How Diversity Boosts Your Corporate Board’s Performance

This article examines why true diversity—not mere tokenism—makes all the difference in a boardroom.



In recent years, organisations and governments have been pushing for improving the diversity on corporate boards as a step towards better governance. For example, Goldman Sachs, in a bid to move away from the all-white male boardroom, announced that it will only underwrite IPOs of U.S. and European companies if they have at least one diverse board member. Likewise, Nasdaq’s new diversity rules require all companies listed on its stock exchange to annually disclose the gender and ethnic composition of their boards and provide an explanation if they do not have at least two diverse directors.

 

In 2005, Norway became the first country in the world to introduce gender quota legislation for public limited companies, requiring at least 40 per cent female representation on the board. The European Parliament passed a law in November 2022 that makes it mandatory for large, listed companies in the EU to have at least 40 per cent of women non-executive board members beginning mid-2026.

 

India is also pushing to achieve gender balance in the boardroom. The revised Companies Act, 2013, made it mandatory for all listed companies and other large public limited firms to appoint at least one woman director to their boards. In 2015, the Bombay Stock Exchange (BSE) levied fines on 530 listed companies that failed to meet the deadline to appoint a woman director on their boards.

 

Globally, the diversity composition of boards is becoming increasingly heterogeneous. For example, the share of women on Fortune 500 boards climbed to 29 per cent in 2021, according to a report released by executive search and leadership consulting firm Heidrick & Struggles. However, in India, only 3.6 per cent of the board chairs are women, down by 0.9 per cent since 2018, a Deloitte report said.

 

Women’s representation in boardrooms is an important driver and signal of gender parity. However, despite the strides made by women in all walks of life, the path to the boardroom remains an uphill climb for a majority of them. A recent research study on diversity quotas in India is suggestive of tokenism. While newly appointed women members on corporate boards were more educated than their male counterparts, they were less likely to be appointed to nomination and compensation committees. Further, the probability of an independent female director serving on the audit committee was nearly 40 per cent lower than an independent male director on the same board.

 

The Benefits of Diversity in the Boardroom

Scholarly research supports the view that women tend to add more value to boardrooms. For example, a study by Daniel Ferreira and Renée Adams, Women in the Boardroom and Their Impact on Governance and Performance, investigated the hypothesis that diversity in the boardroom affects governance in meaningful ways. Their research examined boards of S&P 500, S&P MidCaps, and S&P SmallCap firms.

 

The researchers found evidence that gender diversity on boards has a significant impact on board governance. Male directors on gender diverse boards have fewer attendance problems and women are more likely to join monitoring committees. They also find that CEO turnover is more sensitive to stock performance and all directors receive more equity-based compensation in gender-inclusive boards. The findings suggest that gender-diverse boards allocate more effort to monitoring and have better monitoring quality.

 

Adding heft to Adams and Ferreira’s research is a study conducted by Daehyun Kim and Laura T. Starks - Gender Diversity on Corporate Boards: Do Women Contribute Unique Skills? The study showed that women directors contribute additional, unique expertise to corporate boards, which results in enhanced board advisory effectiveness. That is, adding more women directors with their unique skills (R&D, HR, risk management, sustainability, corporate governance, political/government) will increase the heterogeneity of board skills. This, in turn, enhances the overall advisory effectiveness of the board. In essence, the study suggests that women directors contribute more distinct types of expertise that would otherwise not be accessible to the incumbent firms’ corporate boards.

 

The Dearth of Diversity in Boardrooms

Why are businesses moving at a snail’s pace to diversify their boardrooms?  Partly, regulatory reform such as quotas, while a valuable means to achieve gender equality, leads firms to focus on diversity targets rather than the benefits of diversity, resulting in tokenism that adversely impacts women members’ legitimacy and effectiveness. This also leads to ‘lazy’ recruitment processes. Indeed, anecdotal evidence shows that companies prefer to appoint celebrities and seasoned professionals rather than newcomers who lack the ‘pedigree’ and experience that will add heft to the board mix-up. This leads to overlooking genuine talents who might add value to boardrooms. These behaviours are amplified in countries like India, where women’s participation in the upper echelons is limited, resulting in a narrow pipeline of talent.

 

That the business case for quotas is ambiguous fosters the assumption that diversity is not economically beneficial and leads to adverse behaviours. For example, a recent empirical study by researchers at Imperial College Business School in London found that the board of an underperforming firm is more likely to experience a decrease in racial and gender diversity rates. The study showed board diversity takes a back seat when profits decrease, making it challenging for companies to remain consistent in their DEI efforts.

 

Further, when companies overhaul their board composition, it negatively impacts the level of diversity among the ascriptive backgrounds of board members. For example, when GE revamped its board in 2017 to bring in new perspectives, it saw the departure of a disproportionate number of directors from minority backgrounds, including Andrea Jung, the former Avon CEO, who was one of the five female directors and the only Asian director. After the overhaul, the percentage of women and racial minorities on the GE board significantly decreased.

 

How Can We Get More Women Into the Boardroom?

Besides regulatory reforms, diversity efforts should be championed at the firm level. Today, companies, across industries, are seeking novel ways to measure and track the impact of their DEI strategies. For starters, several corporates have prioritised building an organisational culture that values diversity and uses metrics (e.g., workforce composition by gender, race, and age) to hold leaders accountable to promote diversity efforts. For instance, HCL Technologies has set a target of increasing female representation in senior leadership levels to 30 per cent by 2030. Such measurement and transparency create institutional pressures to build diversity across all levels of the firm.

 

Second, to make progress towards gender parity in the upper echelons, firms must reform and professionalise their recruitment processes to onboard the best female talent. It has been seen that women in senior leadership positions find it hard to break into informal networks that serve as key recruitment channels, thereby, getting excluded from candidacy for senior roles such as CEOs and directors.  Organisations may lose out on recruiting high-potential female employees if they fail to reform their hiring strategy to go beyond informal networks to include more formalisation of selection.

 

Third, mere lip service or tokenism will not get more women to the boardroom. Research finds that it is important to have at least three women on the average-sized board for them to have influence. This critical threshold eliminates groupthink and allows diverse perspectives to enable superior decision-making.

 

Fourth—and perhaps the most crucial—more female role models are needed for India’s girl children to inspire them to become tomorrow’s leaders. If we, as a society, can work towards eliminating gender disparities and harnessing the full economic potential of women in the workforce, it will stimulate the nation’s economic growth.

 

Reimagining Tomorrow’s Boardrooms

As the pressure to ensure good corporate governance mounts worldwide, organisations are scrambling to structure more wholesome boards. In India, even several family businesses are keeping pace with the times and appointing more women in senior executive ranks.

 

For example, Arokiaswamy Velumani, the founder of Thyrocare Technologies Ltd, inducted his daughter Amruta into the business as a board member. On the flip side, there are also highly qualified senior women leaders like Dr Valli Arunachalam, the daughter of Late MV Murugappan, the former Chairman of the Murugappa Group, who is fighting to get a seat in her family’s boardroom.

 

The research study, ‘Standalone Family Firms Lead the Path to Gender Parity in Family Firms’ Boards,’ by Kavil Ramachandran, Professor of Entrepreneurship (Practice) at the Indian School of Business (ISB), and his co-authors, shows that if women board members engage more closely with family firms, they are in a better position to take strategic decisions that contribute to the company’s growth.

 

Boardroom diversity is instrumental to every organisation’s success in today’s competitive world. It's essential for the CEO to have a vision to attract the best talent and launch unique initiatives to form a heterogeneous board. Mandatory training programmes should be conducted for board members to promote a healthy culture that will combat cognitive biases such as stereotyping and groupthink.

 

There are other forms of diversity and inclusion worth considering as well. Organisations like Microsoft have kept pace with the times and launched a neurodiversity hiring programme that recruits talented candidates with conditions, such as autism, dyspraxia and ADHD. Although some progress has been made, globally, there is still a long way to go in having more board members who identify as LGBTQIA+.

 

The race is on for companies to sharpen their diversity strategy to create a top-notch boardroom. Only time will tell if the boardroom of the future will mirror the diversity found in the real world.

In 2005, Norway became the first country in the world to introduce gender quota legislation for public limited companies, requiring at least 40 per cent female representation on the board. The European Parliament passed a law in November 2022 that makes it mandatory for large, listed companies in the EU to have at least 40 per cent of women non-executive board members beginning mid-2026.

 

India is also pushing to achieve gender balance in the boardroom. The revised Companies Act, 2013, made it mandatory for all listed companies and other large public limited firms to appoint at least one woman director to their boards. In 2015, the Bombay Stock Exchange (BSE) levied fines on 530 listed companies that failed to meet the deadline to appoint a woman director on their boards.

 

Globally, the diversity composition of boards is becoming increasingly heterogeneous. For example, the share of women on Fortune 500 boards climbed to 29 per cent in 2021, according to a report released by executive search and leadership consulting firm Heidrick & Struggles. However, in India, only 3.6 per cent of the board chairs are women, down by 0.9 per cent since 2018, a Deloitte report said.

 

Women’s representation in boardrooms is an important driver and signal of gender parity. However, despite the strides made by women in all walks of life, the path to the boardroom remains an uphill climb for a majority of them. A recent research study on diversity quotas in India is suggestive of tokenism. While newly appointed women members on corporate boards were more educated than their male counterparts, they were less likely to be appointed to nomination and compensation committees. Further, the probability of an independent female director serving on the audit committee was nearly 40 per cent lower than an independent male director on the same board.

 

References

  1. https://pubsonline.informs.org/doi/full/10.1287/orsc.2022.1595
  2. https://www.forbes.com/sites/jasonwingard/2021/08/12/no-more-excuses-how-4-leading-companies-diversified-their-boards/?sh=65f349146c69
  3. https://hbr.org/2021/02/what-happened-when-india-mandated-gender-diversity-on-boards
  4. https://www.linkedin.com/pulse/why-diverse-corporate-boardrooms-drive-equity-equality-enrique-lores/
  5. https://www.businesswire.com/news/home/20191114005909/en/2020-Women-on-Boards%E2%80%99-2019-Gender-Diversity-Index-Shows-Women-Make-Historic-Progress-Toward-Gender-Balance-on-Corporate-Boards
  6. https://www.deccanherald.com/business/economy-business/independence-day-india-at-75-how-can-we-get-more-women-in-the-boardroom-1134874.html
  7. https://abcnews.go.com/Business/boardroom-diversity-rise-racial-reckoning-hits-private-sector/story?id=78312353
  8. https://www.wbcollaborative.org/insights/women-leading-boards-march-2022-special-report-in-partnership-with-50-50-women-on-boards/
  9. https://economictimes.indiatimes.com/news/company/corporate-trends/women-directors-at-family-firms-face-competence-versus-kinship-challenge/articleshow/64741474.cms?from=mdr
  10. https://www.wsj.com/articles/nasdaq-board-diversity-rule-takes-center-stage-in-court-battle-11661799731
  11. https://corpgov.law.harvard.edu/2008/11/10/women-in-the-boardroom-and-their-impact-on-governance-and-performance/
  12. https://www.ey.com/en_in/news/2022/10/womens-representation-on-indian-boards-has-tripled-in-10-years

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