The Path to Defining Diversity
The movement against racial inequality, coupled with ESG principles, has intensified pressure on boards to refresh with “diversity” candidates. Political agitation is also intensifying, as states like California and exchanges such as Nasdaq propose stricter issuer compliance for diverse board composition, with more to come.
But are boards and stakeholders, not just stockholders, in agreement as to what constitutes diversity? Moreover, is there a modicum of unanimity among the governance community and those professionals who counsel corporations, including proxy advisors, as to what diversity means — or should mean?
The answers to these questions lie in exactly what is being sought generally in this new climate, and what a particular board aims to accomplish in terms of diversity.
To that end, many search firms have been engaged to recruit diverse directors who are specifically African American, albeit with other skills/background germane to the company. While their proxy biographies usually don’t identify them as such, photographs do.
However, if the company wishes to demonstrate its ethnic inclusiveness (in addition to the benefits gained from a diverse board), must the proxy photo of such director be obvious? What about a board member who is ethnically diverse but whose picture doesn’t reveal it? Should the proxy statement biography of that director identify him/her as “diverse”? We’ve all heard nondiverse executives and politicians say, “Companies should be attracting directors who don’t look like me.”
If ethnic diversity includes other racial groups in addition to African American, perhaps that should be spelled out in the company’s corporate governance guidelines and/or in the nominating and governance committee’s charter. Such language could insulate the board against criticism that it was not wholeheartedly supporting “ethnic diversity”?
Likewise, it’s insufficient to cite “women” alone in a governance statement mentioning gender diversity. The LGBTQ community should be included.
Of the top 10 Fortune 500 companies, only one broadly defines diversity as applying to “race, gender and geography.” Two others mention “women and minority groups,” while a fourth refers to “diversity of backgrounds.” The others simply are silent on “diversity” in either their governance guidelines or in their nominating and governance committee charters.
What about diversity of age on boards? Too many have a plurality of directors in their sixties and seventies and very few in their 30s and 40s. After all, the growth of many consumer-facing companies depends on that demographic. Nominating and governance committees need to rethink the notion that an incoming director must have prior public and/or private board experience. That necessitates recruiting younger albeit highly qualified “newbies” with otherwise impressive achievements and leadership skills. Clearly, they are to be found, though not necessarily in the C-suite.
Boards should define “diversity” not solely in terms of minorities, ethnicities, race or gender. In my judgment, this is an equally critical concept deserving of further explanation in governance documents. Perhaps such a statement, both in text and in practice, should read, “diversity of background including geography, age and diversity of social background.”
Investors are increasingly demanding more than bromides in how companies define board diversity.
A truly diverse board, apart from ethnicity, gender, etc., is also one whose members aren’t grouped socially, geographically or by age, thus promoting total independence.
Steven A. Seiden is president of Seiden Krieger Executive Search.