Strategies to Boost Board Diversity: Analytical Essay

Introduction

Women have come an extensive path to be part of the workforce. Men, on the other hand, have come a lengthy path to accept the jobs which were initially male-dominated to be occupied by women. According to Gupta et al. (2019), gender equality defines the state of equivalent access to opportunities and various resources irrespective of gender, including decision making, economic participation, and the condition to valuing various behaviors, objectives, and needs equality irrespective of gender. According to Smith (2019), Canada could take 164 years to close an economic gender gap. Hence, every organization in Canada has the responsibility to put programs into place to meet gender equality goals. Several business organizations in Canada are on the race to achieve gender equality targets. One such company is Bombardier. According to Bombardier Inc. (2013, July 10), the company believes that gender diversity is a recipe for the company’s long-term success. Therefore, gender equality attainment at Bombardier are goals that the company gives priority every financial year. Bombardier implement diversity policy in 2015 and further set a target about the proportion represented by females in management positions. In accomplishing the Corporation’s pledge to selecting the best candidate to propose to shareholders as applicants for the Corporation’s Board of Directors and equally to designate as members of management of the Corporation. Additionally, the Board of Directors trusts that diversity is significant to ensure that the profiles of directors and members of management deliver the necessary range of perspectives, knowledge, and proficiency required to achieve effective stewardship and management.

As the human civilization becomes more and more developed and advanced, businesses require more sophisticated models and regulation to be able to survive. Corporate governance, therefore, became a classic and indispensable topic for almost every corporation in the world nowadays. In the past few years, board diversity has become an increasingly important element to boards of directors, investors, employees and other stakeholders. The diversity of age, gender, culture and other factors can bring many businesses a more complete prospective, not to mention the constant flow of new ideas.

Board diversity is no longer limited to hiring and training people, which is merely human resources, it is a strategic business issue that the leaders of a corporation should understand and implement. Board diversity requires corporations to find directors who have the best talent and skills to ensure the board’s decision-making process is exposed to and has taken consideration of different experiences, background and perspectives. It can also create a huge impact on the effectiveness of corporate strategy, and may generate lots of opportunities and benefits that homogeneous companies cannot even imagine. As the most important role of corporation governance, Boards of directors should have a deep understanding of how diversity can influence key areas of the board’s management. This includes and is not limited to strategic direction, financial performance and risk management. A well-diverse board should lead to a strong competitive advantage and protentional profits, while corporations failed to do so may experience lacking in their ability to innovate, compete, attract clients and investors, and even causing potential legal issues.

There are many examples in which corporations are building board diversity based on race and gender. Based on Board Diversity Development published in 2018, “according to the 2017 Spencer Stuart U.S. Board Index, women represent 22% of the directors and minorities represent 17% of directors in the largest 200 companies. As of the first quarter in 2018, there remains 585 companies in the Russell 3000 with all-male boards.” However, the concept of diversity is much broader, and a lot of elements should be taken into consideration including age, culture, personality, skills, training, educational background and life experience. A board that successfully secure these factors among different directors can contribute flexibility and creativity to an organization, and effectively assist the company to win a unique position in the complex and competitive global economy.

This research paper will discuss why diversity in board is important, what influence will it bring to the board, three important factors that determines the diversity of the board, and three strategy to effectively increase the diversity in a board. At the end of the paper, the selection criteria of a well-diverse board will be reiterated.

Why is Workforce Diversity Important

Win Competitive Advantage and Increase Profit

The first and most obvious reason why gender diversity is important to a corporation is because it can bring the corporation competitive advantages and therefore increase its profitability. A research conducted by McKinsey & Company sampling 180 companies chosen from Europe and North America shows that the level of diversity in a company’s board has a positive relationship with its financial performers. The companies with a higher level of diversity in their board have ability to make decisions faster than homogeneous companies. This provides them a significant advantage over their competitors, and helps them to achieve better business goals and increase in the company’s profitability.

In a white paper released by Cloverpop, an online decision-making platform, the strong relationship between gender diversity and decision-making process was discussed. Researchers found that “when diverse teams made a business decision, they outperformed individual decision-makers up to 87% of the time when employees with different background and perspectives come together, they come up with more solutions, which leads to more informed and improved decision-making process and results.” (Top 10 Benefits of Diversity in the Workplace，2018) A 2005 business case study of diversity done on comparing the profitability of the top 50 most diverse organizations in the U.S. clear shows that corporations who emphasized diversity as part of their business strategy has an average of 2.7% higher net profit over their competitors and higher return on equity. For example, “PepsiCo attributed one percentage point of its 7.4% revenue growth in 2003, or about US$250 million, to new products inspired by diversity efforts. Seeking to expand into ethnically diverse markets, PepsiCo used its diverse workforce to obtain unique insights into the needs of customers in those markets. PepsiCo products such as guacamole-flavored Doritos chips, Gatorade Xtremo, and Mountain Dew Code Red were inspired by and targeted to minorities. “I believe that companies that figure out the diversity challenge first will clearly have a competitive advantage,”Steve Reinemund, PepsiCo’s then-chairman and CEO, told The Wall Street Journal.” (Diversity Briefing，2010)

The chart above came from the research of Women On Board done by MSCI, it also indicates that companies with female leadership have around 30% higher return than companies without female leadership. (Women on Boards: Global Trends in Gender Diversity,2015)

Variety of Different Perspectives

Besides higher profitability, diversity among workforce can bring different perspectives and viewpoints to corporations. For the board of directors to provide opinions and ideas from different point of view naturally, the directors must have different characteristics, backgrounds and a variety of skills and experiences. When a plan is generated or a business strategy executed, more prospective means a larger crowd of public is considered, a higher level of sympathetic response will be created, which can directly lead to an increase in profitability and goodwill of a company. At the same time, people who equip with different perspectives also create a higher workplace diversity, which could generate different ideas and highly potential benefits.

Increase Creativity and Fostering Innovation

Workforce diversity can also increase creativity and foster innovation for a corporation, which is always considered a difficult issue that may lead to failure or even bankruptcy of a company. Having a board with different background usually means the directors have different experiences, different perspectives, different skill set, different source of inspiration, and different creative and innovating ideas. Combining their perspectives and worldviews can help corporations to find fresh opinions and new ideas on the same issue. Boards of directors should keep discovering different perspectives during early stage in order to achieve a higher level of creativity and fresher innovation idea within organizations.

Google for example, is not longer just the name of a powerful search engine, but the leading innovation brand in the world. “Google’s decision to diversify its research and development processes spurred the innovation that led to the development of Google Finance. In 2004, Google set up its first R&D facility out- side the US in Bangalore, India, and hired a diverse Indian workforce who came from a spectrum of religious backgrounds and spoke a variety of languages. Google Finance was conceived by two Indian scientists at that facility and launched by the company in 2006.” (Diversity Briefing，2010)

Faster Problem-Solving

During the long journey of turning a brilliant new idea into a successful business plan or a profitable new product, problems and obstacles are the two things that will continuously occur. Solving them obviously requires people with variety of problem-solving skills, which is another benefit of having a diverse board. Directors can bring solutions targeting different part of the same problem to the table because of their different backgrounds, experiences and views. As a result, the problems can be solved sooner and with the best solution available. Corporations with higher level of board diversity has a better problem-solving ability has been proved again and again in real life cases.

The example used here is a research done by Harvard Business Review. “In a study of 28 teams, heterogeneous teams solved complex tasks better than homogeneous teams. The diverse teams exhibited a higher level of creativity and a broader thought process. In a study of 45 teams from five high-tech firms in the US, teams composed of people with different functional specialties worked more effectively with other internal teams and showed a higher product innovation rate.” (Diversity Briefing，2010)

Retain Board of Director’s Turnover Rate

Every corporation will always try its best to retain the good board of directors during their term on the board. Board diversity is therefore a key element that can retain the best turnover rate of directors. Diversity in the board will allow the corporation to contain different individual characteristics and perspectives of the directors, and at the same time, make all directors feel equally respected and valued. In this best-case senior, the board of directors will be willing to contribute and stay longer with a company.

On the other hand, Board diversity also requires the board to keep finding more talents and capable directors, which means some directors will have to be replaced within a specific period. As a result, boards with greater diversity have best turnover rates.

Better Company Reputation and Hiring Results

Board diversity is a promotion of a company’s reputation and brand. Building and promoting diversity make your organization looks interesting and socially responsible, which generate enough attraction to new markets, customers and business partners.

Board diversity also leads to better hiring results. Diversity in the board promotes corporation board’s reputation and is a valuable asset for attracting talents from market. “According to a survey conducted by Glassdoor, 67% of job seekers said a diverse workforce is important when considering job offers.” (Top 10 Benefits of Diversity in the Workplace，2018)

Responding to Globalization

Globalization is a topic that has been introduced and discussed for decades now, but it’s still a new concept and a main trend that a lot of companies are trying to catch. More and more corporations are trying to operate their business in different part of the world, which means they cannot conduct business without understanding the local culture and behavior in their target market. Cultural background is an important element when considering recruiting new members onto the board.

Recruiting directors from different countries is the best solution to an unknow culture, especially on matters like attracting potential customers and business partners. “In 2009, for the first time, emerging economies were expected to attract more than half of the global total of foreign direct investment. This free cross-border flow of capital and resources has important implications. Senior managers with an in-depth understanding of cultural and corporate differences may have a significant advantage when negotiating cross-border transactions such as acquisitions and divestitures. Leading corporations are increasingly demanding greater diversity from their partners, clients and customers.” (Diversity Briefing，2010)

Three Strategies to Boost Board Diversity

Improve Recruitment Methods

Based on the research from the Society for Corporate Governance and Deloitte’s Center for Board Effectiveness, most directors (94%) mentioned that their boards are looking to improve diversity but only a few of them (8%) are focusing on increase board diversity at the moment. Around 77% believes referral is the most convenience way to recruit new directors, and 73% respondents said they have used search firms.

Susan Richards, CPA and CMA, is the co-chair of the board of directors for Invest Ottawa in Canada. She believes corporations should reach out beyond their existing network and give more opportunities to typically underrepresented groups such as women, people of color and young leaders. “In our experience, you have to reach out beyond your network,” Richards said. “The issue with networks today is that they are so male-dominated. Women are not part of those referral cycles.”（4 Strategies To Boost Board Diversity，2019）

Invest Ottawa created a diversity committee within the organization, and the board has been using a variety of methods to recruit female director in the past years. The board started to hire different background people not just for the diversity of board, but also as a business strategy.

Establish Training Grounds

Corporation need to set up an advisory group which could provide training to prepare leaders or senior managers who have potential to become directors of the company in the future. Advisory group must also expand their existing network and enlarge their talent pool for future board placements.

Boards have an obligation to be diverse, Richards said: “We should hold ourselves accountable to having a broad view and different perspectives and have an open mind to the kinds of experience we’re looking for.” （4 Strategies To Boost Board Diversity，2019）

Consider New Skillsets

During the research done by the Society for Corporate Governance and Deloitte’s Center for Board Effectiveness, 41% of directors surveyed believes the priority of corporations is hiring directors with specific experience such as artificial intelligence (AI), cryptocurrency, and social media.

Sarah Ghosh, FCMA, CGMA, finance director at SweetTree Home Care Services, thinks boards should consider diversity in age as those companies grapple with new innovations. “One of the challenges is the people they’re looking for are more experienced or already have had a number of significant roles in their careers,” she said. “But there is real value in considering people across the younger generations. Their skillsets are equally as valuable as companies grapple with the changing technology landscape.” （4 Strategies To Boost Board Diversity，2019）Boards will need to be able to identify people with the skills and industry experience in new technology, for example, people who understands the impact of AI on a company’s future development. Beside the utilization of such technology, ethical questions also arise, problems like data source, data utilization, and data security becoming more prevalent at the board level about. These ethical debates around newly established and less regulated areas should be raised by the board considering the best interest and long-term goodwill of a corporation, but setting policy around that can be challenging. Recruiting directors with these new skill sets is therefore more critical than what most boards realize.