The latest Director Note published by The Conference Board presents practical advice on how public companies can maximize the benefits that a diverse board provides by enhancing both demographic and cognitive diversity in the boardroom. It concludes that a cognitively and demographically diverse board is best equipped to perform its obligations and help a company compete, innovate, and respond to the disruption in today’s challenging international markets. Moreover, the report notes that the work of a board is not over once it has assembled a diverse group of directors. To ensure that a board reaps the benefits of diversity, it must foster a culture that embraces diverse insights and ensures that they are incorporated into the decision-making process.
The Director Note, authored by Jared L. Landaw of Barington Capital Group, L.P., provides insights from Barington’s experiences as an activist investor in eight underperforming companies. At each company, an employee of Barington, or one or more other individuals Barington nominated or approved, was added to the board. The Director Note also shares insights obtained from interviewing directors who served on the boards of these companies, both before and after changes were made to the composition of the board.
Among the key findings from the Director Note, entitled Maximizing the Benefits of Board Diversity – Lessons Learned from Activist Investing:
- Cognitive diversity can yield many benefits: Directors who bring new skills, experiences, perspectives, and approaches to problem-solving enhance a board’s cognitive diversity. This can improve a board’s performance, expand its knowledge base, increase director independence and engagement, improve culture and decision-making, and enhance its ability to advise and oversee management.
- There is not necessarily a correlation between cognitive diversity and demographic diversity: While it is commonly assumed that individuals who differ in demographic characteristics will bring new backgrounds and viewpoints to a boardroom, such benefits may be limited if the new directors have backgrounds similar to those of incumbent directors or were selected because they “fit in” well with incumbent directors. For companies to fully harvest the benefits of a diverse board, they should recruit directors who bring a broad range of diversity to the boardroom. This includes diversity in their gender, race, and ethnicity, as well as diversity in their professional backgrounds, skills, perspectives, and approaches to problem-solving.
- Cognitive diversity complements demographic diversity: Among other advantages, 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 these key constituencies. This can help a board better anticipate and respond to the concerns of these parties. While such insights can be invaluable, demographically diverse directors who also have strong professional backgrounds in areas needed in the boardroom may be better able to help a board incorporate their insights into the context of a company’s business.
- Culture in the boardroom is key: Boards may not fully reap the benefits of a more demographically and cognitively diverse board if new directors are uncomfortable sharing their insights, or if their insights are not incorporated into the decision-making process. To ensure that a board benefits from increased diversity in the boardroom, it must have a culture that embraces diversity and encourages the sharing and consideration of diverse perspectives.
“For boards to be effective, they need both commonality and diversity. All directors need to have unimpeachable integrity, sound business judgment, an ability to work well with others, an understanding of the role of the board, and a selfless commitment to the company, but that needs to be coupled with a diversity of backgrounds, skills, and perspectives,” said Paul Washington, Executive Director of The Conference Board’s ESG Center. “Achieving the full benefits of diversity requires sustained effort, from recruiting, to onboarding, to running meetings in a way that genuinely encourages directors to share their thoughts and perspectives when they differ from others in the boardroom.”
The Director Note also shares proactive steps boards can take to recruit directors who are both demographically and cognitively diverse. These steps include:
- Recruit demographically diverse candidates who have strong business backgrounds and experience in areas that are required on the board to meet the company’s current and anticipated needs.
- Use board and director-level assessments to determine what professional backgrounds, skills, and experiences are needed in the boardroom and whether such needs are being adequately met by the board’s current members.
- Recruit from new talent pools and venture beyond using board member networks and historical recruitment practices to help identify diverse director candidates who lack ties to incumbent directors and the senior management team.
- Carefully review a candidate’s background and life experiences, and have in-depth discussions with the candidate and the candidate’s references, to determine whether he or she is cognitively diverse from other members of the board.
- Involve multiple directors in the interview process and conduct interviews in a variety of settings to get an accurate read of the candidate.
“As an investor in numerous companies with homogenous boards, it has been our experience that improving diversity can significantly enhance a board’s ability to perform its key functions, particularly when gender, racially, and ethnically diverse directors are added who bring to the boardroom needed skills and experiences as well as new views, perspectives, and approaches to problem-solving,” stated Jared Landaw of Barington Capital Group, L.P. “Many CEOs are facing the most challenging business environment of their careers. Having a diverse group of directors to advise them on how to respond to issues and disruptions few have confronted before – including a worldwide pandemic, a lingering trade war, changing consumer preferences, and widespread protests over racial inequality – can be invaluable.”
