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Three tips for building a more diverse board of directors

Why it makes good business sense

Increased diversity at the board level has become a hot topic in recent years—and for good reason. It simply makes good business sense. Companies that prioritize racial and ethnic diversity are 35 percent more likely to have above-average financial returns compared to their industry peers.[1] The same can be said for those companies who have focused on increasing their levels of gender diversity as they are 15 percent more likely to financially outperform their national industry medians.[2]

When you consider that board diversity also reduces the propensity for groupthink, allows directors to challenge each other’s thinking and brings different perspectives to the table, it’s clear that diversity makes boards, and businesses, more effective overall. So, it’s easy to understand why a growing number of businesses are striving to make board diversity a priority in 2021 and beyond.

A recent move by Nasdaq could accelerate these efforts. On December 1, 2020, the stock exchange asked the US Securities and Exchange Commission (SEC) for permission to force listed companies to increase their board diversity—specifically, by making it mandatory for them to have at least one woman and one person who self-identifies as under-represented or LGBTQ on their boards. Additionally, Nasdaq requested that every company listed on the US stock exchange be required to publish a diversity report to demonstrate their response.

This is the first time a major exchange has asked companies to disclose information other than legal requirements, and it could be a sign of things to come. Public sentiment is shifting, and public and private companies alike—operating in both the United States and Canada—must revisit their diversity practices if they hope to keep pace. By taking a proactive stance on the issue, you’ll not only be well-equipped to meet any imminent regulation changes, but you’ll be building a better business as well.

We can do better

It’s clear that board diversity can help companies reduce risk, while keeping pace with the 21st century’s exponential rate of change. Shaking things up through diversity can dramatically reduce or eradicate board complacency, and make sure a company is equipped to evolve with the times.

That said, many Canadian companies have room to improve in this arena. According to Osler, women hold only 21.5 percent of board seats within TSX-listed companies, an increase of just under three percent since 2019. Older data from Statistics Canada backs this up. In 2017, women held 21.3 percent of director seats at public companies, and 17.7 percent of director seats in private companies.

And this doesn’t even take into account elements of diversity, equity and inclusion beyond gender. True diversity means attracting people of different ethnicities, sexual orientations, ages, races, experiences, skill sets and physical abilities. According to a study released by Ryerson University’s Diversity Institute, white members made up 91 percent of boards in Canada.

What’s the way forward?

Accelerating your quest for board diversity can strengthen your business in countless ways—and better equip you to face the future. If you’re looking to get started on your diversity journey, you can do so in a few ways:

  • Focus on age, in addition to gender. If the median age of your board members is older, it’s probably time to bring in younger professionals. There are people in their 40s with over 10 years of senior management experience under their belts. By bringing them on board, you get access to their insights and knowledge. This is the next generation of corporate leadership, so it’s critical to engage them early.
  • Review your board terms. To make it easier to facilitate change, consider limiting director positions to two or three years (for public sector and not-for-profit) and no more than 10 years for a public company, rather than life terms. Additionally, you may want to stagger these terms and make diversity part of your charter before looking for new directors.
  • Develop a skills matrix that outlines each board member’s skills—and then work to fill the gaps. Does your board have the right mix of skills, experience and knowledge to meet your business objectives? Are your board members all concentrated in one industry or have similar professional credentials? Do they have global experience?

Moving forward

Board diversity is a critical best practice that is proven to directly impact your bottom line. By making it a priority to attract more diverse board members—and build boards that are comprised of a wide variety of people and skillsets—you’ll not only get ahead of imminent regulations. You’ll also benefit from enhanced organizational performance and better results overall.

If you’re thinking about getting serious about diversity in 2021 and beyond, Grant Thornton can help. We understand board best practices and can share immediate actions you can take to improve board diversity, enhance stakeholder transparency and confidently face the future head-on. To learn more, contact us.

 

[1] https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters
[2] https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters