Diversity is unequivocally advantageous in the boardroom. However, many companies fail to ensure they have personnel in the boardroom who offer a diverse range of skills, experience and knowledge – and this almost certainly has a negative impact. The good news is that boardroom diversity is improving - and it has been for a couple of decades now.
In 2015, 18% of Fortune 1000 board positions were held by women, double the number of females in boardrooms 20 years ago. Racial minorities are also being given more opportunities with 15% present on the boards of Fortune 250 companies. Diversity brings many proven benefits for companies of all sizes, but what makes it so important?
In any company, the goal of the board is to make profits for shareholders. Beyond the shareholders, companies ultimately depend on their customers. Board members should attempt to reflect the customer base and understand their needs and demands as much as possible. This is made easier if you have a board made up of individuals from different backgrounds as they can reflect the real world and their target markets.
Different Points of View
Diversity does not just refer to gender or race, although that is important. It also refers to culture, age, experience, educational background, professional background and more. Essentially, the better the mix of people, the more able the board will be to critically evaluate, think innovatively and be more creative. Different points of view are needed to challenge ideas and develop the best solutions. If everyone on the board comes from similar backgrounds and share similar experiences, the company will be missing out on opportunities to grow and develop.
Better Decision Making
Different views are important because the board needs to be challenged. When everyone agrees, there are fewer options to consider. This might seem easier, but is it more effective and does it offer real stakeholder value? Non-executives are generally invited to join boards specifically because of the need to challenge existing protocols. Having multiple viewpoints and diverse knowledge leads to more options, which generates better action plans. A more diverse board will ensure that members take different approaches when tackling problems based on each member’s thought process and experiences. This ultimately leads to better decision making.
When a company can boast a very diverse board, this reflects well on the company - it will boost the company’s reputation, improve brand image and nurture consumer trust. In today’s corporate world where trust is at an all-time low, consumer perception of a brand is of premium importance.
Does Diversity Boost Revenues and Growth?
All of the above will often lead to better profit growth for companies with diverse boards. In fact, Returns on Equity are as much as 53% higher for the companies in the top quartile of board diversity, according to a McKinsey & Company study. A Forbes report from 2011 also shows diversity played a key role in business innovation and growth.
Boardroom Diversity is More Important than Ever
There are now more efforts underway to improve boardroom diversity. As reported in the FT, in 2018 the European Securities and Markets Authority introduced new rules that 6,000 of the largest companies in Europe must publish their policies for ensuring diversity on their boards. In the UK, the Financial Reporting Council (FRC) also published an updated Corporate Governance Code, which will apply from January 2019. The aim of the new Code is to boost trust in UK businesses, and it presents various recommendations to improve the business culture in the UK - one of which is to ensure more diversity in the boardroom.
Benefit from Greater Boardroom Diversity
Any company can benefit by having a more diverse board of director, but the aim should not be to ensure you have a set amount of women or ethnic minorities just so you can tick quotas off your list. Instead, a more diverse board brings so many benefits to a company, helping to make them function more effectively and adding value to the organisation. Diversity in the boardroom should be actively pursued to boost reputation and revenues.
Engaging Non-Executive Directors is the optimal way to add diversity to a Board. Do you think you could bring a fresh perspective to a boardroom? Join the largest network of Non-Executive Directors today and help to make UK boardrooms more diverse.