BRC Implores Boards to Lead on Diversity, Again
Conversations around social justice in 2020 following the deaths of many unarmed Black people at the hands of police and the pandemic’s disproportionate effect on Black communities threw board composition back into the spotlight and forced corporations to ensure or defend that their boards included diverse directors and voices. Indeed, Black director appointments to Russell 3000 boards between May and the end of October more than tripled the number appointed between January and May, with 130 new Black members.
These conversations seem poised to grow in this new year. For example, Nasdaq’s recently proposed “comply or explain” board diversity listing rule shows that the conversation and criticisms around having a nondiverse board are no longer limited to shareholders, employees, and customers. The rule requires listed corporations to have, or explain why they do not have, at least two members of the board who are “diverse,” including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+. This is a strong step in ensuring that directors of diverse backgrounds are represented in the boardroom.
While NACD has long supported adding more diverse voices to the boardroom, increased stakeholder attention to social issues over the past year strengthened our resolve to publish the NACD Blue Ribbon Commission Report 2020 Update of the Diverse Board: Moving From Interest to Action in December. The report provides updated data, tactics for creating a diverse and inclusive boardroom, and a toolkit to check your board’s progress in creating such a boardroom. Though the events of 2020 speak for themselves, below we share a letter from the Commission cochairs, delving into NACD’s reasons for refreshing the report and hopes for future progress on boardroom diversity.
Our original NACD Blue Ribbon Commission report was written in 2012 with the hopes of its recommendations quickly becoming obsolete. Although progress has been made to diversify the composition of the American boardroom, the report’s ultimate aspiration has yet to be fully achieved. Recent developments have reinforced the importance of board diversity as a business and societal imperative. The pandemic and widespread protests in the pursuit of racial justice have underlined the significance of building diverse and inclusive boards that can help their organizations to navigate through crisis and drive stronger interconnectedness between companies and the world in which they operate. The demands of this new environment compelled us to refresh our 2012 guidance and issue a new iteration of our mandate on board diversity.
Environmental, social, and governance (ESG) concerns have grown in importance in recent years. Societal pressures, investor expectations, and stakeholder attention have aligned to bring board oversight of diversity to the forefront of conversations on the “S” of ESG. Recent legislation and regulations on human capital and diversity have created new standards, with many more expected in the next few years. It is imperative, then, that directors consider how their own composition aligns with the gender, racial, and ethnic makeup of their management teams, workforce, and customers. The demand and expectation for diversity on boards will only continue to grow.
Board diversity comes with clear advantages. Diversity of director identity can help boards to understand the needs of their employees, their critical stakeholders, and their consumer base. Having a diverse board also ensures a diversity of thought and experience, enhancing the collective wisdom and skill sets of the board. It is more essential than ever that boards comprise a diverse group of directors with various backgrounds and perspectives in order to perform as effectively as they possibly can. Being a laggard on this issue is no longer acceptable. NACD’s 2019 Blue Ribbon Commission report makes the case that board leaders must catalyze and orchestrate a transformation in how the board is composed and structured, how it operates and interacts with the business, and how it holds itself accountable. They must unleash the full potential of every director, create an environment that enables diverse voices to be heard, and make uncomfortable decisions about board members who are no longer adding value. In other words, board diversity is now a critical ingredient for building fit-for-the-future boards.
This is, by definition, not an easy process. The report will discuss the current state of boardroom composition, suggest best practices to increase diversity on boards, and provide solutions to common challenges in diversifying the boardroom. It asks boards to consider if the board itself is representative, having directors with the appropriate skill sets—and challenges them to start having candid conversations about diversity on the board and what prevailing biases may hold back any significant changes.
As chairs of the original commission, we have continued to encourage this report’s message for much of the last decade. And we have tried to “walk the walk,” advocating for a diverse workforce and board in our organizations.
With increased interest in diversity stemming from investors, stakeholders, and regulators alike, the need for diverse voices in all aspects of a corporation has become critical. Boards do not need to wait to act on this. Boards must lead, and the onus is on them to take up this mandate to unlock the organization’s potential and set the tone at the top.
As such, diversity is a moral imperative, as well as a legal mandate in some jurisdictions. At the same time, diversity is a strategic imperative. A high-performing board is one that has a holistic understanding of its organization and its industry. This involves understanding every stakeholder, shareholder, consumer, supplier, contractor, and more. Put simply: corporations will not be able to build or maintain a successful enterprise that yields sustainable, long-term stakeholder value without bringing a greater variety of perspectives into the boardroom.
Boards can and should proactively use board agenda-setting to ensure that conversations on diversity and human capital are addressed in every board meeting. Metrics will be key to understanding where the corporation is now, how it is progressing, and where the board may need to dig deeper. While it is beyond the scope of this report, the board needs to hold the CEO accountable for successfully implementing diversity, equity, and inclusion (DE&I) programs; tracking diversity metrics across the organization; and tying diversity to the corporation’s broader value set.
As an aid to implementing these recommendations, this report offers a set of practical tools, examples, and case studies that boards can use to improve diversity in their own boardrooms. These tools will help boards understand investor expectations of board diversity, revamp the board refreshment process, provide oversight of the company’s DE&I program, evaluate external disclosure, extrapolate learning from the compensation committee on human capital oversight, and provide key considerations for the lead director.
Our expectation is that every board moves from discussing this topic to taking action to drive forward progress on diversity. It is time for those who are responsible for leading to lead and to move from interest to action.
Reaa Chadha is a former senior research analyst at NACD.