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​Racism, Diversity, and Governance: Finding a Better Approach

Recruiting diverse directors is the first step in supporting true equity and inclusion throughout the organization.

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​From all sides these days, corporate boards are under pressure to do better at diversity — both throughout the organizations they oversee, and even within the boardroom, itself.

For example, California enacted a law in September that will require all publicly listed companies based in that state to have at least one director starting in 2021 from an "under-represented community" — widely seen to mean racial or ethnic diversity, although LGBTQ representation would also pass muster. The U.S. Securities and Exchange Commission just adopted rules for disclosure of "human capital measures or objectives that the registrant focuses on in managing the business," although the agency didn't expressly say diversity is one such required disclosure.

And even for businesses in the private or nonprofit worlds, stakeholder demands for attention to diversity and inclusion have soared this year. Employees, consumers, business partners, investors — they all want more attention paid not just to anti-discrimination ("don't exclude marginal groups"), but to true equity and inclusion ("deliberately work to include marginal groups").

Right now, however, "boards are responding very tactically," says Coco Brown, CEO of the Athena Alliance, which helps place women on corporate boards. That is, directors have been rushing to appoint a woman to their boards (or, more recently, a Black woman) to fulfill immediate pressures such as the California diversity law. "They're looking around the room and asking if they have one of these, or two of those," Brown says.

OK, that's one step in the right direction — but only one step, and in response to direct pressure. What's the longer term challenge for diversity? And what role should board directors play?

First, Help the CEO and the Company

We always say that directors are supposed to help CEOs set business objectives and priorities. That's true here, too, but it's worth the time to unpack how diversity can help the board do that job.

First, consider how difficult and sensitive racial justice issues are at the moment. Companies, and CEOs specifically, can't ignore the issue — but one tone-deaf or impolitic statement can lead to a harsh rebuke against the corporate brand.

We saw an example in September, when Wells Fargo CEO Charlie Scharf lamented that the bank isn't reaching diversity goals because of "a limited pool of Black talent." That was a dumb thing to say, but few people are well-positioned to tell a CEO when he or she needs to do better at racial awareness. A diverse board of directors can do that.

A diverse board also can help with setting diversity and inclusion objectives, and particularly where to place those objectives against other competing priorities such as financial performance, product development, and regulatory compliance. Blacks, Latinos, and other minorities understand the value of racial equity because they experience the difficulties of inequity every day. They can push a CEO on the importance of the subject; they can insist on holding executives accountable for whatever goals the organization sets.

"This is not about micromanaging the CEO," says Brown, who also serves on the board of Archer Point, an employee-owned tech services firm in Minnesota. "It's about helping the CEO to see … that you do have to engage the stakeholders around you. That's part of the board's role: to steward the long-term health and viability of the organization. Part of that role is being able to reflect society to the CEO."

One first step, then, will simply be to recruit more racially diverse directors. According to a report last year from Institutional Shareholder Services, only about 10% of corporate directors in the Russell 3000 are minorities (although about 15% of newly appointed directors are diverse). According to another study from the Black Enterprise Registry of Corporate Directors, nearly 40% of the S&P 500 still have no Black board directors.

It's also worth noting that California's board diversity law not only requires publicly listed companies headquartered there to appoint one diverse director. Large corporations will need to appoint two or more starting in 2022.

That's a subtle but important point: To understand and address diversity effectively, boards shouldn't just appoint one minority director and consider their leadership needs complete. They'll need to appoint several diverse directors. That's how you get a board that can truly engage on diversity — and provide management the governance and insight it needs.

Getting Into the Details

Let's say the board is diverse and eager to consider how the organization is or isn't succeeding at racial equity. What then?

Some of the oversight might feel familiar. For example, large organizations have U.S. Equal Employment Opportunity Commission regulations to obey and anti-discrimination policies to enforce. Those parts of corporate compliance can be audited, presented to the board for discussion, and remediated for improvement just like any other compliance risk.

Audit functions could then get more ambitious. For example, you could identify the demographics of your customer base (or, for a nonprofit, your donor base and your client base), and then compare that profile to the demographics of your employees and management ranks. Even further, review the demographics of your supplier base.

Hiring, promotion, and compensation policies are another vein to mine for insights about systemic discrimination and racial equity. The challenge is in collecting the right data for useful analysis. Take hiring, for example. Not only would you need to know how many diverse candidates were interviewed for a job, you'd also need to know the diversity of the managers who interviewed those candidates. If personnel executives aren't collecting that data, it's a process weakness.

Auditors also could look at data from exit interviews and workplace culture surveys. Racism, even in the form of subconscious bias, can still take a toll that manifests in that data. "There is a productivity impact," Brown says. "We just don't recognize it from our white privilege, white-collar experience."

All of those findings could then go into a standard audit report for the board; or help to inform more comprehensive diversity reports that some large firms — most notably, the tech giants such as Google, Microsoft, Facebook, and Twitter — share with the public.

Maintaining the Momentum on Race

It's easy for boards to pay attention to racial equity now. In the U.S., protestors have been marching in the streets for months. On social media, people have posted more video evidence of discrimination than can be counted. Of course boards will give more attention to diversity and inclusion these days.

The question is how to sustain that focus, quarter after quarter. Doug Chia, an Asian American and founder of Soundboard Governance, warned in a recent blog post that some directors — namely, white ones — might grow weary of the conversation and drift back to traditional priorities. "These directors want to drop out of the discussion, and many of them will because they have that option," Chia wrote. "Things would be different if we had more boards with directors who don't have that option." That is, racially diverse directors, who are Black, Latino, or Asian every moment of their lives.

It's a valid point: one that underscores why recruiting diverse directors is the first and most important step boards can take to support diversity throughout the organization. Only then can a company effectively pursue the racial equity goals it articulates.

For her part, Brown is optimistic that diversity will inevitably be an ingrained part of the corporate governance landscape; younger generations are too diverse for anything else. "It's only a matter of time before we stop saying, 'I need one Black woman, and one Asian man,' and so forth," she says. "We're just going to have a very diverse board."

And from that, hopefully, we'll have a more diverse and inclusive corporate world.

Matt Kelly
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About the Author

 

 

Matt KellyMatt Kelly<p>​Matt Kelly is editor and CEO of RadicalCompliance.com, an independent blog about audit, compliance, and risk management issues, based in Boston. ​</p>https://iaonline.theiia.org/authors/Pages/Matt-Kelly.aspx

 

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