RSM Resources

Conventional wisdom suggests a company’s board of directors ought to reflect the diversity of its many constituencies, including its customers, employees, investors, and the community or communities it serves.

Not long ago, that logic was founded primarily on factors that had little to do with business success: a sense of social responsibility, the desire to create and maintain a positive public image and,frankly, efforts to avoid becoming the focus of activist groups and negative media exposure. In recent years, however, organizations have begun to recognize the virtues of director diversity run much deeper. Today, director diversity means good business.

Changing norms
A couple decades ago, boardrooms typically were the nearly exclusive domain of middle-age, white CEOs. In more recent years, that homogenous prototype has given way to a still-evolving norm that more closely resembles society at large. According to Business for Social Responsibility (BSR), a worldwide,nonprofit organization dedicated to improving corporate social responsibility,the makeup of the typical American board of directors is constantly evolving.In 1999, for example, 84 percent of Fortune 500 companies had one or more female directors — up from 69 percent in 1993. Among Fortune 1000 corporations,60 percent had at least one ethnic minority on their board, up from 51 percent just six years earlier.

Despite recent improvements, most boards still don’t closely reflect many of their organizations’ overall constituencies.Women comprise roughly 50 percent of the U.S. population, yet many companies have all-male boards. Statistics from the Hispanic Association on Corporate Responsibility show that approximately 14 percent of the U.S. population is Hispanic, yet Hispanics make up 10.7 percent of the workforce and only 5percent of officials and managers. Less than 2 percent of corporate directors are Hispanic.

While some companies maintain the status quo, an increasing number recognize the business case for director diversity. They understand that broader board representation goes way beyond creating a good image and safeguarding against the occasional public-relations snafu — straight to the bottom line.

Director diversity equals good business
Organizations that lag behind the times on director diversity run the risk of sullying their public image. Research suggests they also may be hurting their firms’ profitability.

BSR cites several research studies that show:

• Companies with more diversity have better stock returns and less risk of loss for shareholders.
• Increased representation of women and minorities on a board can help improve stock performance within a year.
• Board diversity contributes to improved employee morale by signaling that the company is committed to advancement of women and minorities.

Albertsons, the Idaho-based grocery chain, has demonstrated a comparatively strong commitment to diversity. It is the only Fortune 200 company with more women than men on its board, and it also has Hispanic and African-American directors. According to CEO Larry Johnston, Albertsons didn’t get there because it strived to add diversity. It got there because it wanted to strengthen its business. Johnston has told reporters on more than one occasion that Albertsons’ diverse board resulted from seeking the best directors available.

"Women have insights to our customers that no man can match, frankly," Johnston says. Roughly 85 percent of Albertsons’ customers are women — so having women directors gives the company the inside track on customer perspectives.

According to the Calvert Group, Ltd., an investment firm that uses director diversity as one criterion for identifying suitable investment targets:

• Women make 83 percent of consumer purchases and have some influence over 91 percent of consumer purchases.
• The purchasing power of ethnic minorities has increased by more than 500 percent since 1990.
• By 2050, today’s minorities will account for nearly 50 percent of U.S. workers and consumers.

In the future, your business success or failure may be closely tied to your ability to populate your board with directors who represent — and can relate to — these populations.

Finding the right match
An ever-growing pool of qualified female and minority candidates has paralleled the growing demand for director diversity, thanks to their increasing presence in management ranks. Companies seeking more diversity among their directors should find it easier than ever to accomplish that goal, although it might require changing recruitment models.

Companies attempting to diversify their boards historically have looked first to academia and public or non-for-profit organizations. Typically, these sectors had higher numbers of qualified women and minorities among their ranks. The business world now produces more and more prospects.

As the demand has risen for diverse directors, so have the methods for identifying them. For-profit recruitment firms will help you locate the directors you need, for a fee. But some not-for-profit organizations provide similar services free of charge and can help in many different ways. These include BSR (http://www.bsr.org);Catalyst, which focuses on women (http://www.catalystwomen.org); Hispanic Association on Corporate Responsibility (http://www.hacr.org);and the National Association for the Advancement of Colored People (http://www.naacp.org).

If you go it alone, many of the same strategies you use to identify high-level employees also will work. Experts suggest you establish your selection criteria upfront to ensure you end up with dynamic,involved board members who can truly strengthen your organization. Typically,good candidates for your board of directors:

• Represent the demographics of the communities you serve, your customer base and your employees.
• Have the knowledge and experience to help strengthen your business strategies and practices.
• Possess contacts in their business world and community that can help generate business or solve challenges.
• Have a proven track record, both as a manager and as a good citizen.
• Are experts and leaders in their field.
• Demonstrate a strong moral and ethical background.

Diversify your board, and you can meet multiplegoals in the areas of business performance, corporate responsibility and public relations.