DEI in the Corporate Boardroom: A Roadmap for Progress
Late last year, Nasdaq took what was arguably the corporate world’s most assertive action to date to promote the diversity, equity and inclusion in the corporate boardroom.
Nasdaq filed a proposal with the U.S. Securities and Exchange Commission requesting permission to require that the 3,200+ companies listed on its U.S. exchange diversify their boards of director, or face penalties up to and including delisting. The proposal tracks closely with a broader shift, both in the financial services industry and in state government. Both Illinois and California have already initiated diversity disclosure and benchmark requirements, and Goldman Sachs recently placed diversity requirements on companies it would help take public. Still, the Nasdaq proposal marks the most substantial move to date by a financial institution toward diversity, equity and inclusion (DEI) prioritization in the corporate boardroom.
Nasdaq’s request is simple: Ensure each board has at least one active director who self-identifies as a woman and one who self-identifies as a member of an underrepresented minority including LGBTQ+. Boards that do not meet those standards must explain why. If approved, existing companies in the exchange would have one calendar year to begin disclosing diversity metrics and two calendar years to meet the requirement or explain why they have not. Companies new to the exchange would have one year to satisfy requirements.
As board directors gather to continue critical discussions about how to meaningful and sustainably enhance boardroom diversity, equity and inclusion (DEI), they will undoubtedly face structural challenges rooted in decades of routine. Below are some strategies for overcoming challenges and creating a strong, diverse and valuable board of directors.
Challenge: Setting a goal, and establishing benchmarks
The first step toward achieving boardroom diversity is to define a clear goal. Why is diversity important, and how will we get there? This exercise can take many shapes and forms as long as it makes sense for the business and stays true to the board’s “why.”
Some goals are established to prompt directors to set aside time to make DEI efforts a priority. The board may commit “X” number of hours per calendar month to networking with and/or recruiting women or individuals from underrepresented minorities. It may move to establish rules requiring blind candidate reviews or benchmarks indicating a percentage of director interviews in 2021 will be given to women or minority candidates. Regardless of the goals, they should be measurable, realistic and enjoy buy-in from the majority of members. Requirements for reporting diversity progress to shareholders and in proxy statements will create a new level of transparency and accountability necessary in achieving meaningful progress.
Challenge: Breaking the recruitment cycle
By all accounts, the ways in which boards recruit potential directors hasn’t changed much in the last half-century. This reality grateful thwarts DEI progress by even the most well-meaning directors. If you always do what you’ve always done, you will always get the same result. In this case, the result is far too often a white male.
Take a break from those methods. Avoid putting out calls through existing members’ professional circles and on LinkedIn, instead seeking out and welcoming applicants whose education, background and experience are not homogenous with existing directors. Start by establishing relationships with leadership and professional associations representing women and underrepresented groups, working with them to identify candidates that could be a fit. The African American Board Leadership Institute, Latino Corporate Directors Association and Women Corporate Directors represent three great starting points. For broader recruitment efforts, select a recruitment firm that has a demonstrated commitment to diversity and that can commit to furnishing candidates that represent a departure from the existing board: women, minority, first-time directors and young professionals. This is a small but critical step in the process.
Challenge: Rethinking evaluation criteria, methodology
As important as establishing a diverse candidate pool is knowing what to do with the candidates once they’re engaged. Like recruitment processes, evaluation methods have long favored homogenous candidates — people who look like, act like, think like existing board members. That won’t do anyone any favors in this endeavor.
Start by acknowledging any unconscious bias that might exist in the review process. Then, establish new evaluation criteria that aligns with the business goals that were previously articulated. Throughout the review process, gather other committee members to take a step back, challenging behavior and attitudes to ensure decisions are not being made based on what has always been done, but rather based on what is yet to be done. Think about if blind or redacted reviews of resumés is a practice that would help eliminate bias, or if interviews can be done in a less formal way so as to force the interviewer to learn about the candidate in a more holistic manner. When added to a smart approach to recruitment, these small but simple changes in the evaluation process will ensure equitable and impartial appointment decisions.
Embracing diversity, equity and inclusion in the boardroom is a key measure of today’s shareholder ESG priorities. A numbers game — one that makes appointments by checking a box instead of through understanding and realizing value — will not sustain. Boards that follow the advice herein, revisit the topic often and commit to growing these practices year over year will enjoy the support of regulators, shareholders and public consumers while creating a more just and equitable world.
Geoffrey R. Morgan is the founding partner of Croke Fairchild Morgan & Beres in Chicago where he provides strategic guidance to growth-stage startups and Fortune 500 companies in areas of corporate law with a focus on corporate finance, M&A, corporate governance and securities regulation.