Building a board environment that enables debate, discussion, and a leadership style that allows for possible disagreement or ideas to discuss tradeoffs allows you to get the best ideas what leads to the best long-term success in a company.
Naturally you get better diversity of ideas when you have people from different backgrounds. This includes ethnic diversity, gender diversity, and generational diversity (including gen Z and millennials).
Geographic diversity representing other cultures and markets is often overlooked and is especially important. At least half of most businesses are outside the US. Boards may want to ask themselves; do we have representation from a European and an Asian Pacific perspective in our debate, discussion, dialogue, and decision making?
Thought diversity is critical: are we including the view of our customer? Do we have our customers’ perspective present in some way to ensure we are receiving their direct input instead of product organization designing in a vacuum and hoping they hit the bull’s-eye?
Here are some facts on diversity from McKinsey:
– Companies in the top-quartile for gender diversity on their executive teams were 21% more likely to have above average profitability than companies in the fourth quartile.
– Companies in the top quartile for ethnic/cultural diversity were 33% more likely to outperform on profitability
– Companies with the most ethnically/culturally diverse boards worldwide are 43% more likely to experience higher profits.
The biggest thing that leads to great outcomes is diversity of thought and inclusion of a range of views in your discussions. Does your company culture allow for the ability to disagree without being disagreeable and to not punish people for taking risks?
To be innovative you must be quick. This means there will be products that do not pay off. You can’t punish and hunt for the guilty. You have to permit a certain amount of failure to get to extraordinary outcomes.
According to an HBR article, “companies with above-average total diversity, measured as the average of six dimensions of diversity (migration, industry, career path, gender, education, age), had both 19% points higher innovation revenues and 9% points higher EBIT margins, on average.”
Given all these datapoints on diversity, my perspective as director who has served on boards in many different industry’s: Cognitive diversity works best when there is robust debate and discussion amongst a truly diverse set of board members with truly differentiated perspectives. It is valuable to have gender representation, ethnic diversity, generational diversity, industry perspectives, the customer viewpoint, and global perspective.
The major passive investors, the index funds like Vanguard, State Street, Fidelity, etc. all have strong policies that value and reward diversity and inclusion.
Companies are best served to get out in front and lead and embrace building a diverse board and a diverse executive leadership team. Companies will be graded on this and it can impact how you are valued during annual proxy voting or make you vulnerable to an activist.
Here are a few facts: 51% of the population is female, and about 40% of Americans identify as racial or ethnic minorities, per the latest census data. Millennials make up 40% of the working age population, this means many of your customers are made up of millennials.
Your companies build world-class teams based on meritocracy by proactively making sure all the talent pools you tap into and the candidate slate that you interview is broadly diverse so that you are not unconsciously biased and leaving out major high-value talent pools.
Diversity is important to drive engagement, debate, and to arrive at the best ideas and business outcomes.
A perfectly diverse executive leadership team or Board of Directors that’s gender balanced, ethnically balanced, globally balanced, and generationally balanced will fail to surface the key insights when there is a command and control culture that does not permit discussion and debate, and doesn’t have a feedback loop to learn with a regular cadence of debriefs of what is working and what isn’t.
Only by bringing out the best thoughts from everyone do you truly get the best outcomes.
It’s ultimately the boards oversight of culture that will be an important attribute to maximizing company potential for the shareholders.