Cross Currents: How Contemporary Governance Reforms Challenge Board Diversity

Key Takeaways: 

• Social movements compete for the attention and shape of corporate leadership
• Board diversity setbacks are an unintended consequence of the recent board reform movement
• A coordinated approach to social movements can elicit better outcomes

Boards of directors represent the pinnacle of corporate leadership. Their judgments and decisions shape the very form and fate of organizations. Research shows that when boards are demographically diverse, financial, social and strategic performance improve[1]. Risk is better managed and innovation flourishes. Diversity (and its advantages) also diffuse more broadly throughout the organization, beginning with the C-suite.

We would therefore expect boards to proactively embrace demographic diversity — particularly in the aftermath of the 2008 global financial crisis when demands for greater board effectiveness soared. Yet in fact the advance of board diversity slowed. Parity — once anticipated by 2040 — has grown increasingly far away[2].

Why at a time of unprecedented need has board diversity slowed? My research points to the interplay of social movements[3]. Despite advantages of greater longevity and wide-ranging advocacy, the board diversity movement was eclipsed by the movement for corporate board reform. Primed by the 2008 crash and endorsed by powerful constituencies (e.g., market regulators and institutional investors), the reform movement seized the attention of board leaders with its demands for greater independence from management. Its recast of board structural conditions and cultural views have also enacted unintended impediments to demographic diversity’s advance:

An original definition of board diversity — diversity of thought —  now saturates boards. Designed to mitigate director groupthink, this reframing is untethered from traditional, demographic bases of diversity (e.g., gender, race, ethnicity)[4].

Long-standing director networks that allowed for learning not only of demographic diversity’s benefits, but also recruitment and appointment of diverse directors are effectively dismantled.

Intra-board collaboration on pivotal board tasks is likewise thwarted due to task segmentation (i.e., delegation of critical tasks to an array of dedicated sub-committees).

Social fragmentation born of intra-board segmentation undermine the bonds of trust essential to mentoring of new board members.   

Collectively, these developments have undermined the advance of demographic diversity within boards.

Ironically, they also undermine governing effectiveness — the very foundation of the board reform movement.

History shows social movements have a capacity to adapt, even collaborate. The prospect of mutual gains — improved governance through greater board demographic diversity — affords a promising basis. So, too, growing recognition by major board reform advocates (particularly institutional investors such as Black Rock) of the value of demographic diversity in the boardroom.