Diversity Within Organizations and on Boards of Directors: a CICA Diversity Briefing
Having a diverse board and workplace is beneficial for business. The Risk Oversight and Governance Board (ROGB) of the Canadian Institute of Chartered Accountants (CICA) recently commissioned a study to raise awareness of the importance of diversity and to provide directors with some insights into how to address diversity issues within their organizations.
In their report, Diversity Briefing: Questions for Directors to Ask (the Report), the CICA indicate that diversity is a strategic business issue, and one receiving increasing focus from shareholder groups and regulatory bodies. Diverse organizations have opportunities and advantages that less diverse organizations may not.
There are important examples of leading global companies successfully utilizing diversity to help develop innovative products and services that improved their bottom lines. An example is PepsiCo, which attributed part of its revenue growth in 2003 to new products introduced into ethnically diverse markets. PepsiCo had used its own diverse workforce to obtain unique insights into the needs of that group of customers (and subsequently introduced new products such as guacamole-flavoured Doritos chips and Gatorade Xtremo).
Diversity encompasses not only race and gender; it includes age, culture, personality, skill, training, educational background and life experience. The Report indicates that many organizations would benefit from an enhanced focus on diversity to improve hiring practices, better integrate employees, and more effectively utilize skill sets needed by Canadian companies.
Implications for Directors
As part of their oversight role, directors should recognize the potential implications of diversity for their organization. While management is responsible for assessing diversity within the organization, developing diversity initiatives and measuring the results, directors should be aware of diversity as it affects various areas of the board’s mandate.
Issues for consideration by directors include:
- the influence of diversity on the organization’s ability to innovate and stay ahead of competitors;
- the potential advantages of including diversity as a component of the organization’s strategies;
- the benefits of considering diverse perspectives in order to improve problem-solving and increase the effectiveness of risk management;
- the need to incorporate diversity into management succession planning; and
- the importance of board diversity as a component of board effectiveness.
The Report suggests 16 questions boards of directors should ask to effectively fulfill their oversight role concerning a company’s approach to diversity. Some of the Report’s suggestions and findings are indicated below.
Question 1: How might greater diversity within the organization enhance innovation in order to support our corporate strategy and set our company apart from competitors?
Question 2: How has management addressed the issue of diversity on teams at both the staff and management level in order to enhance problem-solving abilities?
A 2005 study cited in the Report found that top companies that emphasized diversity as part of their corporate strategy in the US had a median difference in their net profit margins of +2.7 per cent per year over their counterparts and had higher median returns on equity (between 2.5 per cent and 6 per cent) than their counterparts every year.
The Report indicates that companies that increase their diversity base can encourage intellectual debate and conflict, which helps lead to innovation.
Recent studies cited in the Report indicate that heterogeneous teams solved complex tasks better than homogeneous teams.
Question 3: How is diversity taken into account in the composition of the senior risk management team?
Question 4: How can we foster a corporate culture that encourages diversity of thought and opinion and that engages debate among the senior management team?
Having a diverse senior risk management team can reduce the risk of "groupthink" and foster a culture that encourages questions, debate and openness to various perspectives. In a group setting, individuals are subject to group pressures, such as the mutual reinforcement of prejudice and desire to achieve an early consensus. Where the group comprises individuals from similar backgrounds, they are insulated from outside opinions and are more likely to succumb to these pressures. A senior risk management team made up a diverse mix of backgrounds and perspectives can help guard against this risk and encourage questioning, debate and openness.
Question 5: How does the company’s workforce planning address effective succession and sustainability?
Question 6: How is inclusiveness factored into workforce and management succession planning?
Workforce shortages are expected in the next 20 years as employers are dealing with an ageing population of the baby boomer generation, lower birth rates, and global competition for a skilled workforce. Companies that are able to plan ahead and look to a currently underutilized pool of diverse workers may realize a significant advantage.
Question 7: How can our organization’s culture and approach to diversity set us apart from the competition and make us more attractive to preferred business partners?
With the rapid growth of emerging markets and cross-border flow of capital, management that has an understanding and appreciation of cultural and corporate differences may experience significant advantages over competitors that do not. Leading corporations are increasingly demanding greater diversity from their partners, clients and customers. The study notes that 84 per cent of the Fortune 100 companies have supplier diversity initiatives in place.
Question 8: How are the company’s diversity initiatives linked to organizational strategy?
Question 9: How does the company’s inclusiveness strategy compare to that of its key competitors?
Question 10: Who champions diversity initiatives within the organization, and what is the tone set by management as to the priority of diversity goals?
A corporate culture that embodies inclusiveness and values different perspectives on all subjects is one that should be supported by boards and management, who set the tone for the entire organization. Organizations can consider reviewing the facets of successful diversity initiatives of other companies and use those as benchmarks — tailored, of course, to their own strategy and goals.
Question 11: Have clear and measurable goals been set for diversity initiatives?
Question 12: Is responsibility for achieving diversity goals clearly assigned?
Question 13: How do we assess and document the links between diversity initiatives and organizational performance?
One study cited in the Report indicates that ethnic diversity needs to be fairly pervasive to have an effect (20-25 per cent of the organization’s leaders should be from an underrepresented ethnic background). The logic behind this is that there must be a critical mass in order to cultivate diverse thought in the organization. In terms of monitoring the progress of diversity initiatives, recognize that small changes can take a long time for noticeable transformation; record progress and compare over time. Make specific leaders accountable for diversity initiatives and reward success.
Question 14: How does the composition of our board compare to that of the company’s employees? Our customer base? The boards of our competitors or business partners?
Question 15: What skills or perspectives do we need that we don’t have in our current board composition in order to maximize our effectiveness?
Question 16: How have we articulated our approach to board composition and the steps we’ve taken to achieve increased diversity?
Companies should consider expanding the level of diversity on the board for a number of reasons, including the fact that the organization’s commitment to diversity should come from the top. A recent survey cited in the Report indicates that global companies rarely reflect the level of diversity they might given their global reach. The U.S. Securities and Exchange Commission now requires companies to disclose whether — and how — the nominating committee considers diversity in identifying nominees for director.
These questions illustrate the wisdom of embracing diversity in the workplace. Directors should review the 16 questions to determine what measures can be implemented in their own corporations for enhanced profitability and performance in the future.
As legal counsel, we recognize the strategic importance of building a diverse team. Gender diversity has been one of our national priorities since 2004, and currently women partners comprise 27 per cent of our Board of Partners. We also have a Diversity Task Force with measurable goals that reports directly to our leadership team. We would be pleased to discuss our diversity initiatives with our clients at any time, and to partner with our clients on diversity programs of interest to them. Diversity in the workplace makes good business sense.