How Diversity Can Boost Board Effectiveness

Over the past two decades, US corporate boards have become increasingly diverse, as corporate shareholders and stakeholders have made it clear that they expect diversity in boardrooms. In addition to expertise, experiences and other factors, this diversity also includes gender, racial and ethnic diversity. Many companies are making tremendous progress, and a Analysis 2020 identified 200 companies with a diversity greater than 40%, almost four times the number of companies ten years ago. However, a new report shows that the new appointments of first-time filmmakers, women and underrepresented racial minorities slowed down in 2022, possibly influenced by economic and political uncertainty.

Now more than ever, there is work to be done when it comes to demonstrating the effectiveness of diverse boards. While some studies show a positive relationship between board diversity and financial performanceothers have found limited or no relationship.

What’s behind these mixed results? As board diversity increases, it is less conclusive whether and how more diverse boards have become more effective over time. By effective, we mean that boards not only engage in good governance practices, but also focus on inclusive practices, such as encouraging open and honest discussions in the boardroom to help drive strong conversations around monitoring. They may walk the walk by appointing members who bring different ideas, skills, and backgrounds to the board, but are they really listening and acting on the input of these new board members?

Creating a diverse and inclusive culture is as important for organizations today as anticipating disruptive issues such as cyber risk and the future of talent and transformative issues such as environment, social and governance. An effective diverse board is essential to provide oversight on these evolving topics and guide the organization in taking action on inclusion.

Do it with CARE

When boards actively show that they care on diversity, equity and inclusion in multiple ways – including committing to increasing board diversity – they are more likely to create an environment where diverse voices are heard than boards whose DEI’s approach is more circumscribed. Our academic research and leadership experience on boards across industries suggests a potential path for more effective governance: the CARE model (Composition, Activation, Review & Report, Ecosystem).

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