Diversity in company boards is another problem. Here’s how to solve it.
The Securities and Exchange Commission on Friday approve a Nasdaq suggestions to make the company’s boards – and, in turn, the companies themselves – more diverse. The rule requires companies listed instead to report their diversity on the board and be on their board – or however they don’t – either one person identifying as a woman and one person identifying as a no representative minority or LGBTQ person
Following a national census in the summer of 2020 following the police assassination of George Floyd and subsequent Black Lives Matter protests across the country, public and private companies alike. promised to add Black directors on their corporate boards. The Nasdaq rule is one of many promising developments that suggest more board diversity will actually happen. There are also other ways that companies can speed up the process of diversifying their boards.
Investment companies BlackRock and State Road Ask the companies they invest in to report their diversification to the board and improve it. Best of all, California passed a law requiring businesses to be headquartered there to have at least one board member from a underserved community by the end of 2021.
Diversity on a company’s board is important for many reasons.
The board of directors of a company is responsible for representing the interests of the shareholder and ensuring that the company’s finances are accurate as well as selecting the CEO of the company and carrying out the work of that person. The board sets the tone for the entire company, and its members serve as an example of the company’s stance.
“Employees, customers, and investors are diverse,” Nell Minow, vice chairman of Value Edge Advisors, a consulting firm that specializes in corporate governance issues, said. If the people who carry out the important role are no different, how will they know what they need to know to do their job? They are not. ”
Essentially, a board can affect how a company functions and how it progresses. A number of studies, including one by McKinsey & Company, BCG, ug Deloitte, showed the correlation between the different leadership and financial performance of a company. Stocks for socially responsible companies that adhere to specific standards for environmental, social, and corporate governance, or ESG surpassed their peers.
“Now that we know the different boards that are doing better financially, they have a responsibility to diversify,” said Stephanie Lampkin, founder and CEO of diversified analytics and acquisition software company Blendoor, Recode said.
Despite all of this, the boards have always been fiercely white and masculine. Nasdaq saw that last year 75 percent of companies listed instead this proposal cannot be fulfilled as quickly as the requirements for diversity.
Women hold only a quarter of board seats at most 1,000 U.S. companies, according to data from the start of 2021 from the firm’s data management firm. alike. While there is little diversity in the industry, it is equally low.
So is ethnic diversity. Board representation of Black, Latinx, and Asian people is often shorter than their representation in the majority population.
And while the diversity varies, the change is much slower.
What can companies do to make things easier
Many companies make excuses as to why their boards don’t differ, and their reasoning mostly revolves around a number of things: 1) It takes time. 2) There are not enough different people in the pool. Fortunately, both problems can be solved.
Companies have always pointed out the fact that they can only add different candidates if the board seats open. However, board members have no obligation to continue to nominate themselves at the end of their usual one to three year term. Of course, having a seat on a board has many perks, such as payment and stock options, so board members don’t want to give that away.
So instead of waiting for members to leave, companies can add more board seats and fill those with different candidates. Companies can also install seating limits to accomplish the same purpose. The director’s average tenure is now about eight years, up from nine and a half years in 2015, according to Equilar. Limits can ensure a lot of turnover.
Then there’s the pipeline problem: Companies are always looking for CEOs and former CEOs to fill board seats. The chief executive role is a shifting position that also suffers from a lack of diversity, so using a feeder pool known to be a bad place to start. However, companies should continue to look far for new board members.
Expanding their base of board candidates to include general counselors, law school professors, heads of charities, cybersecurity experts, and business school professors, among others, will bring much greater diversity of mind as well as gender and race.
If not, what is the cause? In Minow’s words: “Why isn’t there one person on the board when they’re all from the same place?”
There is a huge moral and financial pressure on companies today to diversify their boards. Some are progressing, but may need more systematic change before we come to a more diverse, including corporate boards from companies that promised it last summer.