Four Ways Boards Can Lead on Racial Diversity
A month before the killing of George Floyd sparked widespread social protests across the country, PwC surveyed more than 250 public corporate directors on current governance concerns, including the issue of board diversity. Our Annual Corporate Directors Survey has been tracking this issue for several years, and preliminary results continue a trend we’ve seen since 2013, with fewer than 35 percent of directors saying that racial and ethnic diversity is a very important consideration for the composition of their boards.
Nevertheless, given the surge in civil rights demonstrations in recent months, I am hopeful that the moment is here to elevate diversity and inclusion (D&I) as key business issues, and for corporate leaders—including boards—to guide the way to addressing systemic racism. The actions boards can take to bolster D&I remain much the same as they did at the start of this year. What’s changed is that there’s now an opportunity for boards to act with renewed purpose and urgency on this issue. Below are four ways board members can naturally—and effectively—lead the way.
Have a plan of action like you would with any other business issue. Accountability for the success of a company’s D&I efforts must be shared at every level of the organization, but it must start at the top. The behaviors of employees are a direct reflection of what actions leaders encourage, for better or for worse.
The CEO Action for Diversity & Inclusion initiative is built on the fundamental idea that business leaders can and must be champions of change. In June 2019, the organization added a fourth core pledge commitment for its 1,000-plus CEO signatories: for CEOs to create and share strategic inclusion and diversity plans with their boards. As executive management, take a moment and ask yourself: Does the company have a strategic plan to address D&I and has it been shared with the board?
Your company’s D&I strategic plan should go beyond company boundaries. How are management and the organization’s procurement team providing opportunities for new, more diverse suppliers? Strong diverse supplier initiatives are another way for organizations to support the communities in which they do business.
Require standardized board reporting to reveal trends. Like any other business initiative, gauging the success of D&I efforts requires having measurable outcomes in place. Establish a minimum set of metrics that must be provided each quarter across diversity, equity, and inclusion goals. This will help ground the discussion in data and the board and management to know where the composition of the organization stands today.
To this end, directors should ask themselves the following questions:
What is the company’s agreed-upon definition of diversity, e.g., does it encompass race, ethnicity, gender, and sexual orientation?
Does the company report talent flow data—hiring, promotion, and retention rates—at every level of the company and by all dimensions of identity available?
Does the company have clearly articulated diversity recruiting strategies—and do they work?
Does the board consider diversity as it oversees succession planning?
Do the metrics cover all areas of diversity, equity, and inclusion?
As more organizations contemplate publishing annual diversity reports, your company’s data must go deeper than the C-suite. Enact processes now to have confidence in what direction the organization’s diversity efforts are trending.
Take a fresh look at the right targets to tie to executive pay. Our 2019 survey found that directors still think their companies struggle with workforce diversity. Less than one-fifth of directors give their companies an “excellent” score for recruiting a diverse workforce (16%), or for developing diverse executive talent (15%). Eighty-three percent of directors agree that companies should be doing more to promote gender and racial diversity in the workplace.
The tools for holding management responsible for program performance remain the same as ever: monetary awards and reviews. Yet, there is little data to suggest that linking executive pay to D&I targets successfully drives intended outcomes; the few companies that do this do not yet have better representation or results than those that do not. When we asked directors whether diversity and inclusion goals should be included in executive compensation plans, just 39 percent of directors agreed. The reality may be that the time and resources spent restructuring compensation plans would be better put to work addressing systemic barriers to diversity directly.
That said, I hope recent events move directors to approach this from another viewpoint, and seriously consider what might be the right metrics to include in executive compensation. Representation will take time to show improvement, so a solution in the meantime could be to tie executive compensation to employee engagement scores across all demographic groups, with the goal of having, for example, no gaps in the engagement scores between Black and White employees.
Think outside the box when looking at your own board makeup. Directors agree that board diversity has benefits. The majority of respondents to the 2019 director survey say it brings unique perspectives (94%), enhances board performance (87%), and improves relationships with investors (84%). More than three-quarters (76%) also agree that board diversity enhances the performance of the company.
Still, as I mentioned at the top of this post, the percentage of directors saying that racial and ethnic diversity is a very important consideration for the composition of their boards has not risen above 35 percent in the past six years—and actually fell to 26 percent in 2019.
I’ve written previously on how to increase diversity on your board, including rethinking director criteria, requiring diverse candidate slates, and expanding the size of the board to make way for diverse voices—and now is the time to act.
Paula Loop leads the Governance Insights Center at PwC.