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Posted: December 05, 2013

Is your board addressing diversity?

A path to constructive policy

Taylor Simonton

As major socio-economic and market forces change the way American companies operate, corporate boards face a new set of challenges. Global markets are expanding; however, international competition is growing as new customers emerge and demographics shift both at home and abroad. Corporate directors must address these challenges to ensure the future success of their companies.

The good news is that most business leaders realize that a proactive diversity policy at the board level is the best way to apply the mosaic of human experience to corporate decision-making.

Multiple factors are involved and unique to each company, and diversity practices and policies vary widely according to each corporation’s size, products, services and markets. There is a universal and generally accepted understanding that the commitment to diversity serves pragmatic business goals. The National Association of Corporate Directors (NACD) has conducted numerous studies and research that clearly indicate that corporate performance improves and governance enhances when different perspectives of ethnicity, gender, background and skill sets enter the boardroom.

Hiring a multicultural workforce and promoting diverse management teams are standard best business practices. Establishing a diverse board of directors is not as easy. While many boards aspire to be diverse, too few achieve it. According to NACD’s 2012 Blue Ribbon Commission Report (BRC), The Diverse Board: Moving from Interest to Action, “There are structural, social and habitual barriers that have been unconsciously erected to prevent boards from obtaining the very best individuals for the board.”

More than half of large corporate boards are populated by former C-level executives and the demographic fact is that many of today’s most senior executives are white males who entered the workforce decades ago, well before the mass influx of women into the workplace and the ethnic diversification of the country. Though this is a relatively common and unintentional situation, many corporate boards, especially of smaller companies, have few or no term limitations that encourage director turnover. Factors such as this make it harder for the addition of a newer guard, which tends to be more diverse in race and gender. A director with the most years of experience is not necessarily the best measure of what is best for your company’s board composition.

Diversifying the board is possible through strong and effective leadership coming from within the board itself. Unlike individual corporate officers or division leaders that are often beholden to only the most demanding customers, boards are in the business of looking out for all stakeholders and maintaining a corporate perspective. The NACD recommends the following practical solutions to overcome the often hidden hurdles for board diversity:

Discuss. Candid, in-depth board discussions about critical topics are at the core of board contribution to any enterprise. The topic of diversity is no exception.

Review and evaluate board composition. Diversity discussions should be rooted in company strategy and board evaluation. A candid exchange of views on both issues is crucial to understanding the board’s composition and the company’s strategic requirements.

Expand horizons for seeking candidates. Boards should consider setting a nominee slate target for the nominating/governance committee and recruiters.

Improve director evaluations. Board and individual director evaluations must be strengthened to hold the board accountable as an effective oversight body.

Preserve, enhance or consider adding tenure-limiting mechanisms. Boards should select the most appropriate tenure-limiting mechanism for their company. Moreover, boards must adhere to the outcome when a tenure-limiting mechanism is triggered, even if the director is still an active participant.

Disclose. Boards should consider going beyond required disclosures and provide shareholders with a thorough explanation of their director search process and the potential value it brings to the company.

Too often diversity is an issue of compliance and not strategy. Although it is the board, not management, which has the responsibility for diversifying its own membership, top management should encourage their boards to strive for diverse composition as a means of strengthening their own ability to make wise and informed decisions. Success can be elusive without the right talent, and entrenched thinking and repeated behavior patterns must be challenged.

The BRC Report concluded that, “diversifying the board may take many shapes, but it is more involved than simply adding more women or ethnically diverse candidates to the mix. Today we are moving beyond good intention and toward strategic imperative. Directors must approach the improvement of their board methodically, with the intent of finding the very best talent as a means to complement the company’s strategy and needs.”

Your company can achieve a path to diversity with a thoughtful plan.

Taylor Simonton, CPA, is a Director and Past Chairman of the Colorado Chapter of National Association of Corporate Directors (NACD) and is a retired PwC LLP National Office SEC Partner, who is serving or has served on the board of directors of six Colorado companies, usually as audit committee chair. NACD is the recognized authority focused on advancing exemplary board leadership and establishing leading boardroom practices. With over 14,000 corporate director members, NACD provides world-class director education programs, national peer exchange forums, and proprietary research to promote director professionalism. Contact Taylor about NACD and its Colorado programs at tsimonton@NACD-Colorado.org or www.linkedin.com/in/taylorsimonton.

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