The Power of Board Diversity by College Student Saamia Bukhari

Posted on October 28, 2020

A few months ago, DDJ hosted a writing contest geared towards college students. Students were tasked with submitting a paper discussing the topic of board diversity and whether it has an impact on corporate performance.

This week we are featuring the work of our first place entrant, Saamia Bukhari. Ms. Bukhari presents key thoughts and arguments as to why diversity can empower a company’s board of directors, as long as such diversity is achieved successfully under the conditions of inclusivity and sincerity. Citing powerful research from various studies, the writer presents empirical evidence that diversity can positively affect a company’s bottom-line, as well as drive innovation from within. We invite you to read her full paper below.

The Power of Board Diversity
By Saamia Bukhari, a junior at Boston College, Carroll School of Management

I. INTRODUCTION

     In exploring board diversity in relation to corporate performance, it is helpful to first define terms going forward. Diversity itself takes many forms including gender, age, ability, culture, religion, socio-economic background, tenure, sexual orientation, and more. The complex nature of diversity means that it is subjective from corporation to corporation. This invites multiple, varying definitions of what constitutes “diversity” in the boardroom.

     A company’s board of directors has tremendous responsibility. Developing business strategy, overseeing, critical decision-making as it pertains to stakeholders (shareholders, employees, customers, etc.), and enacting policy decisions are key duties (“Board Responsibilities”). Diversity on the board is not limited to a single form. In a Harvard Business School Review article, the authors interviewed 19 board members who “suggested that social diversity (e.g., gender, race/ethnicity, and age diversity) and professional diversity are both important for increasing the diversity of perspectives represented on the board.” (Creary) The conversation of board diversity is one that is dynamic and leaves much room for work and progress. There is more emphasis than ever to cut through the homogeneity and welcome the voices that have been muffled for so long. The question is how to orchestrate an inclusive environment so unique voices can sing together harmoniously, freely, and powerfully.

     Board diversity impacts corporate success in a range of ways. Traditionally, corporate performance includes metrics like share price and profits. Board diversity tackles these areas. In addition, diversity expands the scope of corporate performance, like disruptive decision-making. Only if corporations can include the underrepresented in a sustainable, meaningful way can they unlock the innovative power diversity. Otherwise, they risk appearing insincere or fail to truly include others at a deep level.

 

II. CURRENT STATUS

     Before diving into the boardroom, it’s essential to understand diversity's significant impact in the workplace in general, and also the discrepancies. McKinsey and Company research found that “Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians,” and gender diversity 15 percent more likely (“Why Diversity Matters”). This is significant because it demonstrates, in data, the real link between positive financial impacts with diversity. Financial metrics accounted for include earnings before interest and taxes, and returns on equity.

     Even with the data pointing to the merits of diversity in the workplace, only 40% of women participate in the workforce and “Black/African American and Hispanic/Latino populations (overall and just for women as well) are underrepresented at every career level above the support staff level when compared to their representation in the general population.” (Edwards) If there is such a small number of underrepresented individuals in the workplace, corporations must scrutinize their efforts in talent acquisition, retainment, and inclusion.

     Understanding the discrepancy in the workplace informs the gap that also exists at the board level. Women and minorities claim only about one-third of Fortune 500 company board seats (Edwards). This highlights that the issue of board diversity is not one to look at in isolation, but in conjunction to what corporations do to integrate diversity in the workplace. Such jarring statistics also serve as a call to action. In light of the apparent injustices and inequalities that permeate U.S. business and society, there is significant pressure on companies to diversify their respective workforces and boards. If such efforts are conducted intelligently and respectfully, diversity in the board achieves great fiscal and innovative success.

 

III. IMPACT

     Diversity affects a corporation’s bottom-line. McKinsey and Company found that “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.” (Delivering through Diversity) Considering the limited amount of gender diversity on boards today, the potential for greater representation and profitability makes one question why companies still fall behind on this matter. It’s not only gender diversity that impacts. “Companies with the most ethnically/culturally diverse boards worldwide are 43% more likely to experience higher profits” as well (Delivering through Diversity). Gender, ethnicity, culture, and more bring a kaleidoscope of ideas and views into boardroom conversation. Leveraging different perspectives is a primary way of how diversity drives positive financial performance.

     Harvard Business review articulates that “Boards, once the dependably cautious voices urging management to mitigate risk, are increasingly calling for breakthrough innovation in the scramble for competitive advantage,” something necessary in the ultra-competitive landscape of today’s day and age (Davis). The status quo will not work any longer. Gender diversity in the board is critical in advancing forward. Of the 5,000 board directors they surveyed, MIT Sloan Management Review “found that directors on boards with greater gender diversity were more likely to prioritize innovation and technology.” (Cheng) This is no surprise when considering how diverse perspectives healthily challenge the current status. This push for advancing in new ways matters as “companies with greater gender diversity are associated with higher R&D intensity, obtain more patents, and report higher levels of overall innovation (particularly when there is a critical mass of women directors).” (Cheng) What may seem risky to some board members may be considered opportunity to others.

     Driving off the well-paved road may be just what a given company needs to position itself strategically in an increasingly competitive environment. Revolutionary ideas, however, cannot operate as just an idea. Boston Consulting Group “found that innovation revenue—which we define as the share of revenues from new products and services in the most recent three-year period—rises with diversity.” (Lorenzo) Investing in innovative ideas is essential to truly assess and reflect on their consequences. Breakthroughs and disruptions, critical for long-term corporate success, can only be initiated with new perspectives.

 

IV. CONDITIONS  

          A. Inclusivity

     The opportunities from diversifying the board do not happen automatically. Simply “adding” underrepresented individuals is not a ticket to success. It is about including others in a way where voices are uplifted and issues are heard. This can take form in different ways, one by paying special attention to culture and communication. Harvard Business Review discusses the importance of a “collegial” culture and emphasizes that “Boards that want to maximize their effectiveness need to do more to ensure that different perspectives are regularly elicited and integrated into the board’s work.” (Creary) For example, ensuring that board members can equally share their thoughts and ideas without fear of suppression or disrespect.

     The idea of culture closely ties with communication as well. Interviewees from Harvard’s research mentioned that “boards that value open communication are more likely to engage in conversations about diversity — even those that believe they still have a long way to go.” (Creary) Communication means honest engagement of how companies can work and be better. Knowing how to improve is the first step to improving, and that makes a monumental impact in better including diverse board members. Ensuring there is an environment where communication is facilitated in a meaningful way is critical to productivity as well. A study by Landmark University found that “effective communication creates mutual understanding between management and workers which helps in building genuine relationship among both parties in the organizations” and on the flip-side, “poor communication can affect workers performance.” (Femi) Proper communication, as a product of culture, creates the respectful and productive environment necessary for diversity to truly shine.

     Especially when opinions and views may clash, respectful modes of conversing help guide conversation to be fruitful and not destructive. After all, innovation, an important impact of diversity discussed earlier, “requires passionate discussion, debate, and even conflict—most often among individuals with diverse perspectives,” according to Harvard Business Review (Davis). This is critical to note since differences, while bringing a richness of new ideas, can bring its fair share of tension and disagreement. With the new ideas that come from diversity, discussion with mutual respect, effective communication, and listening are essential. Therefore, “To find better ways of governing innovation, more boards are revisiting both their board composition and the way in which they interact,” signaling the real need and effort to realize the great benefits of board diversity (Davis). Culture, interaction, and dynamic, all play a role in integrating the underrepresented in a meaningful way. With proper inclusion strategies the board will be able to learn and thrive.

 

             B. Sincerity

     In an effort to diversify more board seats, companies should do so in a way that fits with the organization and values of the given institution. If not sincere, under the appearance of filling a quota, or conspicuously flaunt unrepresentative individuals, companies risk virtue signaling. “Virtue signaling” relates to publicly expressing an idea, sentiment, or action to gain praise - a negative connotation. This funnels into the idea of “tokenism.” An interviewee of the Harvard Business Review survey of board members shared that  One interviewee revealed how she turned down a board position because she felt that the interviewing board members were not able to comment on her expertise — only their desire to have gender diversity on the board,” a prime example of “checking the box.” Therefore, while diversity is critical, it must also be seen in light with merit and respect for the long-term. Not as a pawn to further ulterior motives for short-term, image-fueled moves. That only runs counter to how diversity can truly propel a corporation.

 

V. ACTION

     
     Building a flourishing, diverse board is no easy task. But to begin with the board may not reflect a company’s workplace efforts in diversity, the root of the issue discussed early. Diversity begins with talent acquisition at the employee, workforce level. Creating strong networks of individuals from a variety of backgrounds, whether it be a firmwide women’s or black network. Allotting the space and resources for issues to be discussed and improved through such groups is important. Addressing biases and microaggressions through comprehensive lectures, conversations, and workshops. When employees feel respected and heard in a more inclusive culture, that is telling to what a board may reflect. Boards can then take advantage of these networks to better understand where to improve and what direction to move. Having a culture that begins at the firmwide level and bleeds into the boardroom is not easy, but allows for transparency and honesty in the work that needs to be done. Perhaps the discussion on how to create diverse boards must not start at the board member, but the employee.

 

VI. CONCLUSION

     Board diversity is powerful as long as the structures and culture around give it the room to be. As McKinsey and Company emphasizes, “Crafting a truly effective I&D [inclusion and diversity] strategy is no small effort, but the potential benefits of stronger business performance are well worth it.” (Delivering through Diversity) Sincerity, genuineness, and adhering to values is at the core of that mission. If fostered with prudence and respect, board diversity can drive profitability and innovation to advance not only at the corporation level, but for business and society at large.

 

saamia bukhariAbout the Author:
Saamia Bukhari is a junior at Boston College, Carroll School of Management

 

 

Browse our thought leadership library - white white papers, commentaries, and more.

 

Works Cited

“Board Responsibilities.” CFA Institute, https://www.cfainstitute.org/en/advocacy/issues/board-responsibilities.

Cheng, J. Yo-Jud, and Boris Groysberg. “Gender Diversity at the Board Level Can Mean Innovation Success.” MIT Sloan Management Review, Massachusetts Institute of Technology, 22 Jan. 2020, sloanreview.mit.edu/article/gender-diversity-at-the-board-level-can-mean-innovation-success/.

Creary, Stephanie J, et al. “When and Why Diversity Improves Your Board's Performance.” Harvard Business Review, Harvard Business Publishing, 27 Mar. 2019, hbr.org/2019/03/when-and-why-diversity-improves-your-boards-performance.

Davis, George, and Linda A Hill. “Boards: Innovation Is Your Responsibility Too.” Harvard Business Review, Harvard Business Publishing, 24 Oct. 2017, hbr.org/2017/11/the-boards-new-innovation-imperative.

Edwards, Rayna, et al. Let’s Get Real About Equality: When Women Thrive 2020 Global Report. Mercer, 2020. Print.

Femi, Asamu Festus. “The Impact of Communication on Workers’ Performance in Selected Organisations in Lagos State, Nigeria.” IOSR Journal of Humanities and Social Science, vol. 19, no. 8, Aug. 2014, pp. 75–82., doi:10.9790/0837-19827582.

Hunt, Vivian, et al. Delivering through Diversity. McKinsey & Company, 2018. Print.

Hunt, Vivian, et al. “Why Diversity Matters.” McKinsey & Company, McKinsey & Company, 1 Jan. 2015, www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters.

Lorenzo, Rocio, et al. “The Mix That Matters.” BCG Global, BCG Global, 26 Apr. 2017, www.bcg.com/publications/2017/people-organization-leadership-talent-innovation-through-diversity-mix-that-matters.


 

DDJ Capital Management is a privately held investment manager for institutional clients that specializes in investments within the leveraged credit markets. Since our inception in 1996, DDJ has sought to generate attractive risk-adjusted returns for our clients by adhering to a value-oriented, bottom-up, fundamental investment philosophy.  DDJ has extensive experience investing in securities issued by non-investment grade companies within the lower tier of the credit markets, including high yield bonds, bank loans and other special situation investments.

The information and views expressed herein are provided for informational purposes only, and do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security. The inclusion of particular investment(s) herein is not intended to represent, and should not be interpreted to imply, a past or current specific recommendation to purchase or sell an investment. Any projections, outlooks or estimates contained herein are forward-looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Investing involves risk, including loss of principal. Investors should consider the investment objective, risks, charges and expenses carefully before investing with DDJ.
Past performance is no guarantee of future returns.