The Governance Responsibility To Increase Board Diversity

Paul Williams, Partner of Major, Lindsey & Africa Takes a Look at the Importance of Diversity at the Highest Levels of Management

The time has come for all businesses to step up their commitment to better board governance in the form of diversity. Companies, as well as its boards, shareholders, employees, and customers will all be beneficiaries of such a commitment. In the following article, Paul Williams, co-lead of Allegis Partners’ board & corporate governance practice, presents the benefits that companies gain from approaching diversity from the top down.

Mr. Williams focuses on conducting in-house searches, particularly general counsel and other senior level positions. He also works with law firm partners who are interested in making lateral moves. In his additional role as director of global diversity search, Mr. Williams leads Major, Lindsey & Africa’s efforts throughout the country in assisting legal organizations in enhancing their diversity initiatives. He is a well-respected leader in the area of diversity, frequently speaking on diversity-related issues. His background as a former chief legal officer and alumnus of two of the country’s largest law firms gives him unique insight into how to effectively recruit diverse legal teams and counsel candidates. Prior to joining Major, Lindsey & Africa, Mr. Williams served for several years as executive vice president, chief legal officer and secretary of Cardinal Health, Inc.

Attention to cultural diversity in the U.S. has probably never been higher. That is true politically, socially, and also in the business world. In all of these arenas, the nation has made important progress. But undeniably, there is much more to be accomplished.

Diversity can manifest itself in many different ways. People, of course, can be diverse by race, gender, ethnicity, religion, economic status, age, and many other factors. In the boardroom of public corporations and other large organizations—where I focus much of my professional life—diversity can also apply to general business aptitude, specialized knowledge, leadership capabilities, types of professional experience, and other attributes. I firmly believe that bringing diverse mindsets, regarding all of these experiences and attributes, to the boardroom is essential to effective board composition, and should therefore be a keystone of board governance best practices.

It is fair to say that I have a unique interest in, and appreciation of, the topics of board governance and board diversity. In addition to co-leading the board search practice at Allegis Partners with my colleague Sara Hays, I am a former Fortune 20 chief legal officer, and I serve as a director of three large public companies: Essendant, Inc., a Fortune 500 distributor of business products; Bob Evans Farms, Inc., the owner and operator of nearly 700 restaurants in the U.S.; and Compass Minerals, Inc., a producer of salt and other inorganic mineral products. To date, I have served on three nominating and governance committees. I currently serve as the compensation committee chairman for Bob Evans and Compass Minerals, and as a board member of the Chicago Chapter of the National Association of Corporate Directors.

There are many reasons why corporations and their boards of directors should pay attention to board diversity. Perhaps most importantly, it is the right thing to do. Shareholders and customers may recognize and reward that responsible behavior. Developing and executing an intentional plan for board composition, which includes all aspects of diversity among its goals, will not only build a stronger board, but it is more likely to be applauded by corporate governance activists than would a less deliberate strategy to filling board seats, however qualified those individual directors prove to be. Significantly, studies indicate that diversity enriches boardroom discussions, while also improving business performance. The time has come for all businesses to step up their commitment to better board governance in the form of diversity. The company itself, as well as its board, shareholders, employees, and customers, will all be beneficiaries of such a commitment.

The Power of Diverse Skillsets

Clearly, companies and their boards have made great progress over the past few decades in terms of improving board composition and recruiting standards. Gone are the days when an empty board seat would be filled by simply reaching out to a guy who was a friend or acquaintance of the CEO—and I choose that word deliberately, since it usually was a guy. Today, companies strive to build highly functioning and professional boards, with much more emphasis placed on ensuring that the board’s members represent the full panoply of skillsets and perspectives required for the board to do its job well. Building a diversity of business discipline expertise is a natural first stop in the board composition process. After defining the board’s skillset needs and gaps with the use of a skills matrix, the nominating and governance committee can build a deliberate plan for adding board talent, with an emphasis on both industry and functional knowledge. Current and former CEOs bring a valuable leadership mindset to a board, and their directorship can be doubly informative and influential if the CEO worked in the same industry sector. And stock exchange regulations require public company audit committees to include at least one director who is a “financial expert”.

But companies can also derive tremendous value from looking beyond these most typical candidates for board seats, and adding executives from other functional areas to the board. A company in a highly regulated industry, or one facing litigation issues, might bring a lawyer onto the board. A hospitality or retail business might seek a consumer oriented marketing leader. Information technology and cybersecurity experts could be a natural fit for healthcare providers, financial services, retailers, and other industry sectors for which information management and security is a paramount issue. Companies actively involved in acquisitions might place an HR leader on the board to weigh in on human capital and employee integration strategies (see sidebar, “Spotlight: The Reality of Talent Risk”). And global corporations might seek international executives for board seats both to bring regional knowledge to the boardroom and to represent key customer constituencies.

A trend toward bringing more diverse skillsets into the boardroom is underway, but it could benefit from greater momentum. The PwC 2015 Annual Corporate Directors Survey fielded responses from 783 public company directors, with 74 percent holding directorships for companies with more than $1 billion in annual revenues. The survey found that those directors continue to view financial, industry, and operating expertise as the most desirable director attributes, followed by risk management, international, and IT strategy expertise. Further change may be fostered by other factors. As sitting CEOs today find themselves less able to take on multiple external board positions—or even a single outside board position—boards will find themselves compelled to look to executives in other disciplines.

In all cases, as my colleague Mike Bergen, the HR Global Practice Leader at Allegis Partners, emphasizes, regardless of the area of functional expertise, it is important to select executives who possess a depth and breadth of business knowledge that makes them valuable participants in all facets of board business, not simply single-subject experts.

What Diversity Means

To function well, boards also need a diversity of leadership styles present in the boardroom. Nine directive-style leaders around a boardroom table might have trouble developing consensus opinions. But when the board includes executives who are skillful in their interpersonal capabilities and understanding of group dynamics, those leaders can balance discussions to allow all directors to feel heard, and bring together board factions to build consensus. Similarly, the emotional intelligence that is often characteristic of HR and marketing leaders can serve as a useful counterbalance to the quantitative perspective generally adopted by CEOs and financial leaders during boardroom discussions.

Cultural diversity is equally important to board performance, as is functional expertise and leadership style. It is critical for a board to have a diversity of men and women, as well as people of color. I am passionate about that, and I do see more boards embracing this kind of diversity. When you reach a threshold point of cultural diversity, it enriches the tenor of discussion on the board and broadens perspectives. Its absence can lead to the type of myopic thinking that is unacceptable on any board. Historically, of course, boards were startlingly non-diverse. Today people are recognizing the need for change, but many boards still lag behind. The “Top 10 Topics for Directors in 2016” report from Attorneys Akin Gump Strauss Hauer & Feld LLP notes, “Many companies say they are committed to achieving a diversified board; however, the percentage of female and minority directors serving on U.S. boards is disproportionately quite low, with women accounting for approximately 20 percent of independent directors on S&P 500 company boards, and minority directors accounting for just 15 percent of all directors at S&P 200 companies.”

Every board needs gender and ethnic diversity. In my view, that is not discretionary.

Age and Term Limits

Age and term limits for directors also enter the board diversity discussion as boards “make room” for the planned addition of new board members. Most public corporations now have age limits for directors, most commonly requiring retirement from the board at age 70 or 72, in part to allow for board refreshment. Meanwhile, certain industry sectors have their own priorities. For instance, a technology-driven business might want to avoid having a board comprised solely of 60-something directors. Some large technology and software companies have directors who are in their 30s or younger, as it is a priority for the board to have a finger on the pulse of trends among the younger generation, and to be conversant with the newest technologies.

Term limits are another mechanism to create board turnover and pave the way to greater diversity, and they also go hand-in-hand with consideration of director independence. Most major companies have not adopted term limits at this point, and I am not a proponent of formal, rigid term limits. Such rules could stand in the way of circumstances where a long-tenured director is still a key contributor and asset to a board.

Rather, it should fall to the nominating and governance committee to be especially attentive when directors reach 10 or 12 years of tenure. Are those directors still as energetic and engaged as when they first joined the board? Do they continue to offer valuable input? 

Sometimes a board needs the fresh perspectives of a few new directors with a willingness to help the company pivot towards a recalibrated strategy. A robust director assessment policy can be an effective mechanism for ensuring director contribution and engagement, as well as facilitating board refreshment.

Forward Progress

Corporate governance and shareholder activism have accelerated the progress toward board diversity. According to the PwC 2015 Directors Survey, corporate governance activists submitted a record number of proxy access shareholder proposals in 2015. The report states, “At its core, board composition is under pressure to evolve. In order to be well positioned to oversee long-term value creation, directors know their boards need the right expertise and experience—including directors with diverse backgrounds.”

Public scrutiny and expanded disclosure regarding the skillsets and backgrounds of board directors have also propelled change. Never has holding a corporate directorship role felt more public and visible. Nominating and governance committees, along with the lead director and perhaps the General Counsel, will play a critical role in designing, adopting, and implementing board composition methodologies, as well as maintaining board buy-in to the process. Commitment to director assessment can also be integral to success with board composition goals. In my experience, board composition processes at most boards today are more thoughtful, methodical, and richer than in the past.

Hopefully aspiring to a perfect 10 score on board diversity, I believe Fortune 1000 companies today have progressed to perhaps a 4 or 5. So there is both reason to be encouraged and reason to redouble our efforts. As an executive search professional involved in board placements, I would say that this is an exhilarating time to be involved in helping boards to achieve the diversity of gender, ethnicity, backgrounds, skillsets, and perspectives that is needed to best serve companies, employees, customers, and shareholders.


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