Topics:   Board Composition,Corporate Governance,Leadership

Topics:   Board Composition,Corporate Governance,Leadership

October 16, 2019

One Goal, Different Paths to a Diverse Board

October 16, 2019

It seems that almost every country, company, and board is focused on achieving greater governance diversity. It is core to thriving in today’s complex global businesses. Achieving it is in every company’s interest, considering the growing and indisputable body of evidence underscoring the advantages a diverse board and diverse leadership confer—whether in terms of shareholder value or, equally important, but harder to measure, in terms of reputation value. Worth noting, however, is that companies are taking vastly differing paths toward this common goal.

Our firm takes a broad view of diversity, which we define as the mixture of experience, backgrounds, and functional skills boards require to advise on and oversee companies’ strategies and senior leaders. And we recognize that depending on an individual country’s or company’s culture and regulatory practices, that mix, and the way to get there, will vary. Useful approaches taken in various countries that can highlight different paths to success follow.

Global Practices

Heidrick & Struggles’ recent Board Monitor US 2019 and Board Monitor Europe 2019 reports capture a snapshot of diversity on boards across these key regions:

  • Of the 462 newly filled nonexecutive director seats at Fortune 500 companies in 2018, 39.6 percent went to women and 23 percent to ethnic or racially diverse candidates.
  • Of the 503 newly filled nonexecutive director seats on the boards of large European companies in 2018, 38 percent  went to women and 36 percent to candidates from countries other than where their company is headquartered. (Companies studied were listed on the following exchanges: FTSE 250, CAC 40, DAX 30, IBEX 35, AEX 25, PSI 20, and ISEQ.)

Comparing Europe and the US, and also looking more granularly at statistics for board diversity within individual countries in Europe, we see a great deal of variation in approach. Generally speaking, those countries that have legally mandated gender diversity on boards lead the pack. Consider France, where 43.4 percent of directors on the boards of the 120 largest French companies are female, and Norway, with 42.1 percent female directors under the same conditions. Others, such as the United Kingdom, which is on track to reach 33 percent female directorship by 2020, have taken a voluntary approach to achieving gender parity on boards. Still others, such as Spain and Switzerland, with “soft laws” that don’t impose sanctions on noncompliant companies, lag behind with 22 and 21.3 percent female representation on public company boards, respectively.

US companies are in a similar position to Spain and Switzerland and, despite the 40 percent of new board seats that went to women in the United States in 2019, women still comprise only 22.5 percent of the total seats on Fortune 500 boards. This is so even though US companies are among those feeling significant pressure to demonstrate diversity on their boards, including from key stakeholder groups that have the power to spur investment in particular companies—or withhold it.

Useful Board Practices

In response to these demands, US boards are enforcing their own measures to ensure greater diversity, and to reach their goals with greater speed. Looking at successes around the world that any nominating committee is capable of putting into action, whether regulations require them to do so or not, we recommend a few clear steps that will lead to more effective boards that are better equipped for future challenges:

  1. Set the board up for success by elevating board effectiveness metrics. Many boards have institutionalized regular assessments geared toward maintaining a more productive team. When diversity is viewed as a key to greater board effectiveness, metrics for diversity are included in such assessments because diversity enables access to a range of views and innovative solutions in board discussion and decision making. Consider adding inclusion performance to the board assessment to measure the success of the board’s recruitment and onboarding efforts.
  2. Align board competencies with company strategy. Strong board leaders recognize that they need board members whose expertise ranges beyond that of traditional CEO candidates. Future-fit directors possess crucial operating experience and institutional knowledge. Modern boards also often require additional competencies—including digital, leadership development, and international expertise—if they are to compete in a rapidly and continually transforming business environment. Nominating committees seeking these skills will almost certainly seek directors who are more diverse by default, as directors with the skills needed now tend to exist among people of different genders, ages, areas of functional expertise, nationalities, and industry backgrounds.
  3. Mandate diversity as a criterion for every director search. Boards increasingly understand that diversity doesn’t happen by accident, and that natural evolution needs to be pushed along. In that spirit, many leading companies now require a diverse slate of director candidates for each and every director search. This practice is increasing awareness of the diverse talent that does exist, and is making a difference in the forward progress of board diversity overall.

Whether in Europe or in the US, whether the catalyst for greater diversity on boards is principally external or internal, the objective is the same. The faster boards work toward transforming into diverse, strategically aligned teams, the more effectively they will be able to serve their companies and all their stakeholders.

Bonnie Gwin is vice chair and co-managing partner, Global CEO & Board of Directors Practice, at Heidrick & Struggles.