Over the past two decades, U.S. corporate boards have become increasingly more diverse as company shareholders and stakeholders have made it clear that they expect diversity in boardrooms. In addition to expertise, experiences, and other factors, that diversity also includes gender, racial, and ethnic diversity. Many companies are making tremendous progress, and a 2020 analysis identified 200 companies with greater than 40% diversity — nearly four times the number of companies a decade ago. However, a new report shows that new appointments of first-time directors, women, and underrepresented racial minorities slowed in 2022, perhaps influenced by economic and political uncertainty.
Now more than ever, there’s work to be done when it comes to demonstrating the effectiveness of diverse boards. While some studies reflect a positive relationship between board diversity and financial performance, others have found limited or no relationship.
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What’s behind these mixed findings? While board diversity is increasing, less conclusive is 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 inclusion practices, such as encouraging open, honest discussions in the boardroom to help drive robust conversations around oversight. They may walk the walk in appointing members who bring different insights, skills, and backgrounds to the board, but are they really listening to and acting upon what these new board members contribute?
Creating a diverse and inclusive culture is as important for organizations today as anticipating disruptive issues like cyber risk and the future of talent and transformative issues such as environmental, social, and governance. An effective diverse board is critical to providing oversight on these evolving topics and guiding the organization to act on inclusion.
Make It Happen With CARE
When boards actively show they care about diversity, equity, and inclusion in multiple ways — including making a demonstrated commitment to increasing board diversity — they are more likely to create an environment where diverse voices are heard than are boards whose approach to DEI is more circumscribed. Our academic research and leadership experience on boards across sectors suggests a potential pathway for more effective governance: the CARE (Composition, Activation, Review & Report, Ecosystem) model.