“Just selecting a strong group of high-ranking executives doesn't cut it,” say PwC and Ariel Investments chairmen.
By Tim Ryan and John W. Rogers
Mellody Hobson, co-CEO of Ariel Investments and vice-chair of the board at Starbucks and JPMorgan, has consistently talked about greater opportunities for minorities, women and other underrepresented employees at all positions.
“When I’m in boardrooms, I seek to ask questions,” she said in a 2018 TED interview. “And when asking questions, you put people in the position of having to respond, or at least to think. And so even if it’s not work, if you’re not in that hiring position, you might say, ‘Listen, I’ve noticed, wow, we’re attracting the same kind of people over and over again. What can we do to expand the opportunities?'”
When it comes to talent management, the traditional role of boards has been to provide oversight of the c-suite, including CEO succession. But many boards have recently realized that just selecting a strong group of high-ranking executives doesn't cut it.
The c-suite must be able to execute a successful growth strategy, which requires talented people and strong succession planning at all levels of the company.
With the lowest unemployment rate in the past 50 years and an environment of sweeping technological change that requires new skill sets; attracting, developing and retaining broad, exceptional talent is so critical to corporate success that it has begun to move onto many board agendas.
While diversity and inclusion (D&I) are one element of a talent management strategy, far-sighted boards recognize its growing in importance as a priority. Some of the reasons are obvious: workforce demographics continue to diversify. By 2045, many demographic experts predict the U.S. will be a “majority-minority” nation where non-Hispanic whites of all ages comprise less than 50% of the total population. And by 2020, for the first time, a majority of people under age 18 will be people of color.
There are shifts for women in the workforce as well. In 2018, women represented 46.9% of the U.S. labor force. Women also have earned more bachelor's degrees than men since 1982, more master's degrees since 1987, and more doctorates since 2006. Yet, there are only 33 women CEOs at Fortune 500 companies and 2019 was the first time that all of these companies had at least one female director.
In recent years, several extensive studies have demonstrated the financial benefits of a diverse workforce. These studies concluded that companies with greater ethnic/cultural diversity as well as greater gender diversity generate higher profitability than those that are less diverse.
Recognizing that progress on diversity and inclusion needed to move faster, a small group of CEOs came together in 2017 to form a coalition called CEO Action for Diversity & Inclusion. The CEO Action signatories pledged to change the cultures of their companies by holding difficult D&I conversations with employees, educating their teams about unconscious bias, and sharing best, and unsuccessful, D&I practices. As of 2019, nearly 800 CEO signatories have joined the coalition, from large and small companies, universities and nonprofit groups.
During its first two years of activity, CEO Action leaders found that cultivating an inclusive culture where employees of all identities are welcomed and able to reach their full potential was not just a c-suite issue, but also a board consideration. In 2019, signatories committed to engaging their boards of directors (or equivalent governing bodies) in the development and evaluation of diversity & inclusion strategies.
Not surprisingly, institutional investors are increasingly asking boards about talent management strategies, including diversity and inclusion. At the request of the Human Capital Management Coalition, a group of 26 institutional investors with aggregate assets of over $3 trillion, the SEC is considering requiring public companies to disclose their human capital management practices beyond employee headcounts currently required.
This rising tide of investor and other stakeholder pressures have encouraged directors to rethink talent management. Subsequently, directors are identifying the need for rapid improvement within their companies. According to the PwC 2019 Annual Corporate Directors Survey, only 16% of directors give their companies an “excellent” score for recruiting a diverse workforce, and 15% give the same score for developing diverse executive talent. The survey also finds that 83% of directors believe that companies should be doing more to promote gender and racial diversity in the workforce. These results reflect the need to build and strengthen inclusive company cultures that support retention and recruitment of diverse talent.
What can boards do to cultivate, incent and implement a culture of inclusion that engages employees of all backgrounds? They can start by prioritizing the issue at the board level. Companies need courageous board members who will drive the challenging conversations that lead to long-term cultural changes.
The board can also see to it that inclusion is inculcated into the culture by working with the c-suite team, especially the chief human resource officer (CHRO), to develop comprehensive training that impacts existing and future leaders throughout the company. Leaders must learn best practices in hiring, employee development, coaching, collaboration and all aspects of the business through an inclusive lens, including raising their awareness of unconscious bias. Through this approach, intercultural competence becomes integrated into daily leadership responsibilities.
Further, boards can support management to cultivate an inclusive culture beyond the employee base by requiring suppliers, including professional services, to demonstrate diversity in their workforce. For example, Exelon Corp., the Chicago-based Fortune 100 energy holding company reported that its high-margin spending with diversity-certified suppliers came to $100 million in 2017. By demonstrating that diversity includes suppliers, leadership sends a strong message to employees that diversity and inclusion are taken seriously throughout the business.
The PwC Governance Insights Center has identified five key actions boards can take to provide greater oversight over how their company develops and manages talent:
- Assign talent management to either the full board or a dedicated committee so everyone understands their roles and responsibilities. For example, nearly 20% of public companies have expanded the purview of their compensation committees to include leadership and talent management.
- Incorporate talent into board strategy discussions, such as requesting that management include a talent/D&I component in every new initiative presented to the board.
- Make talent management experience, including managing successful D&I programs, key selection criteria for new board members.
- Elevate the CHRO to a more strategic role and ask for regular updates. Some boards require their CHRO to present a talent review to the board once a year with updates as needed.
- Make talent management a key performance indicator for executive compensation. Establishing people-development metrics in areas like D&I encourages leaders to place greater focus on talent issues.
Creating a culture of inclusion is good for business and society. Boards, as the highest stewards of corporate operations and performance, must take action to provide management teams the resources to deliver on the promise of an equitable playing field to all employees and all stakeholders.
Tim Ryan is PwC U.S. Chair and Senior Partner; he is the co-founder of the CEO Action for Diversity & Inclusion. John W. Rogers, Jr. is Ariel Investments' Chairman, Co-CEO and Chief Investment Officer.