Diversity

Equity and inclusion moving forward on the business agenda: do we need more quota in the boardroom?

  • GUBERNA
  • en
2021
Sandra Gobert
Type
Article
Themes
Board Dynamics
Diversity

Almost a year ago, on 25 May 2020, a 47 year’s old Black man of Minneapolis, George Floyd, died a senseless and inhuman death caused during police custody. Protests for racial justice and equity spread around the world [1].

Of course, Black people have been agitating and protesting about racism since slavery and the advent of colonialism but according to research, these protests are different because of the diversity of the movement itself. The data collected by Dana Fisher, Professor of Sociology at the University of Maryland, shows that more than half of the protest participants were white people while 26% were a mixture of Asian/Pacific, multiracial or Latin origins. Merely 21% of the protesters were black [2]

Even though we cannot simply extrapolate the American context to a Belgian environment, multiple signs [3] show that a movement with wide support has started that will not be stopped. Accelerated by the burdens of the pandemic which have fallen even more heavily on already disadvantaged groups, diversity [4], equity [5] and inclusion [6] are becoming a business priority too. It is clear however that systemic transformation is needed to replace ethnic inequality by inclusion.

That the debate also lives at board level was shown when GUBERNA was invited in June 2020 by Matin Première to discuss diversity, including the ethnic diversity of board composition within the companies listed on the BEL20. As I highlighted during the interview, one can prove a lot with figures, but in this case they were so extreme that they spoke for themselves.  Out of a total of 212 directors, only 8 directors (not even 4%) were not white [7].

Moreover, according to the data presented by L’Echo [8], these directors were mainly of Asian origin, a population group that forms a tiny minority of Belgian society, which leads to believe that they were mainly international/non-national directors.

In any case, Belgian boards as a whole do not represent the composition of the Belgian society that is a mixture of more than 150 foreign origins, including European origins [9].

We are not an exception to the rule: worldwide, corporate boardrooms remain exceedingly white and male, notwithstanding the demographic diversity within which companies operate.

In the United States, minority representation slowly increases among the top 200 S&P company boards but 80% of the directors are still non minorities whereas 3% of the boards of the top 200 S&P companies has no minority director at all [10]. In 2019, 187 of the 500 S&P companies did not have a single black board member while the Russell 3000 index shows only 4,1% or 123 black company directors [11].

So the question was asked, given the effectiveness of the gender diversity quota regulation in Belgium [12], do we need more diversity quota in the board room, including quota to assure more ethnic diversity?

It is not the first time this question was raised. In the press article De bestuurskamer is te blank of 3 November 2016, De Standaard presented GUBERNA with the same inquiry [13], in response to the UK Parker review which recommends that every FTSE 100 board has at least one minority director by 2021 [14].

It is a fact that most corporate governance regulations and codes are silent on race issues. Since the financial crisis of 2008, governance regulations have focused on board expertise and there has been an increased call for diversity in board rooms, but predominantly focused on gender diversity.

In particular, the case has been made that gender diversity improves the board roles of monitoring and strategy [15].   

The rationale is that women have different insights and points of view that lead to a wider approach of the issues at stake and a more balanced decision-making process.

From the corporate governance perspective, it is the quality of the decision-making process that is the aim of the diversity in boards and not a societal objective of representation of population groups.  

The objective of an effective board is not policymaking but to optimally serve the purpose of the company and its strategic objectives, naturally taking into account the interests of the relevant stakeholders, the sector and the country in which the company operates, the market it is serving and the financing structure of its operations.

When the question was first asked in 2016, GUBERNA’s Expert Listed companies Annelies De Wilde, highlighted the importance of board composition in function of the needs of the organisation and its strategy: there is never one size fit all in due corporate governance.

This is not new: long standing research has proven that diversity is a key ingredient for the quality of decision making.

Even before the crisis of 2008 [16], GUBERNA’s Director of Knowledge Development Abigail Levrau together with GUBERNA’s former Executive Director Lutgart Van den Berghe presented a new research framework for evaluating the effectiveness of boards, identifying diversity as an important board feature that influences board outcomes which may in turn affect corporate performance.

Board composition is defined as one of the variables that influences the effectiveness of a board of directors as the steering decision body of a company.  Diversity is, though an important, only one aspect of board composition, among other variables such as size, duality of leadership, the ratio of insiders and outsiders, rotation, …).

Follow up research by Rita Goyal, Nada Kakabadse and Andrew Kakabadse in 2019 pointed out that board effectiveness is a process-oriented exercise and that the process leading to effective boards can be stimulated by diverse boards.

Diversity also has a downside and their study rightly reveals that effective boards are those that optimise the benefits of their members’ experience: boards with a range of varied experiences, born out of Directors’ gender, nationality, and professional background, challenge the assumptions of the executive more constructively, and enrich the decision-making process [17].

The necessity to pay attention to board composition is today generally accepted and worded in the Belgian Corporate Governance Code 2020, which states as a third principle that the company shall have an effective and balanced board – the board should have a composition appropriate to the company’s purpose, its operations, phase of development, structure of ownership and other specifics.

But is a diverse board sufficient for effective decision making? And does it support a claim for ethnic diversity quota in the board room?

Empirical research on the effects of ethnic diversity on board effectiveness remains scarce today.

An investigation was conducted in 2019 by Paul M. Guest, Professor of Corporate Finance at King’s College, London, on the effect of ethnic minority representation on the key role of the board of monitoring the executive management [18].  

It seems logical that for the monitoring role especially, board composition could make a difference due to the in-group bias of empathy that may preclude board members from adequately monitoring the conduct of executives with whom they identify. Cheryl L. Wade, Professor of Law at St. John’s University School of Law, stresses that, even if taking action to enhance empathy for minority groups is not the solution to address persistent workplace racial inequities, the ubiquitous understanding on the part of corporate boards and managers for other white males may begin to explain why racism persists in large companies [19].   

Paul M. Guest’s study however fails to find evidence that ethnic board diversity is associated with stronger monitoring outcomes [20]. Nonetheless, as highlighted by this author, the study does not look deeper into potential explanations for this lack of impact: are the board selection procedures focusing on “minority” directors who particularly resemble their majority peers; is a specific role attributed to minority directors which takes away their focus from monitoring; or are there other elements at work?

The outcome of this study suggests that not only board composition but also board dynamics play an important role in the effectiveness of the board. It is not only about structure, but also about individual and group behavior: if diversity is an important ingredient of good decision making, is needs to be unlocked to be effective.

This is confirmed by the first findings of a pilot study carried out by Abigail Levrau, Fanny D’Hondt and Marc Timmerman, testing a personality tool on the board of directors as a group during the 2019 GUBERNA’s Board Simulation module. This study indeed reveals the important impact of personalities on board dynamics.

As referred to earlier, the solutions of Cheryl L. Wade also point in the same direction: she does not argue against diversity on boards but believes that it should not be a superficial endeavour that invites minoritised people to be directors but silences them, using them for window dressing and diversity washing.

Quota thus do not seem to be the magic formula to the systemic change because they do not guarantee that companies will better take up the societal challenges of equity and inclusion. On top of that, they risk to overshoot the mark when board composition is not adapted to the strategy of the company or when the dynamics are not sufficiently empowering directors to participate effectively. As we have seen, the objective of board diversity is better decision making in the pursuit of the purpose of the company.

And there is clearly more to optimal decision making than board composition alone!

Also, from a practical point of view, how would it be possible to introduce ethnic diversity quota given the complex ethnic composition of Belgium? Not only do we not know the details of the origins of members of Belgian society, but even if we would have a vision of this patchwork, the diversity of origins would make it mathematically quite impossible to guarantee the representation of each and every minority.

Is there then no role to play for companies and boards?

Of course there is!

Companies aim for sustainable value creation and can thus not ignore the societal context in which they operate and the change that is called for.

The solution is for boards, as the steering and decision-making bodies of companies, to embed inclusion within their functioning and in relation to the three fundamental board roles. An optimal interplay is needed between composition and behavior for boards of directors to take up the roles of leadership, strategy and monitoring in a prosocial and inclusive way.

Dynamics are key: in the first place, boards should make sure that directors from minoritised backgrounds are empowered and given space to do their work [21]. Induction, mentoring programmes, evaluation of board functioning as well as a review of the board recruitment processes are important instruments to achieve this.

The board sets the top tiers of the company and must show the way, within the working of the board but also in designing the structure in function of enhancing inclusion: boards must empower and engage with equity and inclusion leaders, they have to pay attention to relevant performance goals, they need to allocate the necessary resources, and set appropriate compensations.

It is the board that takes the lead towards a definition of the company’s strategy and in setting the values of the company. What we can learn from the discussion about gender quota is that imbedding a culture of openness and inclusiveness at all levels of the companies is crucial. Programmes promoting personal relationships that break through the traditional social lines need to be encouraged, the circle of fishing in the same pound must be widened, talent development procedures need to be reflected upon and internal practices need to be reviewed through the magnifying glass of inclusion.   

Of course, it is also the role of the board to set up effective monitoring systems

Laws exist to tackle the structural racism that is deeply embedded in our institutions and habits, and compliance with anti-discrimination law is part of the fiduciary duty of the board. This also includes oversight of the company’s human capital and oversight of the risks of the company.

Directors have a duty of care and should act in the same manner as a reasonably prudent person in their position would do. Article 2:51of the Belgian Code of Companies and Associations expressly prescribes that every member of a governing body including the executive director is towards the legal person to a proper fulfillment of the task that was assigned to him.

This includes making sure that companies’ structures and procedures comply with law in general and anti-discrimination law in particular. In Belgium, several provisions prohibit direct or indirect discrimination, including any order to do so as well as any form of intimidation emanating from a person or from an organisation that employs individuals [22].

Where and when boards take up these challenges, the impact cascades through all layers of the company and hence, throughout society:
Better Boards, Better Organisations, Better World.

 


[1] The creator of the term Black lives matter were 3 women activists: Alicia Garza, Patrisse Cullors and Opal Tometi.

[2] Dana R. Fisher, 2020, The diversity of the Protests is a Good Sign for racial Equity, https://americanresistancebook.com/?s=diversity.

[3] Demands for decolonisation across the world, removal of colonial symbols, etc.

[4] Defined as the presence of differences that may include race, gender, religion, sexual orientation, ethnicity, nationality, socioeconomic status, language, (dis)ability, age, (political) perspective.

[5] Defined as promoting justice, impartiality and fairness within the procedures, processes, and distribution of resources by institutions or systems.

[6] Defined as an outcome to ensure that those who are diverse actually feel and/or are welcomed.

[7] L’Echo, 26 juin 2020, Un administrateur sur trois est une femme, https://www.lecho.be/entreprises/general/un-administrateur-sur-trois-est-une-femme/10235425.html.

[8] Because it is difficult to collect and not required to be reported, precise and complete data about the ethnic composition of boards is scarce.

[9] Idem: accurate and up-to-date information about the ethnic composition of Belgian society is difficult to find.

[10] 2020 US Spencer Stuart Board Index, https://www.spencerstuart.com/-/media/2020/december/ssbi2020/2020_us_spencer_stuart_board_index.pdf.

[11] J.Yo-Jud Cheng, Boris Groysberg and Paul M. Healy, Why do Boards Have So Few Black Directors, Harvard Business Review, 13 August 2020, https://hbr.org/2020/08/why-do-boards-have-so-few-black-directors.

[12] Paula Arndt and Katharina Wrohlich, 2019, Gender Quotas in a European Comparison: tough sanctions most effective, https://www.lecho.be/entreprises/general/un-administrateur-sur-trois-est-une-femme/10235425.html: 10 European countries have introduced a statutory gender quota after the example set by Norway in 2003. Comparative research points out that quota with sanctions are more effective than voluntary commitments.

[13] De Standaard, 3 November 2016,  De bestuurskamer is te blank, https://www.standaard.be/cnt/dmf20161103_02553457.

[14] The 2020 Parker review report published in February 2020 showed that the pace of progress has been slower than hoped and that only an additional 11 FTSE companies have a minority director on their board, compared to the numbers of 2017: https://diversityuk.org/ftse-boards-failing-ethnic-minorities/.

[15] In 2014, a meta-analysis by Corinne Post, Associate Professor of Management at Lehigh University and Kris Byron, Associate Professor of Management at Georgia State University combined the results of 140 studies and found that female board representation is positively related to accounting returns, a relationship that is more positive in countries with stronger shareholder protections. It also found that the relationship with market performance is positive in countries with greater gender parity and negative in countries with lower gender parity: Corinne Post and Kris Byron, 2014, Women on Boards and Firm Financial Performance: A Meta-Analysis, Academy of Management, https://journals.aom.org/doi/abs/10.5465/amj.2013.0319.

[16] Abigail Levrau and Lutgart van den Berghe, 2007, Corporate governance and Board Effectiveness: Beyond formalism, ICFAI Journal of Corporate Governance.

[17] Rita Goyal, Nada Kakabadse and Andrew Kakabadse, Board effectiveness in FTSE 250 Companies: Diversity May Hold the Key, Governance: the Art of Aligning Interests – Liber Amicorum Lutgart Van den Berghe, Abigail Levrau and Sandra Gobert, 2019.

[18] Paul P. Guest, Does Board Ethnic Diversity Impact Board Monitoring Outcomes, British Journal of Management, https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8551.12299.

[19] Cheryl Wade, 2012, Race and Empathy in Corporate Governance Processes, https://racism.org/articles/basic-needs/economic-issues-and-race/1147-economic08-2.

[20] Abigail Levrau and Lutgart van den Berghe, 2007, Corporate governance and Board Effectiveness: Beyond formalism, ICFAI Journal of Corporate Governance.

[21] This goes further than ethnic diversity alone.  As an example, Paul Ingram, Professor at Columnia Business School, believes that social class is as important as race or gender and companies should ad it to their diversity goals, avoid degree inflation, promote candidates from all departments, and build a cohesive organizational culture: Paul Ingram, The Forgotten Dimension of Diversity, HBR, January-February 2021.

[22] The basic legal provisions are to be found in the Antidiscriminatiewet of 2007 and in the Wet Racisme en Xenofobie, transposing into national law the Directives 2000/78/EU and 2000/43/EU, as well as in the CAO nr. 95 and in Flanders, the Decreet van 8 mei 2002 houdende evenredige participatie op de arbeidsmarkt, for the Brussels’ Region, the Ordonnantie van 4 september 2008 betreffende de strijd tegen discriminatie en de gelijke behandeling op het vlak van de tewerkstelling and in Wallonia the Décret du 6 novembre 2008 relatif à la lutte contre certaines formes de discrimination.