Now that California has officially passed the nation’s first law requiring public companies to appoint members of underrepresented groups to their corporate board, the first vote taken at the next board meeting of every public company in the country should be on board diversity. There is no need for secret ballots. Directors should be upfront with each other so the board can decide whether to move its own plan forward in pursuit of board diversity or whether the board will develop an argument against board diversity that it believes will stand up to the scrutiny of regulators and stakeholders.
The new California law requires public companies to appoint at least one member of an underrepresented group to its board by the end of 2021. By the end of 2022, corporate boards with four to nine members will need to appoint two persons from underrepresented groups; boards with more than nine members must appoint three. The underrepresented groups the law refers to include anyone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identify as gay, lesbian, bisexual or transgender.
The California law makes board diversity a compliance issue for 625 public companies that are headquartered in the state, which means those same regulations could potentially apply to other public companies in the future. The passage of this law means the board diversity issue is not going away any time soon. In fact, it’s time to consider that board diversity may be proving to be a business disruptor with the potential to change the way that business is done.
A business disruptor doesn’t always have to be a flashy new technology – sometimes it can be a business model. That’s what board diversity can be. Here’s why:
• Studies have documented that diverse boards are more profitable. There are numerous studies that have shown that boards that are more diverse outperform boards that are less diverse. While nothing is absolute, having contrasting insights and experiences in leadership generally enhances problem solving and decision-making. The McKinsey consulting firm recently found companies with more diverse executives were 33 percent more likely to produce higher profits. If a business model consistently shows higher profitability it deserves attention.
• Diverse boards are better positioned to serve the real world. To capitalize on world markets, you must understand those markets. A diverse board is more likely to make sincere efforts to understand the differences of its members and that same understanding will be translated into how it approaches understanding the markets that its company serves. Being open to different voices can make the board open to different markets, whether they be markets based in culture or markets based on age, or sexual orientation. Understanding how to reach underserved markets can potentially become an industry disruptor.
• Diverse boards are a catalyst for equity and inclusion in business. Diverse boards are more likely to insist on fairness in everything from pay to promotions. Leadership striking that tone improves productivity across the organization and strengthens the company’s reputation in the communities it serves. Creating customer loyalty is a big part of what makes disruptors effective, so anything that improves that type of engagement is a plus.
Is board diversity truly a business disruptor? Well, if it withstands the legal challenges that are sure to arise, this California law will at least have disrupted how many companies’ board of directors are going to operate over the next 12 months.