How Diversity Can Boost Board Effectiveness

Over the past two decades, U.S. corporate boards have become increasingly more diverse as company shareholders and stakeholders have made it clear that they expect diversity in boardrooms. In addition to expertise, experiences, and other factors, that diversity also includes gender, racial, and ethnic diversity. Many companies are making tremendous progress, and a 2020 analysis identified 200 companies with greater than 40% diversity — nearly four times the number of companies a decade ago. However, a new report shows that new appointments of first-time directors, women, and underrepresented racial minorities slowed in 2022, perhaps influenced by economic and political uncertainty.

Now more than ever, there’s work to be done when it comes to demonstrating the effectiveness of diverse boards. While some studies reflect a positive relationship between board diversity and financial performance, others have found limited or no relationship.

What’s behind these mixed findings? While board diversity is increasing, less conclusive is whether and how more diverse boards have become more effective over time. By effective, we mean that boards not only engage in good governance practices but also focus on inclusion practices, such as encouraging open, honest discussions in the boardroom to help drive robust conversations around oversight. They may walk the walk in appointing members who bring different insights, skills, and backgrounds to the board, but are they really listening to and acting upon what these new board members contribute?

Creating a diverse and inclusive culture is as important for organizations today as anticipating disruptive issues like cyber risk and the future of talent and transformative issues such as environmental, social, and governance. An effective diverse board is critical to providing oversight on these evolving topics and guiding the organization to act on inclusion.

Make It Happen With CARE

When boards actively show they care about diversity, equity, and inclusion in multiple ways — including making a demonstrated commitment to increasing board diversity — they are more likely to create an environment where diverse voices are heard than are boards whose approach to DEI is more circumscribed. Our academic research and leadership experience on boards across sectors suggests a potential pathway for more effective governance: the CARE (Composition, Activation, Review & Report, Ecosystem) model.

Composition

Does the composition of your board reflect the diversity of your stakeholders and support your overall strategy, as well as business trends and succession expectations?

Directors commonly report that achieving adequate representation in some areas is easier to achieve than in others. Said one board chairman, “From a gender diversity standpoint, we are very strong. When it comes to [race and] ethnicity, we are not so good. And that’s something we are working on.”

For Deloitte, the commitment to cultivating a diverse board begins with the composition of the nominating committee itself. Aiming for diversity in experiences, expertise, and other factors among committee members is the essential first step, along with setting clear expectations that the nominating committee is the steward of board diversity. Sarah C. Cuthill, secretary of the Deloitte US board of directors, notes that “the best committee members are those who are committed to advancing diversity, equity, and inclusion through management and governance.”

To make progress on issues of diverse board composition, boards can challenge themselves to diversify membership by looking beyond certain titles when recruiting new members. Casting a wider net for candidates can help increase diversity in gender and ethnicity, as well as in experience and skills. Boards are increasingly looking for members with expertise in areas where their companies have the greatest needs: Consumer organizations may seek marketing proficiency, whereas those with international operations may seek directors with backgrounds in geopolitics.

Other approaches to diversifying board candidates include expanding the search horizon beyond your own industry, building relationships with historically underrepresented candidates well before such needs arise, and considering how the board can hold itself accountable for approaching recruitment in new ways.

Activation

How are you creating psychological safety for board members? What is the board doing to build DEI competencies among newer and more tenured board directors? How is your board activating diverse perspectives through inclusive decision-making? How is this happening at both the committee and board levels?

A board can only go so far with members at different places in their understanding of DEI. Activation, or having the ability and willingness to act on diverse opinions, is a critical inflection point. If a board is going to be more effective, everyone involved must be actively “on board” to realize the benefits of having diverse perspectives around the table. Often, this requires a concerted effort. As one director shared, “Change doesn’t happen easily without agitating and asking questions and prompting. Another Black director and I sometimes talk about who’s going to raise DEI-related issues with the board.”

Board directors need to cultivate a culture of inclusion to create a path toward effectiveness, which ultimately is about getting to more equitable outcomes. Existing board members can view new members with dissimilar backgrounds and experiences as outsiders. Leaders can act by elevating and listening to all voices and creating an environment where board members are encouraged to share their ideas and perspectives. By welcoming dissent, an effective board feels empowered to examine alternative ideas and perspectives. As new ideas emerge and the board achieves consensus, establish a plan that involves everyone in its implementation, and measure its progress.

Board chairs can play an influential role in how their boards stay current on DEI approaches to help improve equitable outcomes. For instance, when Janet Foutty became chair of the Deloitte US board, one of the first priorities was to commission an assessment. The results later became the Board Inclusion Framework, aimed at ensuring that the work done by the board’s committees is reflective of the organization’s broader commitment to DEI.

Incorporating education on DEI topics is also extremely important. For instance, consider having thought leaders on DEI from academia or other companies, as well as leaders from each of the organization’s affinity groups, speak to the talent committee and the full board to provide learning opportunities on DEI in action. These sessions can help board members better understand how activating board diversity can help improve its effectiveness.

Review and Report

What process does your board use to review and report board activities to relevant stakeholders?

In Stephanie J. Creary’s research, corporate leaders emphasized the pressure they were feeling from investors and other key stakeholders to make DEI a priority in the boardroom and beyond. As one leader said, “In 2020, many companies in America experienced a racial reckoning, and many investors made it clear they expect the businesses they support to make DEI a priority.” In many cases, the process of review and reporting to stakeholders creates a sense of urgency for increasing board diversity. But when stakeholders expect goals to be met without concern for the actual effectiveness of the board, an important opportunity to improve board effectiveness may be overlooked.

More meaningful reviewing and reporting should go beyond measuring goals and head count to evaluating effectiveness. Qualitative assessments can be a powerful tool for identifying successes as well as opportunities for improvement. They can also spark productive conversations among board members. At one large investment firm, for example, regular board assessments provide an opportunity for feedback on a range of topics, such as board composition, refreshment strategies, leadership development, facilitation of inclusive conversations, and nominating committee role and performance.

“Assessments can help identify opportunities for a board to enhance its performance and practices and to take intentional action on those opportunities,” said Natalie Cooper, a senior manager with Deloitte’s Center for Board Effectiveness. “Some public companies are disclosing aspects of their board evaluation process, such as the process, methodology and objectives, which fosters a transparency with stakeholders” and drives accountability and progress.

Benchmarking is another way to chart progress. Organizations can compare internal metrics against broader trends in areas like the representation of women and minorities on boards to track their own progress and identify possible areas for improvement.

Ecosystem

How is your board engaging with the entire organization on its workforce DEI strategy, approach to DEI in the marketplace, business/supplier diversity programs, and community engagement work?

Even if an organization achieves diverse board membership, its culture may fall short when it comes to integrating awareness and action regarding DEI. One board leader noted the tendency to focus on increasing diversity on the board and C-suite while overlooking supplier diversity: “We don’t ask questions like ‘Did you hire a Black CPA firm?’ or ‘Who do you buy your printing paper from?’”

Boards have both the opportunity and responsibility to advance DEI within their organizations and beyond. They can start by exploring how to advance DEI within each of their organization’s spheres of influence: the workforce, the marketplace, and society.

• Workforce: Boards can examine talent data to identify potential sources of inequities, how many members of marginalized communities are in leadership positions, and the demographics of people in influence. They can explore whether, where, and why the company is falling short in the retention and career advancement of specific demographic groups. Then boards can encourage transformative change by addressing issues such as skills development and compensation that can help drive gains throughout the culture and value chains of the organization.
• Marketplace: Boards can challenge the way organizations spend their dollars in the supply chain, how the products and services they deliver promote equity, and the impact of mergers and acquisitions (M&As). For example, Deloitte’s board created a subcommittee to review M&A activity by including questions such as “Will these acquisitions be accreditive or dilutive to our DEI goals?”
• Society: Boards can shift their focus from driving shareholder returns to driving value for all stakeholders, including customers, employees, shareholders, and society, while increasing company value — and social good. By aligning its organization’s DEI and corporate social responsibility strategies, a board can help the company shape effective engagement and support in the communities where it operates.

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Organizations may now be realizing that simply meeting a diversity goal is falling short of realizing the true potential of a board. The CARE model offers a road map for creating and activating an effective diverse board, evaluating its progress, and laying the groundwork to make an impact within the organization and beyond.

How can your diverse board realize its true potential?