Pale, Stale and Male: Does Board Diversity Matter?

COVER FEATURE

Does Board
Diversity Matter?

by Andrea Bonime-Blanc and Dante A. Disparte

20 September 2018 GETTY/ THE IMAGE BANK

COVER FEATURE

On the surface, the circumstances THE CONNECTION nies with robust ethics and compliance
surrounding scandals faced by Equi- BETWEEN DIVERSITY, ESG programs experience what they call an
fax, Wells Fargo, The Weinstein “ethics premium.” Over a three-year
Company, Uber, Volkswagen, Wynn RAND PROFITABILITY period, their stock value was 4.88%
Resorts and others could not seem ecent research has underscored higher on average than that of compa-
any more different. Upon deeper the strong relationship that exists nies without such programs.
analysis, however, a common between diversity among leader-
thread in each of these cases could ship and ethical behavior, and supe- The importance of diversity and ESG
offer insight for companies to avoid rior resilience and long-term profitable issues has not been lost on business lead-
future problems: At the time of sustainability. For example, the Janu- ers. For example, the National Associa-
these corporate failures, the board ary 2018 McKinsey & Company report tion of Corporate Directors’ Blue Ribbon
of each company lacked diversity Delivering Through Diversity found a Commission Report on Culture as a Corpo-
and was unable or unwilling to fully continuing strong link between diver- rate Asset acknowledges the impact corpo-
understand the gamut of their non- sity and performance. Companies in rate culture can have on organizational
financial environmental, social and the top quartile for gender diversity on performance and reputation. It also
governance (ESG) issues, risks and their executive teams were 21% more provides recommendations for boards
opportunities. likely to have above-average profitability to assess the health of their corporate
than companies in the fourth quartile. culture and ensure that such an ethos is
In terms of ethnic and cultural diver- embedded in strategic discussions and
sity, top-quartile companies were 33% driving the right behaviors.
more likely to outperform their peers
on profitability. These trends were true In addition, Larry Fink, chairman and
at the board level as well. “We found CEO of BlackRock, the world’s largest
that companies with the most ethnically/ asset management firm, wrote in his
culturally diverse boards worldwide are 2018 letter to CEOs that the company
43% more likely to experience higher will continue to emphasize the impor-
profits,” McKinsey wrote. “We also found tance of a diverse board. “Boards with
a positive correlation between ethnic/ a diverse mix of genders, ethnicities,
cultural diversity and value creation career experiences, and ways of think-
at both the executive team and board ing have, as a result, a more diverse and
levels.” aware mindset,” he wrote. “They are
less likely to succumb to groupthink or
In their 2017 research on “total soci- miss new threats to a company’s busi-
etal impact,” Boston Consulting Group ness model. And they are better able to
(BCG) also made the business case that identify opportunities that promote long-
for-profit companies that place greater term growth.”
emphasis on ESG measures can improve
their valuations and margins. In addi- If the boards of Wells Fargo, Uber,
tion, the Ethisphere Institute tracked Volkswagen, Equifax, Wynn and The
the stock value of publicly traded compa- Weinstein Company had been signifi-
nies on its annual Ethisphere Most Ethical cantly more diverse (see page 22),
Companies list and found that compa- perhaps they would have had more risk
resilience programs in place and fewer

Reprinted with permission from Risk Management.
Copyright © 2018 Risk and Insurance Management Society, Inc.
All Rights Reserved.
www.rmmagazine.com

Risk Management 21

COVER FEATURE

of these cases would have exploded into by men, have an average age of 62 or and family of the CEO who are often
scandals. This is because more diverse over, and exhibit low levels of diver- loath to challenge existing strategies and
boards are better at understanding, over- sity in ethnic, racial, professional, and processes and are subject to paycheck
seeing and balancing not only financial functional attributes. The reality is that persuasion.
issues but ESG issues as well. Unfortu- most boards exclude women, people of
nately, the boards of far too many compa- color, younger professionals, and global WLEADERSHIP AND CULTURE
nies are still too “pale, stale and male,” and non-financial business experts. In hile this may be changing,
populated by current or former CEOs defense of their staid ways, many boards albeit slowly, a review of the
and CFOs, and often devoid of any nota- claim to be “diverse in thought,” suggest- world of business and gover-
ble expertise in ESG and risk governance. ing that, despite their homogenous back- nance reveals that there is still much
Governance diversity means being inclu- grounds, they still are able to contribute progress to be made on board diversity,
sive of those who are most relevant to a wide range of viewpoints and ideas. especially in the United States where
the business of a company—from both a While this may be true in some cases, there are no board gender quotas as
financial, operational and an ESG stand- the bottom line is that since most boards there are in many European countries.
point—whether that diversity relates to continue to be almost entirely made up The argument still used today to justify
gender, ethnicity, race, nationality, age, of the same narrow candidate pool, their low levels of diversity is that there is a
functional or professional expertise, or primary focus is still on growth, profits “lack of suitable talent,” but all too often
leadership qualities. and maintaining status quo. Worse still, this is subtle prejudice masked as meri-
many boards are composed of friends tocracy. Meanwhile, the “diversity of
Most boards are 85% dominated

Board Demographics of Companies Facing Recent Scandals

ORGANIZATION SCANDAL BOARD NO. OF OTHER AVERAGE

MEMBERS WOMEN DIVERSITY* AGE

Equifax Massive data breach 10 2 (20%) Low 63
(2017)
of private information

for more than

150 million consumers.

Poor cyber risk oversight.

The Weinstein Pervasive culture of abuse, 3 0 (0%) Low 62
Company
(2017) sexual harassment and (after

allegations of rape in resignation

exchange for access of 6)

and opportunities.

Uber Multiple cumulative scandals, 11 2 (18%) Low 50
(2015-2017)
including harassment, regulatory

and employment breaches.

Volkswagen Emission rigging scandal 23 5 (22%) Low 59
(2015-present)
affecting more than 11 million vehicles

leading to underreporting of

environmental impacts.

Wells Fargo Account rigging scandal and 30 9 (30%) Low 65
(2015-present)
consumer fraud where millions

of fee-bearing accounts were

created without customer

knowledge or consent.

Wynn Resorts Allegations that founder and 9 1 (11%) Low 69
(2018) CEO engaged in decades-long

culture of direct sexual harassment

and abuse of employees and others

including making a multi-million dollar
payment to a former employee

for sexual harassment.

* Denotes the relative presence of diverse board members along ethnic, racial, professional and functional attributes.

22 September 2018

COVER FEATURE

Pathways to Achieving or complete lack of appropriate risk
Greater Board Diversity oversight at the board level, especially
relating to leadership and culture—the

two most important strategic risks for

■■ Establish a percentage target for which the board is uniquely respon-

diversity (gender, race, ethnicity, sible. Second, there was a prevailing
national origin, age). homogeneity of background, expertise
and demographics of individual board
■■ Broaden the talent pool with members, leading to “groupthink” that
individuals skilled in the areas of risk, likely exacerbated these problems.

technology, ESG, sustainability, Research shows that more diverse

ethics and compliance. boards and executive teams deliver

■■ Reshuffle committees to represent greater financial value and engage
current market needs and operating norms. in more successful strategic decision-
making. Many companies are getting

■■ Separate risk and opportunity oversight from audit, perhaps by this equation right, understanding that
creating a specialized strategic risk and opportunity committee. in order to remain sustainable, profit-
able and attractive for long-term invest-

■■ Bring in third-party specialists to conduct crisis simulations, ment, they must pay attention to more
table-top exercises and cross-industry benchmarking. than just traditional financial factors.
They have come to realize that good
■■ Separate the CEO from the chair and strategic risk management oversight. ESG management, including diversity

■■ Enforce term limits and cap the total number of concurrent board seats. and inclusion within their employee
population, management and board,

■■ Create advisory committees of key outside experts to provide is also good for business.

new perspectives. TBEYOND THE STATUS QUO
he role of the board is not only to
■■ Bring in truly independent, qualified directors and discourage CEOs from challenge management to achieve
appointing friends and family to the board. financial results but to achieve

them in a manner congruent with stake-

thought” claim many companies and their boards make is often holder trust and value systems. In a market where trust is the

just a cop-out for instilling real diversity of background and most important asset organizations have, the board must be the

experience. Many boards have become parochial in thought, sentinel of that institutional trust. This responsibility is perhaps

judgment and action. The lack of meaningful commitments a taller order than what many board members signed up for,

to diversity that reflects society, markets, investors and other but it is the best way to preserve enterprise value, guard against

stakeholders is harming private enterprise. complex risk and retain stakeholder trust.

Recent corporate scandals have resulted in billions of dollars We are living at a time of unprecedented global risk due

in lost market value, not to mention ongoing financial, repu- to the convergence of serious and rapidly scaling challenges,

tational and legal consequences. In many such cases, CEOs disruptions and potentially existential threats, from technologi-

are let go gently with golden parachutes while boards remain cal innovation and disruption, climate change, geopolitical

largely intact and in place, even amid questions about the instability, the severe decline of trust in all institutions, and

apparent lack of appropriate response to ongoing concerns the attendant acceleration and amplification of reputation

within the company. risk by social media. In this rapidly changing world, compa-

There are two common and deeply interrelated threads nies need to have boards that are agile enough to keep pace

running through these scandals. First, there was the breakdown with these new and emerging challenges. Boards must move

Reprinted with permission from Risk Management.
Copyright © 2018 Risk and Insurance Management Society, Inc.
All Rights Reserved.
www.rmmagazine.com

SHUTTERSTOCK Risk Management 23

COVER FEATURE

from a position of sitting back to leaning in when it comes to Boards have a crucial role to play in guiding not only finan-
promoting the diversity of people, backgrounds and expertise cial returns but ESG impacts. A dramatic shift is taking place
among decision-makers. in governance for the dual purpose of maximizing financial
returns and creating common social good for the broader stake-
All too often, large enterprises have no notable separation of holder community. The role of the board must evolve beyond
powers when it comes to the chairman and CEO roles, which check-the-box compliance and move to embrace a holistic and
are most often held by a single person, usually a man. Addition- integrated strategic oversight of ESG, enterprise risk manage-
ally, there is no demonstrable independence when it comes to ment, leadership and culture. An essential part of achieving this
risk oversight and corporate governance standards. As a result, objective is to have a properly diversified board. n
many boards avoid decisions and essentially become a rubber
stamp for the status quo. Stubbornly adhering to such a limited Dr. Andrea Bonime-Blanc is the founder and CEO of GEC Risk Advi-
perspective can create severe blind spots and ultimately destroy sory and author of the 2014 book The Reputation Risk Handbook and the
corporate value. Challenging conventional board structures forthcoming, Gloom to Boom: How Leaders Transform Risk into Resilience
with more diverse candidates can help the board to consider and Value, expected in 2019. Dante A. Disparte is founder and CEO
different perspectives, ask a different set of questions about of Risk Cooperative and the co-author of 2016’s Global Risk Agility and
company strategy, and act as the necessary third rail that keeps Decision Making.
management in check.

Reprinted with permission from Risk Management.
Copyright © 2018 Risk and Insurance Management Society, Inc.
All Rights Reserved.
www.rmmagazine.com

24 September 2018