Build diversity into your board's composition game plan.
In this edition of Directors & Boards, we help you reimagine your board by asking some fundamental questions:
• “What are the essential qualities of a good director?”
• “What ways can boards best leverage technology?”
• “How many boards can a director serve on before they start delivering diminishing value?”
One question we did not ask was: “How can diversity of race and gender best be guaranteed on corporate boards?” The state of California had a novel idea: They created a law.Coming on the heels of a 2018 law that required public company boards include at least one woman, Assembly Bill 979 sought to balance the scales for people of multiple races and ethnic groups as well as those who identify as gay, lesbian, bisexual or transgender. The bill, which required publicly traded California companies to have board members from underrepresented communities, was signed into law in 2020 by Gov. Gavin Newsom, who hailed the legislation as a landmark for racial equality.
One problem, however: The nonprofit conservative advocacy group Judicial Watch wasn't a fan. Believing that the legislation was unconstitutional because of the mandating of quotas, the organization filed a lawsuit in Los Angeles County Superior Court. On April 1, Judge Terry Green struck the law down, stating that it wasn't within the state legislature's jurisdiction to mandate “heterogenous boards” and calling the law “a bit arbitrary” in its description of the groups it hoped to benefit.
It was hoped that the law mandating racial, ethnic and LBGT diversity would mirror the success of the 2018 law mandating gender diversity. According to California Partners Project, a nonprofit working toward gender equity, since the 2018 legislation was passed, the number of women on California boards has more than doubled. It should be stated that Judicial Watch has filed a similar lawsuit looking to eliminate the California gender diversity law, while also working toward having the SEC abandon its approval of diversity laws. Perhaps the gender diversity law will eventually go the way of its racial and ethnic counterpart, but the former did have time to reap positive results. Not so much for the latter.
Regardless, here is an interesting quote from David A. Bell, co-chairman of corporate governance at law firm Fenwick & West on the decision and whether it will impact the thinking of public companies and their boards: “It has already set a benchmark for expectations by a lot of different stakeholders — institutional investors, employees, customers. The benchmark exists, and those expectations are going to carry forth in the world.”
That is an incredible summary and better than I could ever put it, but I will attempt to narrow it down to ten words or less: “We shouldn't need a law to diversify our boards.” Yes, despite the fact that this law is going away (or the fact that you may not serve on the board of a California-headquartered company and would not have been governed by it anyway), the quest for board diversity does not have to. That is because board diversity benefits companies in many ways.
A wide range of perspectives. When you have a board that features a broad variety of experiences, you enhance your possibilities for solutions to problems and strategies to attack company roadblocks. Diverse boards simply generate better ideas and thus have a greater chance at productive decision-making.
Better shareholder representation. The demographic makeup of the shareholder base is changing, and the board must evolve with it. The same goes for the customer base, which is much more likely to invest in a company in which they can see a reflection of themselves.
Clarity on difficult business issues. The challenges facing a company are constantly evolving, and boards need to ensure that they have experienced leaders who offer fresh perspectives on hot-button issues. This is best achieved via frank, open (yet respectful) dialogue between board members. The greater the diversity of viewpoints, the more productive the conversations. The more diverse your collection of possible solutions, the more likely you are to have a comprehensive decision-making process.
Access to a wider pool of talent. We've heard time and time again that one of the main ways that boards find new directors is a current board member saying, “I know somebody….” Is that the ideal way to find new board members? Maybe not. However, if you are actively working to maintain a diverse board, you are that much closer to ensuring the board member you found through a current director's connections is not just a member of the “old boys' club,” but an experienced leader with a diverse background and skill set that can bring fresh insight to your company's challenges.
Now seems like a good time for a reminder about board best practices when it comes to diversity: Don't be that board that picks up one diverse member and then says, “Mission accomplished!” The shift to a diverse board should be a mindset adjustment with the goal of continual improvement, not a move to appease the stockholders. Anything else may result in the board or company being accused of tokenism, which will counteract any of the benefits your board receives from making the step toward a more diverse composition.
And, once you have begun bringing on more diverse talent to your board, make sure that you engage your new directors at board meetings and other business settings. The landscape is rife with horror stories of young, enterprising professionals being recruited onto boards only to be discouraged, bristled at or just plain ignored when they bring their ideas to the table. Be open-minded with the ideas of diverse board members (and their connections), and you'll reap the benefits in terms of perspectives, reputation and financial success.
Barring a successful appeal, California's diversity law for racial, ethnic and LBGT individuals is dead. However, the benefits of building a diverse public company board are very much alive.