Research shows that diverse teams have better performance outcomes. According to a 2012 McKinsey Quarterly article entitled, Is there a payoff from top-team diversity?, “companies ranking in the top quartile of executive-board diversity, ROEs [or return on equities] were 53 percent higher, on average, than they were for those in the bottom quartile. At the same time, EBIT [or earnings before interest and tax] margins at the most diverse companies were 14 percent higher, on average, than those of the least diverse companies.”
Notwithstanding this research, company boards still lack diversity. Massachusetts State Treasurer Deborah Goldberg notes, in a report her office produced entitled Bringing Diversity on Board: A Report on Successful Strategies to Advance Corporate Board Diversity, that a 2016 study on Board Diversity that found “women hold just more than 20 percent of all board seats in the Fortune 500 [and people] of color (men and women) hold just more than 14 percent.” This lack of diversity on boards is consistent with MassTLC’s findings in our 2016 State of the Technology Economy report, The Connected Commonwealth: How the Massachusetts Tech Ecosystem is Creating New Growth Opportunities, which found that only 12% of tech board seats were held by women.
“Board directors are charged with planning the strategic direction of the companies they oversee in a dynamic and rapidly-evolving environment,” said Treasurer Goldberg in a statement. “Recruiting, investing in, and retaining a diverse board is not just a social goal; it is a business imperative. Working together, we are making important progress to strengthen our businesses and our economy. Now is the time to seize the momentum. We hope corporate leaders and other stakeholders find this report helpful and practical.”
Treasurer Goldberg launched a Bringing Diversity on Board initiative earlier this year to engage the business community, learn best practices, and help corporate leaders advance diversity in their boardrooms. MassTLC CEO Tom Hopcroft and executives from members companies Care.com, iRobot, Paradigm4 and Wayfair participated in a May 1st technology sector roundtable on how diverse governance boards help companies maximize profits, expand business opportunities and best serve the interests of shareholders, as well as best practices on how to enhance board diversity. The Treasurer’s office hosted a series of roundtables with executives from the technology, finance, health care, biotechnology, life sciences, and pharmaceuticals sectors.
The resulting report summarizes the input from these forums and outlines diversification strategies for corporate leaders, as summarized below.
- Plan early, write clearly, and work patiently to recruit diverse directors.
The report recommends that companies recruit a pipeline of diverse directors before seats open; specify, in writing, desired qualities of new directors; require search firms to include women and people of color on the roster; develop a timeline but be flexible; consider implementing term or age limits to create board openings; and identify and address unconscious biases and stereotypes.
- Set leadership priorities and company-wide diversity goals.
The report recommends that companies establish clear leadership on diversity from the CEO, board chair, and nominating and governance committee chair; encourage the nominating and governance committee to document its commitment to diversity; explain to investors what happens in the boardroom and frame diversity as a performance issue; use metrics to recognize challenges and plan progress; and raise voices and use influence to advocate and require diversity from vendors.
- Recognize that creating a diverse board starts with building a diverse and inclusive workforce.
The report recommends that companies promote an inclusive workplace culture; build a workplace that supports families and promotes work-life balance; view cultural challenges holistically, not as top-down or bottom-up problems and answers; focus on hiring inclusive managers; advance diversity through mentoring between directors and employees; and actively recruit, train, and mentor youth to support the next generation of diverse employees.
The report further outlines action items for advocates, academics, public officials, and investors.
- Advocates and academics should examine best practices and help focus the agenda.
The report recommends that advocates and academics should highlight company success stories; engage with companies struggling to diversify their boards; facilitate shareholder activism beyond boardroom issues; and build public-private partnerships with business schools.
- State treasurers and government officials should promote board diversity with broader audiences and engage directly with companies.
The report recommends that State Treasurers and government officials should work to increase public awareness and use scorecards with detailed goals to generate public momentum and support for board diversity; create a CEO and board chair advisory board; and serve as a resource by convening diverse directors to facilitate mentorship and networking opportunities.
- Pension funds and institutional investors should use their power as shareholders to advance diversity and explain its impact.
The report recommends that pension funds and institutional investors should urge private equity firms and mutual funds to advocate for increased diversity at the companies they hold; file targeted shareholder resolutions; and connect with broader audiences by explaining the rationale and outcome of corporate governance efforts.