How actively managing diversity can yield impact in the boardroom

As scholars, business professionals and human beings, we know that harnessing diversity can allow us to powerfully and effectively address change and achieve aspirations – both in our organisations and across our wider communities. But could diversity also be a tool for improving how boards operate?  

I was extremely pleased when the Financial Reporting Council (FRC) commissioned the Leadership Institute and SQW to research this topic, and other related ones, in 2020. Being asked to undertake this work gave us unprecedented access to FTSE 350 boards and a unique opportunity to understand not just how they look, but how they function in practice.

The research team used a range of qualitative and quantitative research methods, including extensive interviews with 75 board members representing 25 companies, statistical modelling and novel data analysis techniques. The resulting report, Board Diversity and Effectiveness in FTSE 350 Companies, was published in July 2021.

As well as being able to determine a correlation between increased board diversity and effectiveness, we also found the most progress has been made in gender diversity, which has significantly increased over the past several years.  We also found that boards with well-managed gender parity enjoyed higher stock returns and were less likely to experience shareholder dissent. These boards also exhibited a more collaborative approach to problem solving and stronger committees.

Not enough data manifested in our research to make definitive, statistical-based conclusions on the increase of ethnic diversity at board level and its impact on board dynamics. However, there are positive indications (also manifesting in other research initiatives exploring this theme) that this type of diversity also offers business benefit to organisations.

You can read the report in full here but some of our key insights include:

• Boards need to ensure they are not assuming that there is alignment between members on the definition of diversity. It may well mean different things to different people.
• Almost all FTSE 350 companies have benefited from increased gender diversity and the greater representation of women in the boardroom is reshaping board culture and dynamics.
• The correlation between success with increased gender diversity and success with increased ethnic diversity is zero – what works for one does not necessarily work for the other.
• There is no ‘silver bullet’ that will guarantee success from greater ethnic or gender diversity in the boardroom. But boards that invest time and effort in building the capability to work with multiple aspects of diversity can reap significant benefits.
• Chairs are critical to unlocking the benefits that all types of diversity can bring to boardroom discussions and insights.
• Cultivating a learning and development-oriented culture in the boardroom helps directors overcome their fear of making mistakes and goes a long way towards creating a more inclusive culture.
• Boards should address the development needs of the board as a whole, with a view to enhancing their overall effectiveness as a group.
• Ensuring process conflict does not turn into personality conflict is key for developing a functional diverse board.
• It is critical that boards discuss as a collective, and reflect individually on the question: ‘What are we/am I doing or not doing that is preventing our/my commitment to diversity being fully realised?’
• A multi-disciplinary approach to board evaluation and board development is critical if boards want to create the skills, mindsets and competencies to tackle the findings and recommendations of the report.

Overall, I was struck by just how much time many of the directors we spoke with spent proactively thinking about these issues. Increasing diversity across a small group of low turnover roles that require an extensive skillset is a challenging task. In many, many cases, the directors we spoke to truly believed in building a more diverse board, simply because they felt it was ‘the right thing to do’. Interestingly, the firms that are willing to invest time and energy in actively managing diversity were the firms that enjoyed the clearest business benefit.

It was a real honour to be part of this project, and I hope the resulting report is both affirming and challenging to those who read it who are in board roles. There are many complex issues surrounding board diversity and board effectiveness, but one thing is clear – an open mind, willingness to tackle these issues head-on, and seeing what’s required as a strategic, systemically-oriented change effort, makes all the difference in progressing efforts.

Vyla Rollins is Executive Director of London Business School’s Leadership Institute