And your definition of board diversity is…

One of the areas of focus that was part of the SEC’s recently expanded Governance and Executive Compensation Disclosure Rules that go into effect on February 28, 2010 (http://www.sec.gov/rules/final/2009/33-9089.pdf) was the requirement for companies to disclose whether, and how, the nominating and governance committee considers diversity in its board composition. I must admit that while I wasn’t surprised that there was some kind of disclosure related to board composition, I think what we will see in this year’s proxies will be very interesting.

First let me lay some groundwork that the issue of board diversity is not new to us. Last May, Corporate Board Member hosted a Boardroom Diversity Symposium designed to educate diverse (gender and ethnicity) board candidates about what it takes to serve as a corporate director from the perspective of existing board members. In addition, we invited U.S. publicly held companies’ nominating and governance committee chairs to come and network with these diverse candidates in the hope that those who felt there was a shortage of qualified minority or women directors could be able to network among this talent pool. We ended up with an audience of approximately 130 attendees—the majority of whom were candidates and existing diverse board members. We had very few nominating and governance chairs in attendance, even though Corporate Board Member’s annual What Directors Think research conducted jointly with PricewaterhouseCoopers shows that almost 40% of current board members feel there is a shortage of qualified diverse candidates. This lack of standing committee chairs was unfortunate, because it created a missed recruiting opportunity for many boards who feel challenged to find the right diverse candidates. To complete my background on this topic you may want to scroll down the The Board Blog sequence to May 2009 and read about the event and some companies that gave eye-opening presentations to a very receptive audience.

So with all that background and some serious efforts on Corporate Board Member’s part (including forming a Diversity Council in 2009) to bring a bright light to this important topic, why do I think that this disclosure will be so interesting this year? First, there is no SEC-mandated definition about what board diversity is or isn’t. The SEC mentions factors that boards can consider such as: professional experience, education, race, gender, or national origin. Most of us link ethnicity and gender to the term “board diversity,” but the expanded SEC rules should create some creative board diversity proxy disclosures.

Second, I wonder, after reading the disclosure language, if it wouldn’t be better for boards to have a formal policy on diversity going into this exercise. I say that because if you do, you will need to describe how the nominating and governance committee implements and assesses the effectiveness of that policy. It seems to me, if you aren’t very effective that it would just be better to have a statement on how the nominating committee looks at diversity in board composition and save being scrutinized on its effectiveness. The point here is that you will have to define it, and if a formal policy exists, you will have to defend it.

All that being said, and knowing the background of Corporate Board Member’s support of diverse boards, I feel it’s important to reiterate my stance of how diversity contributes to being an effective board. A simple answer might be to review the experience of Denny’s Restaurant chain. A recent book (The Denny's Story: How a Company in Crisis Resurrected Its Good Name and Reputation by Jim Adamson) written about its experience of being insensitive to diversity throughout the organization, outlines how their lack of understanding about the importance of diversity led to well-publicized lawsuits. Denny’s remarkable turnaround and current insight into why a diverse board is important and how it revitalized the company and staff tops any lecture or research we could offer on this topic.

I like to look at board diversity this way… One of the most important attributes I want from my collection of board members is diversity of thought. Diversity of thought at the board level will mean that there is more sensitivity to a variety of risks; that there is a better understanding of markets, employees, and suppliers; and it positions the board to be more helpful in a multitude of situations that many management teams might not be familiar with (a la Denny’s). I support the SEC in the sense of agreeing that how we get there and how we define diversity can and should be different for every company, but just the mix of markets/customers, employees, and suppliers suggests that board composition should translate into gender, race, and national origin representation.

In closing, diversity, particularly on the board level when inviting someone into the “club,” is still a very difficult topic for many directors and companies to discuss openly. Yet, we have made progress over the years, and it seems that this disclosure rule will push the envelope further. Good luck with your disclosure statements and quest for diversity of thought. As I said… this proxy season will be interesting! 

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Comments

Quality over checking boxes

Posted By : John Taylor
Diversity of thought is lacking in most organizations. There are many advertising campaigns and product ideas that clearly needed someone in the organization to stand up and ask the tough questions. As groups contain more divergent thinking, there is more inherent conflict. Most people like to be around others who agree with them. As a result, it takes confident and open-minded individuals to actively recruit individuals who may regularly disagree with them. Expanding an organization range of experiences is a worthy goal. However, to truly have diversity of thought, many Boards would need to have members who are in their 20's or 30's, uneducated members, or lower net income. Hopefully, the objective of expanding the knowledge base of corporate board members is not merely ensuring the Board has members from different Ivy League schools. John W. Taylor Tiarta L.L.C.

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Timing

Posted By : James Boyd
TJ--sometimes you miss the obvious!The reason I did not attend last year and any year you schedule opposite our annual meeting is obvious.Dont schedule in May if you want corporate directors to attend

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Diversity

Posted By : Mark Bell
The essence of diversity at the board level is cognitive diversity. That is the most valuable asset a board to have to ensure the best possible outcome for fulfilling their fiduciary responsibilities.

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