Board Diversity – A Subtle Challenge

Nov 022008

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

Diversity is a buzzword when it comes to board population and the trend towards minority board membership seems to be gradually increasing. There are consultants who specialize in bringing minority members to companies with the proposal that diversity is a corporate obligation. Most of these consultants focus on either race or gender. My work with boards has led me to a conclusion about this trend.

When the drive for board diversity overshadows the requirements for competence, board performance suffers. When it does not, board performance improves.

Most of the ‘diversity’ consultants that I have met do a very poor job of vetting candidates. The first screen is either ethnic or gender based. One of the reasons for this seems to be that most of these consultants have little experience and less capability of identifying competent candidates – so they take the easy way out and screen for race or gender.[1] The problem is that they do a disservice to the proposition that boards benefit from diversity based primarily based on competence.

Minority corporate directors can play an important role on boards. Each brings something different to the board, and corporate board hiring committees should consider the skills and background the director will bring to the board. As with many other high-level positions, minority representation in the boardroom has been slow. However, the old ‘Jim Crow’ argument that there are not competent candidates available is bankrupt in today’s business world.

Many companies tend to look for new talent at the highest levels of corporate management such as the CEO level. Companies often miss talent and energy by only considering such a small sample. In my own experience, sitting and active CEO’s are already engaged in running their company. They often make for ‘place holder’ directors who do not bring real value to the board. These are ‘rent-a-name’ directors. The often seek board positions they feel it enhances their reputation.

One of the principal reasons that most CEO do not make good directors is that their knowledge of specific topics is derivative. By this I mean that they often delegate responsibilities to others for overseeing compliance with important issues such as the Sarbanes-Oxley regulation. While CEO’s understand the overall concept of large issues, often is the next tier of corporate leadership that best understands the technical aspects of such massive issues. Boards are often better off bringing the expert on-board.

I make this point in order to frame the question of competence and to identify the pool of potential minority directors – a pool which is much larger and better qualified than even the ‘diversity consultants’ suspect.

Minority membership on a company’s board can serve as a demonstration of a dedication to diversity within the management team. Boards should consider the assistance minority leadership offers in attracting minority management talent. A company trying to sell to women needs the perspective only another women can bring. A company trying to recruit a top black executive will have a better opportunity if the candidate sees other black executive running the company and can see the future opportunity’s of a career with a company with other black executives in the boardroom. Companies planning to sell in the growing Hispanic market should look for Hispanic talent to add to the discussion of marketing and selling in this sector of the economy. China has offered many challenges to companies seeking to enter the most populous economy on Earth. The companies most successful have those with senior level management and board members from the Chinese culture.

A board of directors should never hire based simply on race or gender. Boards should direct their hiring committee or succession committee to conduct an assessment of the talent available to board, and look for skills in minorities that will improve the level of talent and broaden the talent available to the serve the needs of the company. Good corporate governance will employ a strategic plan for addressing the talent needs and the representation of minorities needed to fill the talent.

An assessment by Catalyst conducted in 2007 found that Fortune 500 companies with the highest representation of female directors had the best corporate financial performance in many key areas. The board of directors has the prime responsibility of maximizing the return to shareholders. Some of the measures reported by Catalyst were:

Return on equity: On average, companies with the highest percentage of female directors outperformed with the least by 53 percent
Return on sales: On average, companies with the highest percentage of female directors out performed the least by 43 percent
Return on capital: On average, companies with the highest percentage of female directors outperformed the least by 66 percent

Succession committees and hiring committees should take note of such assessments. Boards of directors conducting a deep assessment of the company’s leadership should identify key minority talent and foster their personal growth and leadership development. Boards with strategies to retain minority talent have a much easier time recruiting minority talent as well.

Sarbanes-Oxley requires corporate boards to plan for orderly succession of corporate leadership. Committees charged with conducting board assessments and planning for the future board leadership should include as part of their strategic plan the identification of minority talent and the active recruitment of the best minority talent that fills in gaps in expertise on their board of directors.

[1] Two examples might illustrate my point. An Asian friend runs such a ‘search firm’. He argues that putting Asians on boards increases the board’s diversity and enumerates the benefits of doing so. However, his ‘search’ for candidates is limited to his immediate network and he keeps ‘nominating’ the same ones repeatedly. Another of these ‘board diversity’ consultants is a woman. The pattern is the same but goes even further. She is adamantly opposed to any male influence in her organization. In both cases, bigotry is driving the consultant’s agenda. Bigotry is not an effective road to increasing diversity in any productive way.

~~~~~~~~~~

Sorry, the comment form is closed at this time.