Corporate failures and scandals in the not-too-distant past have shone a spotlight on the quest for new ways to improve corporate governance. One of the main issues that has come to light after the trying times brought about by the financial crisis is the general need to improve board performance. When experts and researchers evaluated the main issues where boards were faltering on performance, much of it pointed to the lack of diversity in the boardroom.
Part of the definition of good corporate governance includes bringing diverse thoughts, opinions and perspectives together. While that sounds appropriate in theory, corporations have largely failed to put that concept into practice. The reality is that corporations have never really quite gotten away from the practice of appointing members to the board who happen to be white men.
Perhaps part of the reason that it’s taking so long to add more women and those from diverse racial backgrounds to the board is that boards often seek board directors with experience. The pool of women and minorities with executive experience is small and the pool of women and minorities with board experience is even smaller. The only way to turn the corner on that is to help more women and minorities secure the proper experience for board service, which will increase the talent pool in future years.
Large companies are starting to catch on to this concept, and they’re taking action by encouraging lower-level executives, many of whom also happen to be women and minorities, to go out and seek board positions. The combined experience of having executive experience along with board experience will increase the number of women and minority candidates.
Board Service Is a Perk for Executives
One such company that has stepped outside its comfort zone in preparing its employees to get board experience is Marriott International Inc. The CEO, Arne Sorenson, is encouraging the company’s lower-level executives to join a board of directors to better prepare them for future leadership and provide them with valuable experience. So far, five Marriott employees have found board positions. Three of them are women, and one is a black man.
One of the perks of being an executive is that it makes it easier to secure a position on a board of directors. Serving on a board brings additional perks, such as extra pay and a larger business network. According to Spencer Stuart, the average total compensation for a board director of an S&P 500 company is upwards of $300,000.
Board service provides valuable experience and gives young executives better opportunities for future job openings. Because lower-level managerial positions tend to be filled more by women and people of color, encouraging them to apply to boards will eventually fill the pipeline for senior executives and boards with more diverse populations. According to data compiled by Bloomberg, of the 10 companies that have the most employees serving on other boards, executives with board directorships are largely females or people of color.
Large Corporations Are Taking the Lead to Encourage Women and Minorities on Boards
In addition to the initiative by Marriott, other companies are also making progress toward increasing the number of women and minorities on their boards. Major investment firm Goldman Sachs Group Inc. announced last month that it would be discontinuing to underwrite initial public offerings (IPOs) for U.S. and European companies unless they have at least one female board director or minority.
While women make up about 50% of the workforce, they finally just got to about 25% of the S&P 500 board directors only as of last year. For the very first time, the majority of new board directors in 2019 were people of color.
Sorenson was one of the first Marriott executives to take a position on an outside board and he currently serves as a director at Microsoft Corp. By taking that position, he began to understand that if other executives would do the same, it would give them greater exposure to other important industries, such as technology, which would also help Marriott in the long run. Marriott’s CFO, Kathleen Oberg, recently joined the board of Adobe Inc., and Stephanie Linnartz, Marriott’s group president in charge of consumer strategy, joined the board of Home Depot.
Allowing Board Directorship Brings Risks and Rewards
Allowing executives to serve on the boards of other companies can be a bit of a double-edged sword. On the one hand, they bring valuable experience back to their own company. On the other, it takes valuable time away from their own positions, especially if they serve on more than one board. Some recruiting firms recommend that companies place a limit of allowing executives to serve on one outside board only.
From a positive aspect, companies can just as easily view outside board service as a tool that sharpens skills and grooms candidates in preparation for future CEO positions as they open up.
Digitization Is the Modern Way for Nominating Committees to Cast a Wider Net
Investment firms such as BlackRock, State Street Global Advisors and Goldman Sachs cite better returns for diverse boards. In response to the pressure to diversify boards, nominating committees seek to cast a wider net for board candidates in hopes of finding more women and minorities for consideration.
Diligent Corporation and NACD came up with the perfect software solution to fill that need — the Nom Gov tool. When recruiting board directors, companies want to know as much as possible about candidates before they even contact them. Nom Gov provides users with access to a global database of thousands of board director and executive profiles in real time. The tool streamlines the process for obtaining critical data that impacts board effectiveness and the ability to make data-driven decisions.
Nom Gov also provides your nominating committee with the ability to view your board’s skills and expertise in relation to those of your peers and industry to give you insights into their combined strengths and weaknesses. The tool takes boards beyond the typical, white-male-dominated business network and opens seats to more women and people of color, giving them a chance to prove themselves.
Nom Gov provides a solid process for helping directors diversify their boards, pursue effective succession planning and, ultimately, improve the overall performance of the board.