Diversity On Corporate Boards
An executive who went to sleep in the 1970s and woke up today would find many aspects of corporate life unrecognizable. That person would be stunned by transactions conducted at digital speed, barriers removed from seemingly impregnable markets, and greater diversity in the workplace (or at least the intention to achieve it) among nearly all of the world’s largest companies.
But while our time traveler would feel out of place at his desk, he would feel quite at home in the boardroom. Whereas business has transformed rapidly, corporate boards have evolved at a glacial pace. Today, women hold just 21 percent of the board seats at Fortune 500 companies, and ethnic minorities hold only 15 percent. After rising steadily for seven years, in 2016 the number of women in the boardroom of Fortune 500 companies actually fell.
Even as the U.S. grows more diverse and markets become more globalized, many boards remain culturally homogenous. This is markedly at odds with the shifting demographics of America, where, by the middle of this century, no single ethnic group will constitute a majority. At the same time, markets like China and India make up an increasing share of the world’s economic growth: 35 percent of global growth is expected take place in China from 2017 to 2019, versus 18 percent for the United States and just 8 percent for Europe. In addition to being a source of consumer demand, China is rapidly becoming an innovation hub, known for its ability to produce new economic value by creating or improving business models and production processes. Soon, companies will find that a growing percentage of their customers, and perhaps their investors, are Chinese.
Boards that do not reflect the composition of the world’s most vibrant markets will not be able to compete as effectively as those that do. Culturally homogenous boards will struggle to connect with newly emerging consumer groups; and although companies will strive to attain this connection through data, without diversity, their efforts will likely fall short.
Many multinational companies remain only dimly aware of the problem. They are blinded less by overt cultural prejudice than by a simple failure to register the changes that have taken place in their target markets over the last 25 years.
For example, recent surveys show that more than half of board members and directors in the U.S. believe their boards are already sufficiently diverse. Worse, 16 percent believe that diversity has had no benefit at all.
These beliefs are badly misguided. Research by McKinsey suggests that companies with more women on their boards enjoy stronger financial performance and have fewer problems with bribery, corruption, shareholder battles and fraud. Gender-diverse companies are 15 percent more likely to outperform their less-diverse competitors. Ethnically diverse companies show even more striking results, with 35 percent of these businesses outperforming. Diverse companies tend to attract more top talent, achieve greater customer and employee satisfaction, and make better decisions. This “diversity dividend” shows that, far from being a public relations exercise, diversity is simply good business.
I began my business career in China 30 years ago. Fortunate enough to have been exposed to Chinese culture as a French teenager, I learned the language quickly. As the country changed around me, I launched a series of businesses. My preconceived notions about the region vanished and I learned to thrive in this new world.
This happened because I had acquired a feel for the market that no amount of statistical analysis could have produced. Like any businessperson, I value data; but numbers alone can never tell the whole story. Business is about people – their languages, traditions, aspirations and beliefs. Understanding those things sharply increases one’s odds of achieving commercial success.
This understanding is precisely what diversity provides. To obtain it, some companies (and some countries) are taking action. PwC’s new report, “A Look at Board Composition,” analyzes the boardroom structures of S&P 500 companies. The retail sector leads, with boards that skew slightly younger and more female than those in other industries. Norway stands out among nations, having adopted a rule mandating that boards be composed of 40 percent men and 40 percent women, with the remaining 20 percent open to either sex.
The digitized world has brought us closer together. But the lack of diversity on corporate boards shows how disconnected some of the world’s key influencers remain. This creates a gap in perceptual ability that makes boards myopic and prevents companies from reaching their full potential.
Recognizing the problem is the first step toward solving it. In addition, companies must make diversity a business imperative by setting clear objectives and, if need be, linking performance-related bonuses to measurable diversity targets. This is the central challenge: embedding diversity in the corporate culture, so that it is not dependent on any one CEO and does not become a passing fad that generates lip service but no real change.
Connection, not detachment, empowers a business. Commitment, not complacency, strengthens a board.
The time to act is now. Companies that seize the power of diversity on their boards can own the future simply because they will already be part of it.