Constructing A More Diverse Board of Directors: A Guide to Achieving Diversity
Source: Georgia Institute of Technology
In today’s globally competitive marketplaces, businesses are looking for any and every advantage over their competitors. According to Georgia Tech Scheller College of Business Professor Seletha Butler’s article, All on Board! Strategies for Constructing Diverse Board of Directors, published recently in the Virginia Law & Business Review, the board of directors of companies should be more inclusive, reflecting “the demographics and composition of the global marketplace that the companies serve.”
“Diversity improves the governance of a board of directors for several reasons,” said Butler. In citing prior research, she references a number of reasons for diversity, including: “(1) access to and utilization of untapped talent in order to include the best available human resources; (2) women and minorities have greater independence from management and therefore reduce the risk of management being self-serving; (3) diverse boards generate more information; . . . (5) diverse boards signal credibility of positive corporate behavior . . . .”
Butler suggests that U.S. companies need to take action soon due to the competitive global environment as other countries are implementing diversity protocols and policies that could leave American companies behind. She further argues for an inclusive U.S. corporate structure that can be the inclusiveness model for the global business environment.
There are a number of ways to achieve diversity. Butler proposes a regulatory reform and has developed a Tier-7 Diversity Strategy for constructing a diverse board.
Her regulatory reform recommendation argues for a transparency regulation requiring the public filing disclosure rules to compel information disclosure such as post-secondary degrees, international background or exposure, key highlights of the last 20 years of employment history, and key current and past for-profit and non-profit board service as well as other attributes including race, gender and ethnicity to be disclosed in annual proxies.
“Such regulations would enable consumers to assess the level of diversity of specific companies and to base their investment and purchase decisions on more complete information,” said Butler. To be inclusive in her recommendations, Butler provides potential counterarguments to such transparency regulation.
Butler’s Tier-7 Diversity Strategy includes: preparing early, post-secondary governance study and training, promoting from middle management, establishing an inclusive nominating committee, utilizing available diversity information as well as being intentional and understanding international actions on board diversity.
Preparing Early refers to focusing on the training of underrepresented minorities in the areas of finance, economics and law. This could include elements such as the Bridge to Business Program—a partnership between the Scheller College of Business and Agnes Scott College designed to encourage more women to pursue careers in business and management. According to Butler, these fields are the most prevalent in backgrounds of existing directors and can help refute the “Diverse Director Limitation Argument.”
However, “early stage preparation requires the tough evaluation and implementation of equal educational opportunities across all educational systems,” said Butler.
Post-Secondary Governance Study and Training, and Promoting from Middle Management
Butler suggests that providing underrepresented group director trainees with adequate governance training on the roles and obligations of board members is another method for addressing the board inclusiveness issue. Additionally, such study and training can help address the challenge of diverse board members having individual values that don’t align with shareholder values.
“Training programs should include guidance on selecting career paths within a designated industry, specifically in industries that lack diversity,” said Butler. “This industry specialization approach would provide diverse director protégés with opportunities early in their director training process to gain insight and experience in a specific industry.”
Butler suggests that “because female directors are notably less prevalent in industries such as energy, infrastructure, electronics and technology than in other industries, a greater focus should be placed on exposing females to these underrepresented industries and on providing them with training and advancement opportunities.” Also, within the framework of—post-secondary governance study and training and promoting from middle management,—Butler discusses the importance of senior management identifying, sponsoring, mentoring, developing and promoting diverse talent in preparation for corporate board service.
Establishing an Inclusive Nominating Committee and Utilizing Available
Butler discusses the importance and influence of the nominating committee in shaping board diversity. She recommends having a diverse nominating committee and ensuring that the committee uses existing sources to help identify potential qualified director candidates when bringing new members onto the board.
Being Intentional: Existing Self-Action, Being Proactive in Alignment and Voicing Board Service Interest
According to Butler, “Historically, board candidates’ names are drawn from elite social networks.” She suggests that because many minority groups lack access to such networks, such lack of access may be one contributing factor to the perceived shortage of qualified minority candidates for corporate board service.
Butler recommends that this diverse talent with board service aspirations must be intentional regarding their interest in board service, including building their social network to include such elite social networks and voicing their interest in board service.
Understanding International Actions on Board Diversity
Another way to increase board diversity is for boards to take more progressive action, suggests Butler. Other countries are taking a leading role by implementing proactive policies to ensure a culture and corporate platform of inclusiveness. If the United States lags too far behind, then it may need to play catch up when other countries continue to gain influence in global governance policies.
Butler identifies the United Kingdom, Australia, Sweden, Norway and Spain as some of the nations taking action to address board inclusiveness. However, Butler points out that she does not advocate quotas to achieve diversity as some of these nations have done, but instead argues for the implementation of the strategies listed above as a mechanism to attain diversity.
Seletha R. Butler is an assistant professor of business law and ethics at Georgia Tech’s Scheller College of Business in Atlanta, Georgia. Professor Butler’s research agenda focuses on corporate governance issues, including the structure, obligations and activities of boards of directors. She holds a bachelor’s degree in corporate finance, from the University of Alabama, a law degree from Harvard Law School, and an MBA (global focus) from Georgia Institute of Technology. Butler worked at global law firms in Atlanta and Chicago and one of the nation’s largest commercial banking organizations, and has served on or provided advice to a number of corporate boards.