Board Diversity Leads to Innovation, Inclusivity, and Profits

Jill Klein spent decades working with the not-for-profit organization Women in Technology (WIT)  to help women in the Washington, DC, area advance from the classroom to managerial and executive positions. But over time, she turned her attention to higher-level positions—corporate director roles. 

“We became managers, we became directors, we became CIOs,” said Klein, Interim Dean, School of Professional and Extended Studies at American University’s Kogod School of Business. “The next place to really look was the corporate board.”

When WIT first surveyed the local landscape of corporate directors in 2010, they were surprised to find that DC lagged behind the rest of the country in female directorship and realized they needed to find ways to increase diversity in the workplace.

“There are so many bright, talented people in the DC area,” said Marguerete Luter, who chairs The Leadership Foundry, a WIT initiative established to prepare women to serve on corporate boards. “We just assumed we would be at or near the national average or better than the national average.”

Luter explained that DC still falls behind the national average for female directors. Women hold only 14.7 percent of board seats in publicly traded companies in the DC–MD–VA region, according to an October 2017 report by WIT and the Kogod School of Business at American University.

The efforts by Klein and Luter to increase female representation on boards align with a growing national awareness of the need for diversity in the workplace, especially when it comes to leadership roles. Board directors are elected representatives of the shareholders who meet to formulate policy and address major company issues.

Lesley Grossblatt—former COO and vice president of product at theBoardlist, an online platform that connects women with board seats at tech companies—said boards should be viewed as strategic operational assets.

“It’s the board [that] is potentially there to help you see ten steps ahead, versus two steps ahead,” Grossblatt said. 

Today, boards are generally white and male. Women occupy 22 percent of all S&P 500 board seats, and minorities make up only 17 percent of directors at the top 200 companies on the list, according to the 2017 Spencer Stuart US Board Index. This annual report offers the latest data and trends in board composition, board governance practices, and director compensation among S&P 500 companies. 

The Benefits of Diversity in Business

Because the board plays a critical role in driving a company’s overall strategy, a diverse group of directors can lead to more strategic governance and increase inclusivity across the organization. Directors are elected with the expectation that they’ll draw on previous experience and bring strategic insights to an organization.

It’s key, however, for there to be more than one diverse perspective in the room. While a single female or person of color on a board might offer a new viewpoint, it isn’t enough, said Siri Terjesen, the Dean’s Faculty Fellow in Entrepreneurship at the Kogod School of Business and Director of the American University Center for Innovation. There needs to be a critical mass to be able to bring up and thoroughly discuss certain ideas to improve inclusivity, she said.

Diversity at the board level may also more closely represent the company’s customers. 

“It is very rare that you are selling only to white men,” Luter said. “You have to look at the makeup of the people making the decisions and [ask] does that mirror what you are trying to sell and to whom you’re trying to sell.”

Diversity is important to customers when it comes to the brands they choose. According to Enso’s World Value Index, millennials are more likely to be drawn to brands that have a global outlook and encourage diversity.

A lack of diversity at the board level could raise serious concerns for customers as it did for Twitter at one point. Women made up more than half of Twitter’s users when it went public in 2003, but the social media company faced a backlash because of its all-male, all-white board. As of fall 2018, Twitter’s 11-person board boasted four female members and three people of color.

Diversity in Business Is Valued by Customers

The board serves as a very public representation of the company, and their target audience may ask themselves whether it’s “a company that looks like me,” Klein said, noting that customers may decide to forgo business with the organization if the answer is no.  

Beyond guiding high-level strategy, directors have opportunities to work individually with company leadership and the CEO, who typically sits on the board. If a board is diverse, the CEO and other executives can leverage members’ experiences to determine how to make more informed business decisions.

Additionally, a diverse group of directors may be more inclined to consider creative strategies proposed by company leadership. Improving diversity and maintaining a diverse board have been linked to more innovation and to companies earning more revenue for new products and services. And according to a report from McKinsey & Company, organizations with diverse boards are 43 percent more likely to experience higher profits (PDF, 6.8 MB).

Diversity can help a board continue to innovate when it comes to company strategy, as well. “You have to be creative, where you’re not just cranking out the same thing over and over again,” said Grossblatt. “There’s a huge advantage in being able to be forward-thinking when you have the multiplicity of points of view in the room.”

A Top-Down Strategy: Promote Diversity in the Workplace

A diverse board not only sends an external message to company stakeholders and customers, but it also projects that diversity in the workplace is valued and supported internally at all levels of the organization.

It’s an essential part of driving change throughout the organization and improving diversity at the highest levels, shared Dee Sabol, executive director of the Diversity Council, an independent nonprofit organization in Rochester, Minnesota, that combats racism and discrimination.

“The barriers to success are so great when you don’t have that commitment at the top and that willingness to kind of model the way,” she said. Sabol added that it can show a company’s dedication to providing a career path for women and minorities and affirm its desire to elevate anyone who’s qualified into leadership positions.

Board members can take direct roles in improving diversity, too, because they often oversee functions like human resources and recruiting and can ensure those teams hire and support diverse, qualified candidates.

“They’re going to say, ‘Where are the women executives? Where are the women middle managers?’ ” said Klein. “ ‘Are you training women at the same rate you’re training men?’ ”

To Sabol, board diversity is a way for a company to definitively demonstrate that the interests of all employees are being represented in discussions at the highest levels, just as the organization would consider the needs of its customers. 

“It feels authentic to the people below in the organization to say, ‘You know what, we have a woman now in this role, or we have two women on the board,’ ” she said. “ ‘Our organization represents me.’ ”

For now, Luter and Klein are watching as DC-area companies inch toward inclusion. Female directorship has risen 8 percent during the seven years WIT and the Kogod School of Business at American University have conducted their study. Female board members currently take up 15 percent of the total board seats in DC; however, at this rate, the city won’t achieve true parity until 2055.

“We are making small bits of progress,” Luter said. “But we have so far to go. We should not be comfortable. We should not rest on our laurels just because things are starting to happen.”

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Citation for this content: American University's online MBA program