Required Reading: Deloitte’s 2017 Board Diversity Survey

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The Deloitte 2017 Board Diversity Survey (the “Survey”) is fascinating, and should be required reading for anyone interested in corporate oversight.

Several months ago I wrote about the fact that thought diversity in America’s boardrooms simply can’t take place until search firms and nominating and governance committee chairs stop limiting their new board member searches to a needlessly shallow candidate pool – one that only includes sitting and retired CEOs or CFOs. That piece was borne out of the astonishing fact that nearly 70% of newly appointed board members of late in the S&P 500 were CEOs and CFOs (per Heidrick & Struggles).

Why does this matter so much?  Two reasons: (1) there is precisely zero evidence that CEOs/CFOs make better board members; and (2) the overwhelming majority of CEOs/CFOs are older white males (i.e. the antithesis of thought diversity).

To be resolutely clear (and as I said in July ’17), there are scores of seated and retired CEOs/CFOs who are outstanding board members – full stop. That said, there is also an unending continuum of executives from outside the C-suite (including those with no prior board service), who successfully bring their distinct backgrounds to pre-IPO and small-cap boardrooms. As is clear from the Survey, the latter are still systematically overlooked.

From the Deloitte 2017 Board Diversity Survey

·     “Ninety-five percent of respondents agree that their boards need to seek more candidates with diverse skills and perspectives.”

·     Yet somewhat inexplicably… “Only 16 percent rate lack of diversity among the top problems they face in recruiting new members or planning succession.”

·     “Almost 90 percent of board members see current or retired CEOs as the most effective board members.”

·     “Deloitte’s 2016 Board Practices Report also found that 84 percent of large-cap and 90 percent of mid-cap organizations most often rely on current directors’ recommendations of candidates.”

Some frank observations.

Deloitte 2017 Board Diversity SurveyCEOs… like other CEOsBullet points 3 and 4 are, in some sense, all you need to know about how we got to a place where most boards conspicuously lack thought diversity. Boards are largely comprised of CEOs, and they default to appointing more CEOs. This is a sure fire recipe for boardrooms filled with older white men; i.e., people who have similar backgrounds, and who think similarly.

Lots of talk… but not a lot of walk. When asked about the need for greater thought diversity, boards clearly talk a great game. But bullet point 2 shows the actual state of play; i.e., virtually no change.

Nothing will change without the buy-side. The most potentially impactful constituency with respect to fostering thought diversity in boardrooms – large institutional investors – has collectively been the embodiment of “all hat, and no cattle.” Those who manage trillions of dollars could create boardroom thought diversity pretty darn fast if they really wanted to, inasmuch as they functionally are the market. But because they haven’t put their money where their proverbial mouths are, there is no inducement for search firms and nominating and governance committee chairs to fear retribution for perpetuating the status quo.

Enter Deloitte, and their courageous recommendationA global professional services firm with decidedly few peers actually said – out loud – that boards should:

“Move beyond exclusionary search criteria, such as board or CEO experience, to include more holistic and flexible ways of identifying and selecting candidates.”

Perhaps we might look back on this moment years from now as the beginning of more value-added board composition practices.

 

This article was originally published on LinkedIn Pulse.

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ADAM J. EPSTEIN

A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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