Companies are increasingly recognizing the many benefits of having diverse boards. Drawing on the expertise of people from a variety of backgrounds provides new awareness and insight, enabling companies to improve the quality of their decision-making. Diverse boards also empower companies to better represent the variety of customers and clients they serve.
Increased board diversity can also mean increased profits. McKinsey and Company’s latest diversity report shows a statistically significant correlation between a more diverse leadership team and a company’s financial performance. Companies in the top quartile for gender diversity on executive teams were 21% more likely to outperform on profitability, and companies with ethnically and culturally diverse boards were 43% more likely to see higher profits.
These advantages have led some of the nation’s biggest companies to focus on increasing the diversity of their various boards. Fortune 100 companies are leading the pack in boardroom diversity, with women and minorities holding 38.6% of all board seats. Fortune 500 companies are following suit, with women and minorities composing 34% of their boards.
Diversity at the highest levels of company leadership has become so important that some state governments are mandating diversity initiatives. California recently mandated that all publicly traded companies headquartered in California have at least one female director by 2020. California’s law recently inspired Illinois State Representative Emanuel “Chris” Welch to sponsor House Bill 3394, which passed in the House and is set to come before the Senate committee this week. The current version of the bill amends the Business Corporation Act of 1983 by requiring publicly held domestic or foreign corporations whose principal offices are located in Illinois to diversify their boards by having at least one African-American director and one female director. Representative Welch intends to expand the bill to also require companies to have one Latinx director.
In an interview with WGN Radio, Rep. Welch explained the need for such a bill: women comprise 51% of Illinois’ population but account for only 20% of board seats, African-Americans comprise 15% of Illinois’ population but account for only 9% of board seats, and Latinxs comprise 17% of Illinois’ population but account for only 3.8% of board seats. The bill has faced pushback regarding its legality under the Illinois Constitution and Human Rights Act, which both prohibit companies from discriminating based on gender or race. However, it is the intent of the bill that matters: encouraging boards to evaluate their composition and remedy any lack of gender or ethnic and cultural diversity. Rep. Welch pointed to research showing that companies with stronger diversity on their boards perform better, and called the proposal a “win-win.”
House Bill 3394 provides increasing penalties for each violation, and if it passes, Illinois companies will want to ensure compliance to avoid fines. But regardless of whether the bill passes and such diversity is mandated by law, the research alone should have Illinois companies springing into action. Recruiting diverse members is a good first step, but companies should also focus on building a work environment that employs and supports women and minorities, effectively helping to build a pipeline of diverse board candidates for the future.
Once committed to increasing diversity, a board must look to, and follow, the company’s corporate documents that lay out the appropriate process for appointing new members. To reap the full benefits of a diverse board, members must ensure that new and different perspectives are heard and valued, and that diverse members are not recruited simply to “check the box.” Having more diversity at the top will improve business relations internally and externally, increase profitability, and give talented members with different perspectives more opportunity to contribute to the decision-making and direction of companies: a true “win-win.”