Why Having a Diverse Board Is Good for Business

By Kiely Kuligowski,
business.com writer
|
Apr 02, 2020
Image Credit: g-stockstudio / Getty Images

Diversity introduces fresh perspectives and challenges old thinking. Learn how to create a diverse board of directors for your business, and find out how it can improve your bottom line.

  • Diverse companies are 35% more likely to have greater financial returns than their less diverse industry peers, according to McKinsey report.
  • Having a diverse board helps reduce risk, it challenges stale thinking, and it sets an example for the rest of the company to be inclusive.
  • To create a truly diverse board, try to avoid tokenism, embrace multiple kinds of diversity, and make it a company policy.

At the beginning of 2020, investment bank Goldman Sachs announced a new policy: They will no longer take a company public unless it has at least one "diverse" member of the board. In 2021, Goldman Sachs will require that companies have two diverse board members. Goldman Sachs joins other companies such as BlackRock and State Street that will vote against companies with an all-male board of directors. (California imposes a $100,000 fine against companies that have all-male boards.) Other countries, such as Norway, Spain, France, and Iceland, have had laws requiring that women make up at least 40% of boards at publicly listed companies for years.

Studies have proven that diversity within a company is good for business. It increases a business's understanding of its customer base, supports creative thinking and promotes a global mindset. McKinsey's "Diversity Matters" report found that companies rated well for racial and ethnic diversity were 35% more likely to have greater financial returns than their industry peers.

Although though Goldman Sachs is certainly on the right path, diversity is not something that is gained by having one person who is not white and male on the board.

What does it mean to have board diversity?

Board diversity can mean many things, but it ultimately comes down to diversifying the way members think and look at the business.

"Diversity can be looked at from a number of viewpoints," said Heidi Pozzo, founder of Pozzo Consulting. "When discussed today, the focus is often on gender and race. But to have a truly diverse board, you need experience from inside and outside the industry; you also need people with different perspectives of business."

It is important to keep in mind, however, that differences in thinking are informed by a person's experiences, which are influenced by things like their gender, race or ethnicity, which is why initiatives like Goldman Sachs' are effective.

"Boards can too easily slip into groupthink, where ideas are rarely challenged and the board does not update its own thinking," said Robert C. Bird, a professor of business law at the University of Connecticut.

When determining whether a board is diverse or not, consider where members differ according to these variables:

  • Age
  • Competencies
  • Ethnicity
  • Experience
  • Gender
  • Philosophies
  • Race
  • Religion

The more perspectives you have, the more likely your board is to have productive discussions that will better serve your business.

Why is it important to have a diverse board of directors?

A diverse board serves your company in many ways. The purpose of a board of directors is to guide the company – it is in the company's best interest to make sure that the board is capable of looking at issues and challenges from many perspectives.

Here are four ways a diverse board can help your business.

1. A diverse board creates good corporate governance.

While it is widely agreed that a board's first responsibility is to its shareholders, those shareholders are dependent on the support of customers and the company's employees. A diverse board more accurately reflects the real world and opens a company up to considering the needs of a broader group of people who may be involved with the company.

"A business owner cannot know everything," said Timothy Seeley, a coach and speaker on leadership development. "It is helpful to have people that can bolster your weak areas."

2. A diverse board mitigates risk.

By incorporating several different viewpoints and philosophies, a diverse board decreases a company's chances of making risky decisions.

"If a board is made up of entirely like-minded people from the same backgrounds, it's essentially a sounding board that will agree with any decision and not have new ideas or perspectives to share," said Deborah Sweeney, CEO of MyCorporation.

Corporate boards should be made up of members with a range of experiences who will help business owners approach a decision or problem from multiple angles, which can help them discover opportunities and identify potential roadblocks.

3. A diverse board keeps the company moving forward.

A board must constantly be challenging itself and the company to keep pace with the ever-changing dynamic of modern business, and that cannot happen with stagnant ways of thinking. Boards should operate under the idea that there is no right answer, and make a commitment to hearing everyone's ideas out carefully and respectfully.

4. A diverse board provides an example for the rest of the company.

Leadership starts at the top, and a diverse board sends a strong message to the rest of the company that diversity is valued and practiced within the entire organization. A diverse workforce can mean good things for your business, too – 83% of millennials report feeling more engaged in an inclusive workplace.

How can you create a diverse board of directors?

Creating an effective and diverse board is not as simple as hiring one woman or one person of color. It requires careful thought and deliberate recruiting, taking into consideration multiple types of diversity.

Here are a few strategies to help you recruit a diverse board.

Avoid tokenism.

The most important thing to avoid when diversifying your board is tokenism, or making no more than a symbolic effort. Hiring one woman for gender diversity or one person of color to your all-male or all-white board would be tokenism, and it does not fulfill the purpose of true diversity.

Try hiring or bringing on several new board members at once, ensuring they all bring with them unique perspectives and qualities.

Make it policy.

Having rules and regulations regarding diversity for your board seats may make it seem like you are checking a box for diversity, but having it as a company policy can show your shareholders, employees, and other organizations how seriously you are taking the issue of diversity in your board composition.

It can also help hold the board accountable and encourage targeted hiring, but implement policies that make sense to your employees so they don't feel like the policies have been forced on them or are restrictive.

Consider search firms.

"Search firms are a great resource," said Pozzo. "There are organizations such as the National Association of Corporate Directors that provide education and training for directors, as well as provide a network for directors and potential directors. To broaden diversity, candidates should not be limited to CEOs and CFOs. Leaders in marketing, technology and other areas should be considered."

Embrace all kinds of diversity.

Ensure that you are not only looking to add people of different genders or races to your board. It is important that you include age, experience, way of thinking or religion in your considerations. This helps create a truly diverse board that can provide nuanced and varied perspectives on the many issues and challenges your business will face.

Kiely is a staff writer based in New York City. She worked as a marketing copywriter after graduating with her bachelor’s in English from Miami University (OH) and is now embracing her hipster side as a new resident of Brooklyn. You can reach her on Twitter or by email.
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