The Supply and Demand of Board Diversity
Progress towards achieving true board diversity is stagnant. 48% of female board seats are held by only 19% of female directors. Only 10% of board members are from a non-Anglo-Celtic background. The number of board members over 70 years old increased from 16% to 22% in 2022.*
Why is progress so slow?
Let’s consider the economics of this situation.
As bland as this sound, economics provides us with the important lesson of Supply and Demand.
In economics, Supply is the number of goods and services in a marketplace. Demand is what a consumer is willing and able to buy of these goods and services.
Applying the theory of supply and demand to the context of board diversity we can translate the definitions to be:
- Supply is the quantity of diverse board-ready candidates in a marketplace. And,
- Demand is the collective level of the willingness and ability of boards to appoint (or present for election) these diverse candidates.
With this in the back of our minds, my premise is that the reason we are not seeing greater progress in board diversity is that the programs that are aimed at achieving board diversity work only on increasing the supply side of the equation and do a little work to boost the demand side. Getting diverse candidates ‘board-ready’ is only half (if that) of the solution to the board diversity issue.
The plethora of board-readiness programs for diverse candidates largely focus on informing individuals with diverse characteristics (gender, ability/disability, cultural background, race, heritage, etc.) on directors’ duties and other corporate governance basics. These are fantastic learning and education opportunities for (all) people to take. I believe educating aspiring, new, and existing board members must continue. However, I question whether these diverse-cohort-focused board-readiness programs in and of themselves move the needle at the pace and to the extent desired (and, it could be argued, required). I also worry that they have significant negative connotations and outcomes attached to them.
To me, they reinforce the message that there is a deficiency inherent to the diverse candidate and that THAT is the reason they are not getting on a board. I hear from many board-interested candidates that they are ‘not qualified’ for the boardroom and because they missed out on a diversity program, they won’t make it onto a board so they opt-out of a board career before they even give themselves a chance.
Furthermore, this same message of inherent deficiency is reinforced to the general board population and contributes to the often-used excuse that there are not enough ‘qualified’ (AKA board-ready) candidates to bring into our boardroom. There are A LOT of under-skilled and ill-prepared people currently on boards for me to believe that this is actually a valid line of thinking.
Additionally, focusing board diversity on very narrow cohorts of diverse candidates limits or constricts our overall idea of diversity. This is perhaps the reason why there are now many boards that are pale and stale; having achieved movement away from pale, stale, and male. I doubt that this is what we really thought of when board diversity became an area of priority.
There isn’t (and perhaps never was) a diverse board-ready cohort Supply issue. Diverse candidates are not the problem we may have been led to believe. There is a Demand side to the board diversity equation that must be considered but rarely is.
First, here’s what I think is going on from the board perspective (and I don’t think ANY of this has been set up to intentionally discriminate – these are unintended consequences to existing factors):
- The recruitment of new board members is multifaceted. What boards need or want at a particular time, and what is going on within the organisation and the board influences WHAT is needed from new board members. Most of the time boards are NOT looking for pure governance knowledge – which is what most board-readiness programs focus on. It is that, AND it is much more (the candidate’s overall unique value proposition).
- Board appointments are political as well as practical: connections and networks can be invaluable to organisations, and consequently can be powerful factors influencing who ends up on the board of an organisation. Yes, it helps for these board members to understand governance (in fact, it’s mandatory), but if you can land a well-connected person on your board, you would value that more highly than many other factors. I can teach you governance. I cannot teach you a network and having the right connections.
- Investors, Venture Capitalists, shareholders, significant doners, and funders may stipulate that their investment comes with a board seat or two. These “money people” usually nominate someone to be their ‘representative’ on the board to safeguard their investment. In turn, this reduces the number of board seats on the open market.
- Boards set their own standards or requirements of the qualifications, skills, expertise, etc. desired from board candidates. Sometimes these can be driven by legislation, listing requirements, or certain industry rules or standards (e.g. a CPA-qualification is required for Audit committee members). Sometimes the criteria is driven by what the board or organisation needs to balance out their existing bench strength. And sometimes the constitution stipulates specific parameters around who can nominate for a board role or may completely restrict the appointment of board members by the board. These parameters further restrict the available candidates.
- Opportunities on boards are relatively rare. For most boards, one or two positions become open each year, and many times the incumbent board members re-stand for election or appointment. And because most people tend to dislike change and tend to like certainty, a known quantity (that is, the existing board member) retains their seat at the table. It may be many years before a board position can be openly contested without the incumbent board member competing. This issue is exacerbated if the board does not have maximum term limits for its board members.
- People are ignorant (mostly unintentionally). I am. You are. We all are. This is not in itself good or bad (although it can and does lead to negative outcomes; many that we’re unaware of due to our ignorance), it just is a facet of human nature and reality. We don’t even know to think that we can think about something differently. It’s impossible to have all the knowledge and experiences that allows us to understand every single perspective on something. So, we can’t even think to think about something differently until we have our perspective widened. This is where we hear the excuse “we can’t FIND any diverse board candidates” from a board that continues to deploy the same recruitment methods year after year.
- Lastly, sometimes board members just won’t leave. Sadly, there are too many examples of why maximum term limits had to be introduced.
These structural and personal issues culminate to create the demand problem on boards. Board diversity – or lack of board diversity – is not a supply problem. It’s a demand problem.
More programs targeted at “fixing” diverse cohorts is not going to increase demand to meet the rate of supply. Actions need to be taken by boards to unlock demand in order to pull the diverse candidates into the system.
Here are some ideas for actions that boards can take now:
1. Review your board structures and governing documents to see where they are holding you back from building a diverse board.
• Constitution: do board members have maximum terms? Are your nominating candidate requirements overly prescriptive? Does the board have the ability to appoint people to the board?
• Shareholder / Investor / Doner contracts: are your investors filling seats unnecessarily? Does the organisation require investors to meet diversity criteria?
• With your self-established candidate criteria, is it beyond reasonable? Does it create a threshold that is unnecessarily too high for most people to meet? Have you differentiated between what is teachable and what isn’t? And what is mandatory and what is optional?
2. Each time a board member sees a board-readiness program targeted at a diverse cohort, bring that conversation to the boardroom.
Ask what you could do to integrate that diversity into your board. At the same time, be aware of your ignorance and consider talking to someone FROM that diverse cohort to truly understand what they see as barriers to getting on boards. What actions and ideas can you integrate into your board and board recruitment practices?
3. Find ways to bring diverse voices into your boardroom.
It’s an uncomfortable fact that specific candidate attributes – diversity being one of those – will only be bought onto the board if it is seen as valuable for the board and organisation (in fact, this is true for all board member attributes). There must be an ROI. Not everyone can be on the board, and you don’t want to build a diverse board just to tick boxes, virtue signal, and not have meaning and purpose behind it that can be positively leveraged. That is insulting and demeaning.
This means that other mechanisms can be used to bring a wider array of diverse voices into the boardroom: committees, advisory councils, board advisors, focus groups, and engaging representative organisations are all ways to bring diverse perspectives into the boardroom. Truly unlock the value of diversity by asking better questions, sharing information (being vulnerable), and see the relationship as long-term or ongoing. Seek input into board recruitment, structures, governing documents, and how the relationships can be truly meaningful and valuable for everyone.
4. Accept your ignorance.
It’s not wrong or evil, it’s truly unintentional (the vast majority of the time). So, we have to be aware of our unawareness. Be open to questioning the way we/you do everything and be willing to bring in different perspectives on issues. This is a valuable board skill to develop, not just as it relates to board diversity.
Board diversity is a demand issue. Boards must take actions to be willing and able to appoint (or present for election) diverse candidates that are already in oversupply in the marketplace. It’s not the aspiring and diverse board candidate who is the problem. They don’t need fixing before being board ready. Yes, educate yourself to the requirements of a board member (ALL board members must), but do not see it as the golden ticket into the boardroom. For each board-readiness program aimed at a diverse cohort, demand a similar education program for boards themselves. Ask, how are boards also increasing demand for this diverse cohort? Like the economy, the board economy is two-sided, so let’s treat it this way.
* Data relates to ASX 300 companies. Check out the full research report.