ESG: The Impact of Board Diversity on Organizational Performance
Among the countless ESG initiatives that companies have embraced, a notable effort has emerged from the Governance component — the push to diversify boards. There’s no doubt that board diversity is a key part of a company’s commitment to social responsibility and effective governance. But how does having a diverse board actually affect organizational performance?
When done well, it can have at least five positive effects that, when considered together, can have a big positive impact on organizational performance and the bottom line.
What is board diversity?
In the context of ESG practices, board diversity refers to the composition of corporate boards that embrace a range of perspectives and backgrounds. This includes diversity in terms of gender, race/ethnicity, age, social, and professional diversity, including education, industry, technical expertise, and so on. Put another way, one form of diversity isn’t enough to qualify as a genuinely diverse board.
A diverse board recognizes the value of varied experiences and insights. This makes for a more inclusive leadership team that mirrors the diverse world we live in and also leads to better decision-making. All of this improves the board’s capacity to positively impact organizational performance.
A diverse board recognizes the value of varied experiences and insights.
Be aware of having diversification efforts fall into the trap of “checking the box” or tokenism, though. One Harvard Business Review article reveals how an interviewed board director “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.”
Moreover, having a diverse board means little if the culture of the board itself doesn’t value that diversity. As the article concludes, “Diversity doesn’t matter as much on boards where members’ perspectives are not regularly elicited or valued. To make diverse boards more effective, boards need to have a more egalitarian culture — one that elevates different voices, integrates contrasting insights, and welcomes conversations about diversity.” Luckily, when done right, the effects of board diversity have been found to be well worth the effort.
1) Improved financial performance
The business case for board diversity is clear, with numerous studies showing that companies with diverse boards tend to outperform their peers financially.
For instance, the latest McKinsey & Company report on diversity revealed that organizations in the top quartile for gender diversity were 25% more likely to outperform those in the bottom quartile. When it came to racial diversity, that likelihood jumped to 36%.
Similarly, a study on Chinese firms found that cognitive board diversity — in this case, “educational diversity, financial expertise and tenure diversity” — helped to minimize financial hardship, suggesting that directors with diverse perspectives and backgrounds “can shield businesses from financial difficulties and upsurge the company’s value.”
These studies are just a few of the many that prove that diverse boards have real, measurable benefits. Having an inclusive and multifaceted leadership team positively impacts an organization’s bottom line so embracing diversity isn’t just a matter of conscience — it’s a strategic advantage.
2) Improved decision-making and accountability
Having a diverse board also helps to improve decision-making processes and accountability.
When boards have a wider range of perspectives and experiences at the table, this diversity sparks open conversations that challenge the status quo and reduce the likelihood of groupthink. By considering various viewpoints, diverse boards can make more informed and prudent decisions, as well as better identify and mitigate risks
An HBR study found that having cognitively diverse directors who would ask tough questions, challenge proposals of management, and share valuable insights with fellow directors eventually encouraged the same behavior in others. This “helped boards more effectively oversee management and improved decision-making.”
Board diversity promotes heightened accountability.
As one director from the study explained, “When members of the board began challenging each other — and listening to each other’s viewpoints — it led to positive outcomes. Good healthy disagreement led to good decision-making.”
Furthermore, board diversity promotes heightened accountability. When you’ve got individuals from different backgrounds, industries, and demographics on board, each member is more likely to be aware of the unique challenges faced by different stakeholders. This awareness creates a sense of responsibility towards the different groups involved, pushing the board to act in the best interests of everyone as a whole.
3) Boosted innovation
Some research suggests that board diversity is linked to greater innovation, helping companies get and stay ahead of their competitors.
According to BCG, “Companies that reported above-average diversity on their management teams also reported innovation revenue that was 19 percentage points higher than that of companies with below-average leadership diversity — 45% of total revenue versus just 26%.”
Additionally, these diverse organizations performed better financially, with “EBIT margins that were 9 percentage points higher than those of companies with below-average diversity on their management teams.”
The findings make sense. When you bring people together from different backgrounds, cultures, and areas of expertise, you get a broader range of insights and innovative ideas. As a result, companies that embrace diversity at the highest levels become more adaptable, better at solving problems, and build stronger connections with their customers.
Keeping in mind the essential role that innovation plays in any company’s long-term vitality, this point alone would be sufficient reason for a concerted effort to diversify your board.
4) Enhanced reputation and stakeholder trust
Having a diverse board can also strengthen an organization’s reputation and foster trust among its stakeholders. By reflecting a wide range of perspectives and experiences, diverse boards are better equipped to connect with their customers, employees, communities, and investors. This connection strengthens the organization’s position in the market and reinforces its commitment to inclusivity.
Ultimately, a diverse board sends a powerful message, and customers, investors, employees, etc., who know this are more likely to feel valued and supported because they are able to see themselves reflected in the decision-making process. This has the byproduct of improved brand loyalty.
There is a demand for diversity. As David Rodriguez, Marriott International’s EVP and global CHRO, and a member of the board of directors of American Woodmark, states, “This is an age of transparency … There’s going to be pressure on companies, and there’s no hiding these days.”
Diverse boards that reflect the makeup of their stakeholders are able to better comprehend and address their needs.
Also, as noted above, diverse boards that actually reflect the makeup of their stakeholders are able to better comprehend and address their needs. This makes for a positive feedback loop that’s especially crucial for industries where you need to diligently be on top of the latest consumer trends, insights, and priorities. As one opinion suggests, “Since women make 70% of consumer purchasing choices, consumer-focused corporations with gender-diverse boards may have an advantage in decision-making that is more responsive to their customers.”
In some cases, board diversity can even lead to greater transparency and, as a result, trust among stakeholders. A study on age-diversified boards in the “opaque industry” of banking found that these diverse boards were more effective at monitoring managerial decision-making, resulting in reduced earnings management practices and greater financial reporting transparency.
Overall, by fostering a diverse board, companies have a tremendous opportunity to build stronger relationships with stakeholders, bolster their reputation, and do a better job serving their customers.
5) Talent retention and employee satisfaction
Finally, a diverse board and a genuine commitment to diversity can be a powerful magnet for attracting and retaining top talent. It also encourages a positive company culture and high employee engagement. When inclusivity is demonstrated at the highest level, it sets the tone for the entire organization, signaling an environment that values and respects individual differences.
With diverse voices at the decision-making table, companies create an inclusive atmosphere that appeals to a broader range of candidates. According to Deloitte, 80% of employees say inclusion is important when choosing an employer. Employees are more likely to feel comfortable and engaged when they see leaders who mirror the diversity of the world around them. This sense of belonging leads to greater job satisfaction, productivity, and commitment to the organization.
Even more, a diverse board can impact talent retention and employee satisfaction. The same Deloitte survey above revealed that 39% of workers would leave their current organization for a more inclusive one, with 23% indicating that they’ve already left.
A diverse board and a genuine commitment to diversity can be a powerful magnet for attracting and retaining top talent.
Ultimately, a majority of workers value a company’s diversity, equity, and inclusion (DEI) efforts. In fact, a Momentive study reported that 62% of workers consider DEI to be “an important factor in their company’s ability to drive success.” Jarringly, though, only 48% of C-level executives agreed, with nearly half claiming that DEI “is a distraction from our company’s real work.”
Letting this disconnect continue could have serious consequences on companies’ ability to draw in and keep talent. Fortunately, by embracing diversity at the board level, organizations can create a ripple effect throughout the company, attracting and retaining top talent that drives innovation and fosters a positive and collaborative work culture. In this way, diversity becomes a competitive advantage.
Board diversity: a pillar in achieving ESG goals
Diverse boards have proven time and again that they are not just a checkbox for good corporate citizenship but are catalysts for greater organizational performance.
The positive impact of board diversity extends far beyond short-term gains. Investing in diversity and inclusion is a down payment on organizational resilience. By prioritizing diverse leadership, businesses align themselves with the very essence of ESG principles while also empowering themselves to navigate the complex challenges of an ever more competitive business landscape while unearthing opportunities for organizational growth.