Diversity’s Role in Boardroom Leadership

What does boardroom culture yield when a board commits to a broad embrace of diversity—including diversity of gender, ideas, ethnicity, race, education, age, and skills?  Do chances improve for decisions that help lead the company to maximize its potential and meet its leadership responsibilities?  And if so, how?

Given all the research data about boardroom diversity, it’s tempting to turn to data for answers.  Yet data are limited in what they can tell us about how diversity affects boardroom culture and leadership.  By contrast, examining the experiences of directors who have served on a board that embraced—or didn’t embrace—diversity as an element of its culture can uncover key mechanics of how diversity improves a board’s ability to lead.

Diversity Data Limitations

Research data have no problem tracking certain specific issues related to boardroom diversity.  For example, research data can tell us that gender diversity is growing, albeit slowly, on the boards of the 3,000 largest publicly held companies incorporated in America.[1]  Female representation on these boards reached 18 percent at the end of 2018, up from 16.5 percent at the end of 2017, and up from 15.1 percent at the end of 2016.

By contrast, research data have difficulty shedding light on other issues related to boardroom diversity.  For example, does this uptick in gender diversity correlate with an improvement in corporate performance?  Post and Byron (2015) analyzed the findings of 140 peer-reviewed studies of board gender diversity.  Pletzer, Nikolova, Kedzior and Voelpel (2015) analyzed another 20 such peer-reviewed studies.  These two analyses suggest that the relationship between board gender diversity and corporate performance is either zero or weakly positive.  Yet in fact this conclusion can be given little weight for a number of reasons, including these:

  • Because the number of women on boards is still so small, the influence of those women on those boards is likely to be modest. What will that influence be, and what will corporate performance be, when the percentage of women on boards, either because of board decisions or because of laws resembling the one recently passed in California, reaches or exceeds 50 percent?  Until we reach that point, trying to discern whether gender diversity correlates to corporate performance may be a difficult pursuit at best.
  • One can assess how Acme Anvil & Dynamite Corporation performed for five years with all male directors, then assess how Acme performed for the next five years with three female directors, then compare the company’s performances. Yet the first five years may have presented challenges at the company or in the marketplace that differed wildly and in ways that cannot be quantified from the challenges of the next five years.  These variables undercut most any conclusion one might want to draw about boardroom gender diversity at the company during that decade.  For example, perhaps company fortunes did not soar during the second five years, but board diversity saved the company from ruin during those years.  Would the all-male board have made the same impact during those years?  We’ll never know. It seems unlikely that any boardroom diversity study can account for intra-company and marketplace challenges enough to create two identical playing fields on which to compare two different periods of company history.

Attempts to measure how other aspects of diversity—e.g., racial, ethnic, educational, or skills—affect boardroom culture and performance would seem likely to end up being inconclusive for similar reasons.

So at least for now, in looking to assess the impact of diversity on boardroom culture, the question to ask might be, “What happens when board members embrace diversity as part of the bedrock on which their boardroom culture[2] is built?”

Diversity as a Boardroom Upgrade

We recently conducted a series of interviews on boardroom culture, featuring conversations with accomplished tech industry directors, CEOs, investors, and founders.

The interviewees said a lot about diversity’s role in boardroom culture, sometimes in response to a direct question about diversity or board composition, and sometimes in response to a question that, at first glance, appeared to be about an entirely different topic.

So what happens when board members commit to a broad embrace of diversity—including diversity of gender, ideas, ethnicity, race, education, age, and skills—as a main element of their boardroom culture?  The interviews indicate that diversity gives the board opportunities to upgrade its ability to lead.

  • Trade preconceptions for talent. “[If you]…leave your preconceived notions about what somebody has to offer at the door…. then you can find surprising talent in places you wouldn’t expect.”[3]  When different is okay, the board’s stockpile of talent can grow more quickly into a competitive advantage.
  • Trade tenure for skill. “Different skill sets are needed at different stages [in company evolution], which is where the idea comes in that people may not make the entire journey with you.”[4]  When different is okay, new directors, with indispensable skills, can arrive in the boardroom at the opportune moment.
  • Trade classmates for customers. “…[B]oards need to be reflective of the company’s target market. The board practice of having a bunch of people who have known each other for 30 years, who may or may not have any value to the company, is not helpful.”[5]  “It was very helpful for me to have a second voice in the room talking about why [restoring nerve sensation in the wake of a serious breast operation] is important. It wasn’t viewed as just my opinion–it was viewed as representing a viewpoint from the perspective of female patients.”  “[The company wants] the skill sets of board members but given that their market is predominantly women’s health issues, they want to make sure that there are women making the decisions about the where the company goes.”  When different is okay, new directors can transform the board’s connection to customers.
  • Trade intransigence for operational competence. “I view this board as my advisory group, and so I go out of my way to make sure that I understand all perspectives. We don’t have the feistiness of people who feel their voice is not heard because I think we hear their voices… I think an ideal board would have a broad mix of diversity, not only gender but also diversity of thought and experience. If the board is our sounding board for different perspectives on issues, then diversity makes us stronger.”  Where different perspectives are okay, the CEO can benefit from the full sweep of the board’s experience and expertise.
  • Swap friction for advisory skill. “We have different perspectives and are good at airing and discussing those without animosity; it’s really all of us trying to do the best thing possible for the company. We listen to and respect the different perspectives because we know it’s important to air conflict as it arises.”  Where a different perspective is not a threat, the distraction of animosities can be minimized, and the search for finer ideas on oversight and strategy can be intensified.
  • Swap competition for insight. “Every high-functioning board I’ve been on had at least one person who by their nature adopted that role and was able, in the midst of all the IQ, creativity, and emotion, to stay above the fray and at the right moment ask a clarifying question that got everyone to re-calibrate… That’s the board member I want…someone who wants the company to be successful more than they want to prove they are right.”[6]  When different is okay, different directors can play different roles, the competition to be smartest man in the room can be left at the door, and the quality of the group’s work can improve.
  • Swap embarrassment for leadership. “Misogynistic behavior [is the worst board practice I’ve seen]…The bad news is that people really don’t want you to talk sometimes, or your ideas are not valid until re-spoken by a male, or you’re perceived to be less strong of a thinker because you’re wearing a bra…[W]e should be banging the drum for diversity on boards. Not just gender diversity, but all kinds, because different types of opinions add up to something better. I hate to say this, but if doing so requires regulation, then I think we should regulate, because I think in the end it will create stronger companies.”  When different is okay, the company can distinguish itself in the marketplace by leaving unacceptable behaviors behind and squaring its operations with society’s greater aspirations.
  • Swap control for growth. “I would argue that organizationally the chairperson should not be the CEO, simply because organizations move in the direction of the questions that they ask. If you have a chairman and a CEO, one and the same, there are questions that might not get asked. He or she could create an atmosphere in the room that is hostile to certain questions being asked, and in that case the organization suffers.”[7]  When different is okay, the impulse to cling to titles and quash debate can be abandoned, more people can contribute to the board’s work, and the openness that leads to organizational growth can flourish.

A Question of Leadership

On one level, then, based on the experiences of the interviewees, a broad embrace of diversity can act for a board as a sort of gateway decision to upgrades in talent, skill, customer connection, operational knowledge, advisory capacity, insight, societal leadership, and organizational growth.

On a more fundamental level, a broad embrace of diversity means that the board’s work can be the byproduct of people who are different, and their ideas, which are likely to be different and likely to lead to questions.

Why do questions matter?  As Founder/CEO 3 observed, “[O]rganizations move in the direction of the questions that they ask.”  Organizations don’t move, and probably don’t grow or even survive or exist, without asking questions.  Questions might be the lifeblood of every organization.  Every business plan is, in some sense, an answer to a question.  The more insightful the questions, the more likely the answers to them will be insightful, and the more likely the organization built on them can thrive.

So openness to questions, the ideas behind them, and the people who ask them, even when those ideas and people seem unfamiliar, would seem to be not a proposed policy to put into committee for consideration over the coming quarters—i.e., not a big disruption—but rather to be an indispensable element of any board that wants the organization to make payroll this month.  Openness to different people and their different ideas and their questions would seem to be why diversity is an element of boardroom culture that improves chances that the culture will yield decisions that lead the company to maximize potential and meet leadership responsibilities.

Will this full commitment to diversity guarantee better decisions and leadership from the boardroom, and thus better company performance?  Guarantee is too absolute a link to claim between diversity and performance because, as noted in the Acme anecdote above, diversity is never the only variable that affects performance.

But in an economy where investor, regulatory, and societal demands are creating a marketplace whose complexity is shifting and increasing, and where global economic stability is far from guaranteed, who seems more likely to lead a company to maximize potential and meet leadership responsibilities:  a diverse group of open, inquiring minds with an upgrade in talent, skill, customer connection, operational knowledge, advisory capacity, insight, societal leadership, and organizational growth, or a closed group whose crush on their preconceptions forces them into betting that, tucked up in their tree house, they already have all the answers?

ENDNOTES

[1]  The Equilar survey cited is based on board composition on the Russell 3000, which Investopedia defines as the companies with the 3,000 largest U.S.-traded stocks.  https://www.investopedia.com/terms/r/russell_3000.asp

[2] The Merriam-Webster Dictionary defines culture as “the set of shared attitudes, values, goals, and practices that characterizes an institution or organization.”  https://www.merriam-webster.com/dictionary/culture

[3]  Founder/CEO 1 is an innovator, entrepreneur and seasoned board member.  He has has founded six companies, three of which went public.

[4]  CEO 2 is chairperson, CEO and president of a public company.  She also serves on the boards of several public and private companies.

[5]  Venture Investor 1 has served on many venture-capital-backed boards.  At the time of the interview, she was senior managing director at a large corporate venture fund.

[6]  Venture Investor 2 is a partner emeritus at a prominent Silicon Valley venture fund.  He is a veteran member of many boards across a breadth of technologies.

[7] CEO 3 is a five-time founding CEO of successful tech companies.  He has served on the board of several public companies.

This post comes to us from Joseph Mandato, a managing director at DeNovo Ventures, senior advisor at Mainsail Partners, lecturer at Stanford University, and co-chair of Harvard University’s Advanced Leadership Coalition. William Devine leads the Corporation in Society practice at William Devine Esquire, a Silicon Valley compliance and governance law firm, and is an adjunct professor of law at Menlo College.