The Link Between Board Diversity and Smart Business

Our time is one of rapid technological and social change. The baby boom generation is giving way to a more diverse, technology-focused population of bank customers. In conjunction with the lingering effects of the Great Recession, these changes have worked to disrupt what had been a relatively stable formula for a successful community bank.

Corporate America has looked to improve diversity in the boardroom as a step towards bringing companies closer to their customers. However, even among the largest corporations, diversity in the boardroom is still aspirational. As of 2014, men still compose nearly 82 percent of all directors of S&P 500 companies, and approximately 80 percent of all S&P 500 directors are white. By point of comparison, these figures roughly correspond to the percentages of women and minorities currently serving in Congress. Large financial institutions tend to do a bit better, with Wells Fargo, Bank of America and Citigroup all exceeding 20 percent female board membership as of 2014.

However, among community banks, studies indicate that female board participation continues to lag. Although women currently hold 52 percent of all U.S. professional-level jobs and make 89 percent of all consumer decisions, they composed only 9 percent of all bank directors in 2014. Also of interest, studies by several prominent consulting groups indicate that companies with significant female representation on boards and in senior management positions tend to have stronger financial performance.

In light of these studies, new regulations mandating the formulation of diversity policies are understandable. The Securities and Exchange Commission instituted mandatory statements of diversity policy for publicly traded companies in recent years. This initiative has also been echoed in a recent policy statement from the Federal Reserve that focuses on a company’s “organizational commitment to diversity, workforce and employment practices…and practices to promote transparency of organizational diversity and inclusion.” These initiatives are meant to promote a corporate culture that allows for what is known as “effective challenge.” Demonstrating effective challenge, which includes the company’s ability to avoid group-think and to include new voices in critical debates, is a cornerstone of the federal bank regulators’ risk management model. In the eyes of these regulators, a more inclusive and diverse board is more likely to create effective challenge, improving the institution’s governance and operation.

As a result, board diversity goes to the heart of effective corporate governance—does the board have the skill set and perspective needed to keep pace with a rapidly changing economy? Are directors asking the right questions of management and their advisors? And do directors have access to the appropriate information to make good decisions for the institution’s shareholders? Incorporating fresh voices and skills into the boardroom can shore up weaknesses and allow the board to better represent the institution’s customers.

But increased diversity on a bank board goes beyond just gender and racial diversity. It also includes greater range in the age of the directors and inclusion of skill sets, such as technology expertise, that are necessary in understanding risk in today’s business environment. Here are some ways to consider diversity in your organization:

• Start with the strategic plan. Is your institution contemplating remaining an independent institution for the foreseeable future or is it looking to sell in the near term? The answer to that question will likely be a key driver of how and when to incorporate new voices into the boardroom.
• Reassess your market. The pace of demographic change is increasing. Failing to have a strong handle on who lives and works in your market area can result in lost opportunities. These shifts can drive organic growth and new product offerings in your market or signal a need to expand your footprint.
• Reach out to current and potential customers.  Board composition is a strong signal as to which customers the bank seeks to serve. Is your board a help or a hindrance in reaching out to the customers targeted by your strategic plan?

Evaluating board diversity should not focus only on numbers or quotas, but rather on whether the board has the human resources it needs to reflect its community and to provide the perspective necessary to manage the bank profitably into the future. On this basis, tapping into a deepening pool of diverse director candidates as part of an effort to build a more transparent and inclusive corporate culture is just smart business.