines so that they go beyond the superficial requirements and achieve meaningful culture change.
Nasdaq’s new ruling follows an increasing social commitment from private sector organizations to Diversity, Equity, and Inclusion (DEI). Many organizations have invested in aspects of DEI for years, and newly heightened attention to racial justice movements and the disproportionate effects of Covid-19 across the globe have shed light on the urgent need to invest more heavily and advance more quickly.
And yet, despite knowing the various benefits of DEI, businesses still struggle to achieve diverse representation at all internal management levels. This is especially true for boards of directors, which often draw their membership from former executives, an even more identity-monolithic pool.
Nasdaq’s proposition therefore is as significant as it is difficult. The recommendations offer initial guidance on diversifying boards that steers companies in the right direction, but they are not enough to diversify static and often homogeneous board environments. Boards are responsible to their shareholders, and therefore, to the customers and communities the organization serves, including their employees. Good governance must mitigate risk for all stakeholders while ensuring that the organization’s future is sustainable.
At a minimum, future sustainability and financial success demand representation, equity, and inclusion. For example, when the global pandemic posed unprecedented challenges and strained the viability of many organizations, a number of leaders developed effective, innovative solutions by leveraging diverse ideas, skill sets, and experiences. When done right, leveraging DEI for the board can unlock multiple benefits, including better decision making to inform core governance issues, being at the leading edge of environmental, social, and governance (ESG) issues, more equitable representation of shareholder and stakeholder needs, greater alignment with the company’s employee, customer, and supplier base, as well as dynamic skills, backgrounds, and perspectives to anticipate and respond to changes in market and consumer trends. The organizations that will benefit most from Nasdaq’s decision are those that see its recommendations not as tick boxes but as an impetus to achieve thoughtful and purposeful change.
Research in the field suggests that many boards have fallen short in their efforts to embed DEI to date. Here are three reasons why:
- Embedding DEI requires the board to identify meaningful reasons to seek diverse talent.
- Broadening professional circles requires tapping into different networks outside the reach of current board members.
- Going beyond tokenism and symbolism requires updating traditional thinking, adapting ways of being, and seeing value differently.
There is no quick win to address each individual challenge. But if we can step back and recognize how these challenges are related, we can appreciate the value of an interconnected approach. Below are a set of guidelines for creating and enabling high-functioning, representative boards.
Evolve our views of diversity to go beyond tokenism. But don’t forget the value in core social identities.
Too often, we limit our understanding of diversity to identity-based differences. When we do this, we overlook diversity’s true force: the unique and varied expertise and experiences that, when integrated, drive problem-solving, improve decision-making, and expand our creative potential. Nasdaq’s call for boards to increase the representation of directors of varied social identities may lead some boards to take a reductive and potentially tokenistic approach. But in embracing a broader view of diversity, which considers social identities alongside skills, experiences, thinking styles, interests, and values, boards can build a greater appreciation for cultivating inclusive cultures, where the value of diversity can be channeled towards the board’s ability to create value and responsibly govern their organisations.
Holding these three forms together — identities, experiences, and expertise — also enables us to step back and take a more objective view of what is missing and what is needed to cultivate a boardroom that is fit for the dynamic present and for the ever-evolving future. In doing so, we can protect the boardroom from the reductive grasp of tokenism and can help overcome the counter-productive sentiment that identity-diverse candidates are anomalous additions to a largely homogeneous board. This new approach helps us appreciate and leverage the collective dynamics, styles, and perspectives needed across the board to ensure long-term success.
Whereas Nasdaq’s guidelines nudge boardrooms forward by calling on them to tack on a member of an identity group not currently represented, there is an opportunity for us to do so much more. An expanded view of diversity can help boards strengthen their governance, avail themselves of the opportunity to better meet their obligation to all stakeholders, to stay at the cutting edge of environmental, social, and governance (ESG) issues, and to build a company that is fit for the future, rather than reflective only of the past.
Access board candidates with a wider variety of identities and experiences by expanding beyond our networks.
It’s no secret that boards of directors tend to be homogeneous in terms of race, ethnicity, sex, gender identity, sexual orientation. While board members may intend to recruit diverse talent, their networks are often comprised of people who share similar traits and backgrounds. What is missed when we stick with our limited networks, and what is gained by moving beyond them?
Many of the advantages of expanding our professional ecosystems are intuitive: help boards create a larger, more diverse pool for CEO succession and board recruitment, better meet responsibilities to shareholders and other stakeholders, better adapt to a shifting ethical and commercial context for investors and for customers, and better achieve the known organizational and commercial benefits of more diverse, more representative, and more inclusive teams. Building a culture of inclusion is critical because, as research in the field has shown, team effectiveness rests heavily on cohesion and constructive challenge, which in turn enhances board effectiveness — and board effectiveness is linked with corporate financial performance.
To break through affinity bias, board members must work to access and leverage circles outside of their current reach. Boards can achieve this by working proactively to create new relationships beyond those that are already familiar. Boards can also accomplish this goal by engaging organizations specifically designed to help meet their diversity objectives, such as Women on Boards, Board Ready, and the Latino Corporate Directors Association.
Search firms can be a useful partner, particularly boutique organizations that are owned and led by Black, indigenous, and other people of color (BIPOC). Larger search organizations are likely to replicate the in-network identity dynamics that already exist within most big companies, and writ large, the search industry is not without its own problems. For instance, many search providers receive incentives to place candidates, which means they approach the placement with a personal, vested interest. Search firms also tend to manage risk by over-valuing relevant work experience and particular educational credentials while under-valuing potential and lived experience — an approach that greatly narrows the pool of prospective candidates. Firms that offer these services can help an organization achieve its goals, but leaders, boards, and management teams must also work proactively to expand their own professional ecosystems.
Cultivate genuine commitment by defining our purpose.
Stakeholder capitalism suggests the notion of “good governance” continues to expand to include a wider variety of stakeholders — not only shareholders, but also employees, customers, communities, and more. These various stakeholders are assessing whether organizations and the Boards that govern them maintain alignment between their announced aspirations and their actions. DEI is becoming a core lens through which this alignment is viewed. Incongruity between these two can raise questions about the organization’s integrity and the sincerity of their commitment.
For example, despite what may have been good intentions on the part of companies seeking to respond to the platform of the Movement for Black Lives, the pressure to be “seen” to act led many organizations to take fragmented and often misinformed actions around racial equality. Where a strong sense of purpose and accountability were informing actions (as evident in the response from Ben & Jerry’s), that motivation was apparent — and its absence was equally apparent when these core elements were missing (such as the more scrutinized approach taken by Amazon).
What can boards learn from this? Boards that wish to make and uphold a genuine commitment to inclusion, equity, and diversity must cultivate a shared purpose that considers how and why their intentions may not match their actions. Introspecting with humility and admitting shortcomings is not a sign of failure; doing so demonstrates a willingness to reflect and a commitment to move forward with a revised plan of action. Embracing vulnerability and transparency creates clarity for all stakeholders and enables board members to effectively enact meaningful and lasting change in their efforts to attract, retain, and harness the known value of greater diversity on boards.
Editor’s Note (8/31/21): An earlier version of this article incorrectly reported that NASDAQ will now require listed companies to have at least two directors from underrepresented groups. The article has been updated to reflect that the new rule allows for companies that do not have that number of diverse directors to explain why they do not.