Diversity in leadership ranks can benefit a company’s reputation, and its absence presents an inherent risk. The real goal, however, is not just reputational gain; it’s performance — as a diverse team will be better able to both anticipate risk and seize opportunity.
Why leadership diversity is an ESG imperative
Leadership diversity is not a new concept. For years, corporations have been making commitments to increase underrepresented groups in their workforces, recently at the most senior levels. What changed in 2020? Investors’ expectations.
It’s no longer enough to pledge diversity; they need to see it. Amidst a global pandemic and social justice movements that spotlight glaring inequities in business and society, board and leadership diversity has become an essential element of demonstrating ESG (Environmental, social and corporate governance) performance.
In a recent post, we asked: “As a human structure, what does a corporation owe the human beings it comprises and serves?” Ensuring corporate leadership represents the diversity of our internal and external stakeholders — and diverse professional and personal experiences — is a place to start.
The performance principle
Excluding certain populations from the leadership table is not only concerning from a moral and ethical perspective; it hurts business too. Goldman Sachs’ decision last year to not take companies public without ‘at least one diverse board candidate’ is rooted in the investor’s experience that public offering performance with at least one female director is “significantly better”.
A series of studies by McKinsey & Company points to the improved performance of companies who appoint a heterogenous board. By adding diverse directors, a company benefits from unique points of view, fresh insights and even varied technical and professional skills. The diversity factor has also been proved to enhance decision-making.
Lacking representative diversity at the leadership level is a long-term, material risk– and mitigating risk to optimize sustainability is at the heart of ESG.
The global investment community is increasingly serious about the issue, and Goldman is just the tip of the iceberg. Last year, Nasdaq filed a proposal asking the Securities and Exchange Commission to approve new listing rules and transparency measures surrounding the makeup of companies’ boards of directors. And Canada’s CPP Investments – with nearly $5 billion in assets – has a proxy voting policy to enable greater board diversity.
Where we are vs. where we need to be
Unfortunately, we have a long way to go. According to the Alliance for Board Diversity, representation of women, and minorities on Fortune 500 Boards has been “painfully slow.” For example, 1,033 board seats were filled by directors new to Fortune 500 boards between 2016 and 2018. Of those, 80.7 percent were filled by Caucasian directors, with 59.6 percent filled by Caucasian men.
While the trend toward diverse leadership has improved over the past decade, the numbers don’t lie: the corporate world continues to lag behind. We see this reflected in statistics and have heard it directly from some clients. They know they need to do better to address diversity among their leadership and board of directors.
At Argyle, we also recognize that despite having visible-minority ownership and a highly diverse employee base, our leadership team is less diverse today than we aspire to be tomorrow. That is why every senior member of our team pursues diversity training and ongoing education.
Where do we start?
Organizations with homogenous boards and c-suites must do the critical work of listening and learning from their internal and external communities to understand their expectations. A well-thought-out plan and transparent communication are essential, but objectives must be set and measured regularly.
This work has not only become an expectation from business leaders, investors, and regulators; it will become table stakes for reputation and long-term business performance.