Influenced by state legislation as well as the efforts of institutional investors and other diversity advocates, companies have been adding more diverse directors to their boards than ever before. In 2019, a record 59 percent of the directors added to the boards of S&P 500 companies were women or were men belonging to a racial or ethnic minority group. Now, as companies seek to navigate numerous issues few have faced before, including a worldwide pandemic, a lingering trade war, changing consumer demands, and widespread protests regarding racial inequality, even more may be seeking to increase their diversity. But what characteristics should boards look for when adding directors to improve gender, racial, and ethnic diversity to ensure that these new directors also enhance diversity in the boardroom from a practical perspective?
How Diverse Is Your Board, Really?
Significant benefits can accrue from having a demographically diverse boardroom. Among other things, a demographically diverse board is more likely to represent the composition of a company’s employees, customers, and suppliers and can therefore provide a board with a better understanding of the company’s key constituencies. Thus, a demographically diverse board may help a company identify and respond to market shifts and changes in consumer expectations more effectively than a homogenous board. But this is only true if the board maintains cognitive diversity as well as demographic diversity. In interviews with 18 boards of directors, the author found that cognitively diverse directors were frequently able to share valuable insights with their fellow directors, expanding the board’s understanding of the company and the strategic and operating issues it faced. They also found that they were more likely to ask tough questions and challenge the proposals of management and their fellow directors than incumbent directors who were long-tenured or had personal or professional relationships with others in the boardroom.