More Work Needed on Racial Diversity in Boardrooms

by Kathleen Hoffelder, Senior Content Editor, NJCPA – May 26, 2021
More Work Needed on Racial Diversity in Boardrooms

While organizations in the United States may have the drive to create more diversity, equity and inclusion in boardrooms, more work needs to be done to explain its importance to organizations, according to the “Driving Authentic Diversity in the Boardroom” panel sponsored by Ivy Exec and Santa Clara University Leavey School of Business in April.

Panelist Barry Lawson Williams, a former managing general partner at Williams Pacific Ventures (WPV) and an interim past president and CEO of the American Management Association, explained that boards are just as important as the CEO. “They, in fact, pick the CEO and lead the succession planning. They review and approve the strategy. They review the risk management. There are various functions that a board does that significantly determine the direction of a corporation,” he said. “That’s why the focus is on boards of directors because they are so important in the lives of corporations.”  

So, why be diverse? According to Williams, “It’s been proven that diverse thinking results in better results.” He added, “The bottom line is that those companies that have diverse management and boards have proven they perform better.” He adds that companies that have diverse boards and have representatives on the board who understand new market segments, new growth markets or international markets will be better off. “Not only will you be able to attract the best minority talent, but non-minority talent is not going to go to companies that aren’t diverse,” he explained.   

Panel host Dennis Lanham, senior assistant dean of Executive Education and executive director of the Silicon Valley Executive Center at Santa Clara University, suggested that having a diverse board should be part of an organization’s fiduciary responsibility. Some companies will say they are committed to diversity and have a budget in place for that, he explained, “but other companies have the desire, but they are struggling. They certainly have the tools but don’t know what to do.”

Roughly 30 percent of the Fortune 200 companies still lack a Black director, added Williams, and if one looks the U.S. market indices, such as the Russell 2000 and the Nasdaq Composite Index, he said the percentage that do not have a Black director is higher than that. However, in the post-George-Floyd environment, that number is probably down to 20 to 25 percent, but more needs to be done.

Progress in Motion

While, according to Williams, “We are just at the beginning of what we have to do,” some states like California have been a clear leader on the board diversity front for years. California already imposes fines unless there is a certain amount of gender diversity on boards. More recently, a new mandate went beyond just gender diversity. In December 2020, new requirements stated that by the end of 2021, all boards must have one underrepresented member. By the end of 2022, boards that have nine or more members need three underrepresented members, and those with five to eight members need two underrepresented members.

Nasdaq also came out with a proposal in March 2021 to require listed companies to increase their diversity, but the Securities and Exchange Commission has delayed a ruling on it.

Barriers to Increased Representation

Several hindrances exist to having a fully diverse board — from the structure of boards today to who should sit on them. For one, there is still a misconception, according to Williams, that there is a lack of minority candidates available for board roles. “I think the work that I and others have done show…that’s just not true.”

Disparities also exist between the diversity of private and public companies. Private companies, for example, are more likely to not have minority or other gender representation compared to public boards, Williams noted. Given that there are 100 minorities on boards currently, he said, “We have to be at least thinking about 500 for the next couple of years.”

Since current legislative and regulatory mandates apply mainly to public companies, private companies continue to lack the drive to have diversity. “There’s a whole chunk of private companies that are not being mandated to have diverse boards,” added Lanham.

Boards also tend to select people who they can personally vouch for. “A few people will come through an executive search that are not known to that board or anyone on the board and may have such overwhelming skillsets that they will get through. But, for the most part, boards like people like themselves — people they know or who they think will be a good fit,” said Williams. “If you don’t have those relationships, you are not going to be in the game.”

Another issue is the limited number of seats that do come available on a board in any given year. Williams noted that many people serve for 10 to 15 years on a board, and perhaps that number should be reduced.