Research supports the idea that diverse boards are more transparent and accountable than boards that lack diversity. Shareholders don’t just want an acknowledgment that boards are being more transparent, they want to see proof of it. The Council of Institutional Investors (CII) reports that investors are looking for disclosures that support how the lead director filters information and insight across multiple levels and how they facilitate one-to-one discussions with individual board directors.
Scott M. Stringer, Office of New York City Comptroller, issued a charge to boards of directors to adopt a policy that requires boards to include qualified women and racially and ethnically diverse candidates in its initial list of candidates. This was the third phase of an initiative that relies on diversity to ensure boardroom transparency and accountability.
Research and recommendations by the National Association of Corporate Directors (NACD) provide solid counsel on how companies can improve boardroom accountability and transparency, and digital tools assist in the process.
Transparency and Accountability in Practice
In the interest of boardroom transparency and accountability in practice, the NACD commissioners have divulged some recommendations for boards.
NACD suggests that boards should use the proxy statement and the Compensation Discussion and Analysis to tell the full story about how the board operates. They should disclose information on the board’s rationale for the leadership structure they chose, details on their annual board evaluation process, information about ongoing board director education, and the scope of the board’s philosophy about current and future leadership, including succession planning.
Designated members of the board could also engage directly with investors about matters of importance and communicate more openly during times of crisis. Internal transparency between the board and the employees and customers is something that also needs improvement.
The key to board transparency and accountability is for each individual board director to have a clear purpose. This prohibits them from simply going through the motions. Each board director needs to approach board service from the standpoint that they need to serve as long as they’re needed, rather than as long as they’re wanted. The ideal situation is for the board to assess their contribution, recognize when they’re faltering or struggling to keep up with change and voluntarily remove themselves from the board when they’re not up to par. Since that normally doesn’t happen, the board needs to set goals for themselves and conduct annual evaluations to hold themselves accountable, both individually and collectively.
How Diversity Connects to Boardroom Transparency and Accountability
Empirical research indicates a positive connection between diversity on boards and profitable corporate performance. According to a McKinsey report, companies with greater gender and racial or ethnic diversity in the leadership team yield a stronger financial performance. From the standpoint of risk, MSCI research indicates that gender-diverse boards have few incidences of bribery, corruption and fraud.
From a practical standpoint, boards that homogenous are cohesive and pose a greater risk of groupthink. Once close relationships form, individual board directors aren’t as willing to challenge ideas that are forthcoming in the boardroom.
Along the same lines, after the 2008 financial crisis, the International Monetary Funds’ (IMF) Independent Evaluation Office identified a “high degree of groupthink” as a contributor to the IMF’s failure to foresee the risks that led up to what became a worldwide financial crisis.
Financial experts took a cue from the NFL to change the way they recruit candidates for boards and executive positions.
Phases of The Boardroom Accountability Project
Scott Stringer is an investment advisor, custodian and trustee of the New York City Retirement Systems (NYCRS). He oversees more than $200 billion in assets under management and deals with substantial long-term shareholders of over 3,000 public companies. Stringer advises companies to operate much like the Rooney Rule in the National Football League, where the board’s search for board candidates should include nontraditional environments like the government, academia and nonprofit organizations in their search for diverse board member candidates. Stringer’s call to action is based on the three phases of the Boardroom Accountability Project, which launched in 2014.
The Boardroom Accountability Project encouraged boards to be more diverse, independent and climate competent. In its first phase, the project made proxy access a market standard. Corporations paid attention and the number of companies with proxy access grew from six to over 600. Over 70% of the companies were S&P 500 companies.
The second phase is called Boardroom Accountability Project 2.0, and this phase sought greater boardroom transparency by requesting companies to disclose the race and gender of their board directors, along with their board skills and experience. This phase also brought the board matrix format forth as a means of disclosing characteristics about the board. The number of United States companies that disclose race on boards doubled from 23% to 45% under this phase of the project.
NYCRS revised its Corporate Governance Principles and Proxy Voting Guidelines to reflect that it opposes incumbent nominees who serve on a board’s nominating committee if “the board lacks meaningful gender and racial/ethnic diversity, including but not limited to any board on which more than 80% of the directors are the same gender.” At the board level, gender and racial disparity are still apparent. NYCRS plans to file shareholder proposals at nearly 56 companies that lack racial diversity at the highest levels.
Finally, Boardroom Accountability Project 3.0 takes the approach of long-lasting change in the marketplace. Similar to the Rooney Rule, the latest phase of the Boardroom Accountability Project aims to widen the talent pool. It requires boards to include a diverse set of candidates for consideration at the time of recruitment. Diversity search policies should require initial lists to include women, racially/ethnically diverse candidates and expertise in areas beyond the typical business classifications. Policies should extend to any third-party consultants that assist in conducting director or CEO searches.
In a 2016 study by the Harvard Business Review, the results showed that nominating committees that included at least one woman or minority in a finalist pool changes the status quo to help combat unconscious bias from the individuals doing the interviewing. The odds of hiring a woman are 79 times greater when two women are in the finalist pool. With two minority candidates in the finalist pool, minority candidates had a 193 times greater chance of being selected. A 2014 Russell Reynolds report showed that as minorities gained seats in the boardroom, companies were also likely to increase minority representation in the C-suite as well.
Diligent Corporation has made it easier than ever before to find women, minorities and other candidates who bring diversity into the boardroom with the Nom Gov tool, which brings thousands of board and executive profiles to the fingertips of the search committee.