Diversifying Board Representation a Win-Win-Win for Companies, Shareholders and the Public

By Vivian Tse

In light of current economic conditions, one may be inclined to think that corporations are putting supplier diversity on the back burner as they continue to attempt to steer recovery back on track. In reality, there is no better time to make the case for increased diverse representation at enterprises in the context of corporate governance.

With demographic figures demonstrating that the U.S. is poised to become a white minority country by 2050, it is essential for corporations to embrace the realities of the changing marketplace. Within the context of more diverse board representation, corporations are in turn better governed and less inclined to take unnecessary risks. At the same time, they are also more representative of the constituencies they seek to represent and stay ahead of the curve in terms of responding to future trends.

This push for greater inclusion is not new, nor is it restricted to the U.S. alone. There has been renewed scrutiny in corporate governance practices since 2001 following the collapse of Enron, in turn, spurred by faulty accounting practices at Arthur Andersen, and MCI, leading to the passing of the Sarbanes-Oxley Act in 2002. In more recent memory, the spectacular failures of Lehman Brothers, Bear Stearns, and Merrill Lynch have brought on increased pressure on the parts of major corporations to rethink their policies and conventional operations, realizing that business cannot continue as usual.

Enlarging board representation is not restricted to looking at ethnic diversity alone. Calls for more female representation have long existed and Time Magazine acknowledged this in 2002, naming whistleblowers Enron’s Sherron Watkins, WorldCom’s Cynthia Cooper and the FBI’s Coleen Rowley as its People of the Year. When looking at changing corporate culture, discussion often turns to whether more women in the upper echelons would have prevented gross mismanagement at some of the country’s top firms.

“Certainly, a smart corporation that elects a minority to its board recognizes that board members with ties to their communities provide the additional benefit of positive visibility that can foster stronger relations with minority segments of the buying public,” said Jackson Lewis partner Weldon H. Latham in a legal briefing. “A diverse board represents a win-win-win situation for board member-community-company.”

Latham challenged major corporations to fully engage minorities and women at the top levels of their companies. “Successfully electing highly qualified minority and female board members, which elevates them to these coveted positions, may be the litmus test of a corporation’s commitment to achieve diversity,” he said.

Five years ago, global index provider FTSE Group and corporate governance evaluator Institutional Shareholder Services (ISS) launched the FTSE ISS Corporate Governance Index series. The FTSE ISS CGI assesses corporate governance performance using ISS’s Corporate Governance Quotient (CGQ), a set of 61 criteria (55 in non-U.S. markets) in eight categories, such as board, compensation and “progressive practices.”

“Our CGQ criteria were developed within a framework of corporate governance best practices,” said Cheryl Gustitus, senior vice president for communications at ISS. “Over a lengthy period, ISS consulted with a cadre of academics, institutions, issuers and various industry constituents to vet its criteria.”

In addition, diversity-tracking stock indices have tended to outperform the markets. The danger, however, with having a relatively small number of companies that comprise such an index is that it disproportionately skewers weightings if there are severe laggards in its composition. The rising fortunes of diversity-forward companies is not lost on influential players, even in the midst of a recession.

“A factor currently influencing the board selection process is the ‘new markets’ phenomenon: the increasing reliance on minority and female consumers to enhance profitability and market share of mainstream corporations,” said Latham. “This growing reliance on minorities and females as customers has elevated the importance of diversity in most major corporations.”

The ascensions of African Americans to the CEO/COO evidences the major change on the horizon, Latham, who is black, added. Even earlier, women began benefiting from the “new markets” concept.

“There are still numerous Fortune 1000 companies with no women and no minorities on their boards. In these companies, the selection of even a single minority or female, although grossly inadequate for purposes of diversity, would be a significant improvement on the status quo,” he said.

To achieve greater success in securing more minority and female board members, corporate board nominating committees need to develop an appreciation that the required skill sets for success on corporate boards need not be restricted to successful achievement in the business community alone, Latham said. “There are areas where the same essential skill sets are indicative of success in other endeavors,” he said.

Additionally, an even broader cross-section of talented minorities and women can be found either just below the highest levels of the corporate hierarchy or in other enclaves of power, such as government, law or academia. Some enlightened corporations have begun to realize that in order to expand the pool of talent, they must utilize alternative but equally rigorous criteria to secure diverse board members, said Latham.

“A board committed to reflecting its community, shareholders and, most importantly, its consumers will find a way to be more inclusive, with no degradation of board quality,” he said. “This approach is clearly in the best interests of the company.”

This is not to say that corporations should hire minorities and women for the sake of demonstrating diversity, Latham added. In the past, there were few, if any minority or CEOs, and some corporate boards used this fact to justify their white-male-only composition. The validity of this argument has obviously eroded over time as minority females such as PepsiCo Chairperson and CEO Indra K. Nooyi take on the top role at one of the country’s, if not world’s, biggest companies.

It will take years for this “revolution” to achieve its ultimate goal: making diversity in the boardroom the norm, said Latham.

“Nonetheless, the demise of the ‘strictly white male boardroom’ is inevitable because diverse boards are definitely good for business,” he said.

 

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