Diversity a Must for Effective Corporate Governance

Diversity a Must for Effective Corporate Governance
Corporate boards need to go beyond superficial diversity and simply counting the number of women or people of color if they want to ensure effective corporate governance, according to a panel hosted by The Deal and Cozen O'Connor.

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As the Covid-19 pandemic and protests against racial injustice sweep the country, corporate managements and boards need to have conversations around the systemic issues laid bare by the crises. 

Boards need to go beyond “tinkering around the edges of diversity and inclusion, and counting the number of people of color around the boardroom,” said Tanuja Dehne, who sits on the boards of Advanced Disposal Services Inc. (ADSW) and Granite Point Mortgage Trust Inc. (GPMT). 

Boards need to have an authentic understanding of the importance of diverse directors, Dehne said on a panel Thursday, Sept. 10, hosted by The Deal in partnership with Cozen O’Connor PC, “Board Diversity: A Must Amidst Covid-19.” Though corporate boards are not as diverse as they could be right now, companies can still ask the right questions to get the right people into boardrooms, Dehne added. 

The number of women on the boards of Russell 3000 companies, though still a small figure, has increased from 9% in 2008 to 19% in 2019, according to data from Institutional Shareholder Services Inc. S&P 500 companies did slightly better, growing from 13% in 2008 to 28% in 2020, according to BoardEx.

Black directors, however, only made up 4.1% of boards on the Russell 3000 in 2019, while ethnic minorities accounted for a little over 10%, the ISS report showed. 

While large public corporations have the spotlight on them from institutional investors, smaller companies, like the ones that make up the Russell 3000, don’t get as much attention on their board composition, said Jared Landaw, COO and general counsel at Barington Capital Group LP.

The lack of diversity often leads to corporate governance issues, Landaw said. “Boards are best served by seeking to maximize diversity in their boardroom by recruiting directors who are both demographically diverse and cognitively diverse,” he said. 

In a 2020 study titled “Maximizing the Benefits of Board Diversity,” Landaw notes how L Brands Inc.’s (LB) Victoria’s Secret fell out of step with its customers’ evolving view on beauty, diversity and inclusion because of a homogeneous board.  

Barington Capital, which owns a 0.2% stake in L Brands, installed two women directors on the board in April 2019 as part of a standstill agreement to end a proxy fight. The firm also urged L Brands to separate Victoria’s Secret from its Bath & Body Works business, which the former came close to doing before private equity firm Sycamore Partners LLC walked away from a planned deal in April.

Having a diverse board is also important when it comes to the leadership’s relationship with employees, said Katayun Jaffari, chair of corporate governance and securities group at Cozen O’Connor. 

“If they have not experienced social injustices themselves, or have ailing family members and those at the front line of health crises themselves, it may be difficult for them to understand the current needs of their employees, their customers and their suppliers,” Jaffari said.

The board’s diversity and its relationship with employees will also affect the pipeline for potential directors, she added. 

Dehne said she has made it a point to ask questions around employee safety and availability of personal protective equipment and the company’s contribution to the communities it operates in, particularly those affected by racial injustice. 

The panel agreed, however, that it’s not easy to ask these questions or communicate diverse perspectives if a boardroom does not foster a culture that encourages such dialogue. 

“If the culture in a boardroom is one that encourages groupthink, it’s going to be really, really hard for people with diverse views and perspectives to feel comfortable speaking up,” Landaw said.

Dehne shared her own experience of how decisions can sometimes be made outside the boardroom by a small number of directors while excluding others. “The reality is decisions are often made on golf courses or in men’s rooms,” Dehne said. “I have real life experience with this where I wasn’t there when a decision was being made.”

Oftentimes, diverse or new board candidates feel they should just be grateful to have that seat at the table, Dehne said. But directors should ensure when joining a board that they’re not just being recruited to check the diversity box and can express their opinions freely. 

“I’ve done so and it has been really terrific been able to say to my boards, ‘I’m here, I have a point of view, I have a voice, and I’m going to share it,'” she said.

—Ron Orol contributed to this report

This story first appeared on TheDeal.com on September 10, 2020. 

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Diversity a Must for Effective Corporate Governance

Diversity a Must for Effective Corporate Governance

Corporate boards need to go beyond superficial diversity and simply counting the number of women or people of color if they want to ensure effective corporate governance, according to a panel hosted by The Deal and Cozen O’Connor.

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