With the topic of “diversity” is at the top of many boardroom agendas, the National Association of Corporate Directors has made diversity a focus this year with a series of four national events on diversity, a Blue Ribbon Commission on diversity and by continuously adding diverse director candidates to NACD Directors Registry.
While there has been a fair amount of activity around the concept of diversity in businesses, law firms, colleges and universities and research firms, there is no consensus for how to achieve a diverse workforce—or boardroom. One reason for this lack of accord is that diversity can be defined in many ways—from ethnic background to experience and ideas to gender.
NACD’s focus on diversity aims to begin a national conversation about what diversity looks like on boards and, more importantly, how to achieve it. The first step in the conversation began April 17 in San Francisco, where directors and potential directors gathered for “Diversity in the Boardroom: A Competitive Advantage,” the first of four national events in 2012. Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System (CalSTRS), noted that when companies need directors, it’s important to have an ample supply of candidates. She highlighted the Diverse Director Database (an initiative led by CalSTRS and CalPERS) and NACD Directors Registry, which allow board candidates to create profiles and companies to search those profiles when boardroom seats are available, as tools.
One concept that resonated throughout this week’s NACD event in San Francisco was when a participant suggested that another area diversity can encompass is behavior, meaning there is a board member who will play devil’s advocate in the boardroom, someone who takes the status position and more. However, it’s also essential that board members don’t become categorized by their attitudes. The challenge is to create a boardroom dynamic that allows all directors to contribute and be heard.
The topic of diversity isn’t only igniting conversations in the United States. Gender diversity made worldwide headlines in March when senior European Union justice official Viviane Reding called for legislation in the European Union to increase the number of women on boards at European companies. In 2011, Reding asked companies to increase the number of women on boards to 30 percent by 2015 and to 40 percent by 2020 by replacing departing male directors, and 24 companies responded. Dissatisfied with the reaction, Reding is now talking about implementing quotas. “Personally, I don’t like quotas,” Reding said in a New York Times article. “But I like what the quotas do. Quotas open the way to equality and they break through the glass ceiling.”
While there is no legislation on the table to increase the number of women on boards in the United States, there is a Securities and Exchange Commission rule that requires companies to disclose whether, and if so how, a nominating committee considers diversity. But the lack of legislation or regulation doesn’t prevent pro-women groups’ strong belief that the United States could use a boost in boardroom gender diversity. Since its founding in 1962, Catalyst has been advocating for more women in corporate leadership and the boardroom, and in more recent years a growing number of groups have joined the call for more women on boards. There are also grassroots initiatives such as 2020 Women on Boards, a national campaign to increase the percentage of women on U.S. company boards to 20 percent or greater by the year 2020, and WomenCorporateDirectors, the only global membership organization and community of women corporate directors, which has a 10-step action plan to increase the number of women directors, helping to raise awareness about the need for gender diversity on boards.
Examining only demographics, it becomes clear there is a shortfall in the boardroom. Although women make up more than half the U.S. population, according to a Catalyst report, only 16.1 percent of U.S. Fortune 500 board seats are held by women and only 3 percent of board seats are held by women of color. A 2011 Directorship article noted that if quotas similar to those used in Europe came to the United States right now, most American boards would fall short.
For gender diversity advocates, there is no easy answer for how to implement change. Boardrooms do face an uphill battle when it comes to adding more women; a significant hurdle is that boards often have a slow turnover rate. “Reasons for this downtrend may include the downsizing of boards, the raising of director retirement ages and less voluntary director resignations during the economic downturn,” said Julie Hembrock Daum, co-leader for the North American Board & CEO Practice of Spencer Stuart, during an NACD peer exchange in 2011. “The lack of board turnover creates a very real challenge for board renewal and getting new skills on the board.” Daum also noted that S&P 500 companies named the fewest number of new directors last year than in the past 10, which translates to fewer opportunities for anyone, male or female, seeking a board seat.
Bonnie Gwin, vice chairman of executive search firm Heidrick & Struggles, summarizes the important role that women directors can play in changing the faces in the boardroom: “I’ve seen among women a sense that they want to mentor and embrace other women and ensure they have opportunities.”
Rosemarie B. Greco, who sits on the board of directors at Exelon and PECO, brings wide-ranging board experience to this issue, along with being a member of NACD. She is a trustee of SEI Investments, has served on four additional corporate public company boards and two privately owned corporations, and co-chairs Vision 2020, a national women’s leadership initiative. Greco says she thinks part of the solution is term limits. “Some directors cling to their board seats, beyond a reasonable time period, and need an honest self evaluation of their own relevancy,” she says. “If there are no term-limit guidelines, the updating of director skills and experience can be negatively impacted, and, most certainly, the opportunity to fill board seat vacancies with diverse candidates will be minimized.”
Although many boards are elected annually, CEOs and chairmen of boards have so many responsibilities that they may be reluctant to disrupt a cohesive board, Greco notes. “It takes a disciplined approach to put into place a set of goals and a process that everyone understands that also has a trigger point when people’s individual skills need to be evaluated and a decision made on the relevance of those skills and experiences,” she says. Greco says the next priority should be always to have a diverse pool of candidates with equal or similar sets of skills and experiences and equal numbers in the pool of men and women. “If a board is intent upon diversifying its membership—to reap the benefits of diverse perceptions and profiles as well as to mirror the demographics of their stakeholders, customers and most importantly, the company’s employees—then a commitment to developing a diverse board candidate pool is the critical next step,” Greco says.
Two other constraints for companies when looking to fill director positions are often time and money. “I really don’t believe CEOs are saying, ‘No women, no way.’ A lot of companies feel they don’t know qualified women,” notes Malli Gero, the executive director of 2020 Women on Boards. “One thing we observe is that the biggest companies tend to do far better than the small ones. The bigger companies probably have more money for broader searches, and smaller companies may be more dependent on their rolodexes.”
Another issue is that most women lack the perceived requisite experience to joining the board, namely they are not CEOs, Daum says. “Generally boards like people who have operating experience—people who run companies and major divisions— and there are fewer women in these positions.” Some recruiters suggest that boards look beyond the traditional CEO positions to pull candidates. The ranks of CFOs are an obvious place to begin but some go further. “Maybe they look for an experienced HR executive with a lot of knowledge on compensation or they look at individuals with roles in strategy and business development,” says Jena Abernathy, vice president of executive search firm Witt/Kieffer.
On the education front, NACD is committed to educating C-suite-level employees on boardroom opportunities. From encouraging top leadership to select candidates to serve on outside boards to grooming executives to serve on their own corporation’s board, NACD wants to see a real change in the boardroom environment.
For women looking to add themselves to the pool of director candidates, Julie C. Norris, a partner at CTPartners, stresses the importance of building a network. “Bringing someone onto a board involves finding someone who is trustworthy and fits the culture of the board. If that person is known to members of the board, or is known and respected by others who can provide perspective on that person’s potential contributions and cultural fit on the board, that’s often an important part of the decision-making process,” she says.
Another idea that some suggest is the need to move from looking at traditionally “qualified” candidates and being more open to the boardroom as a training ground by bringing on “qualifiable” candidates, Greco suggests. She defines qualifiable as people who have a set of skills and experience the boards needs but may be lacking in boardroom experience. “To best serve their fiduciary duties, boards need to have a well-defined process whereby a skills, experience and performance value can be developed for each member. The values should be considered in light of current and future strategic corporate direction and business plans,” she explains. “Decisions on the relevancy value of each members skills, experience and performance can then be more easily determined; and years of service can be taken into consideration within the board’s term limit guidelines.”
Some states are also beginning to use pension power to include more women on boards. Both Massachusetts and Pennsylvania added new rules to proxy voting policies in the last year to allow targeting of companies that have few or no women directors, Businessweek reported. A survey by Calvert Investments, a $12.5 billion fund that promotes diversity and sustainability causes, notes that at least a dozen states now have similar policies in place. Since 2004, Calvert has targeted companies more than 60 times and the “added heft of state treasurers is expected to increase compliance,” according to the article, paraphrasing Aditi Mohapatra, senior sustainability analyst at Calvert. On the hit list this year are six companies, including Discovery Communications and retailer Urban Outfitters, Mohapatra said in the article.
There are reasons to be optimistic about gender diversity on boards, Norris said: “Boards are recognizing the need to rethink composition to reflect market demands including the adoption of new technologies, marketing via digital channels and driving growth in international markets.”
Cheryl L. Soltis is assistant editor at NACD Directorship magazine.