Is It Time For A Diversity Audit?

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Several recent high profile audits happened as the result of negative publicity and at least one expert says that's one of several reasons not to wait.

Naveen Bhateja, Executive Vice President and Chief People Officer at Medidata Solutions, oversees functions that are critical to creating a mission-driven culture and that contribute to the company’s overall performance. A 27-year human resources veteran, he leads people operations, talent acquisition, diversity, equity and inclusion, workplace benefits and resources, and corporate social responsibility.

Bhateja, who has worked with companies like GE, JPMorgan Chase, Experian, Amazon and Juniper Networks, recently spoke with Corporate Board Member columnist Matthew Scott about why boards should consider conducting a diversity audit. Excerpts of their discussion, edited for clarity and length, follow.

What exactly is a diversity audit and why should boards consider conducting one?

It’s an unbiased, real look at the state of the affairs. There is the obvious piece which involves the board doing an audit of itself from a diversity standpoint: Looking at the range of backgrounds, skills and experiences that your board directors possess. But the audit covers many more issues than just gender and age. It’s also about the cognitive diversity on boards – diversity of thoughts and experiences. The scope of the audit should include the board’s governance around diversity – establishing a formal policy to outline the company commitment to equality. And that means looking at your employee and supplier demographics, looking at your company’s culture and practices, and how they enable a diverse culture and creates an inclusive organization. 

So, the audit helps you establish a baseline for where you are regarding diversity, equity and inclusion. And part of this involves the board evaluating whether or not there are metrics and accountability measures for the executives regarding DE&I efforts. As part of the audit, boards should consider looking at external benchmarks and external research regarding gender representation, pay parity, supplier diversity, and really making sure that you have established a baseline. This will allow you to really chart where your organization aspires to be and then you can track your progress against that. 

In general, how has the concept of a diversity audit been received by boards?

Some boards have started waking up, saying, “Maybe we need to look at our composition.” There are different levels of maturity. Some boards have said, “Maybe we just need to look at the NASDAQ diversity rule to have at least one woman or at least one minority or LGBTQ-plus member on the board,” and for them that’s checking the box and more than enough. They feel that’s having done a diversity audit. 

At the end of the day, the board is responsible to create shareholder value. And there are clear benefits and a business case for having a diverse, inclusive organization – not just from a reputation perspective, but also from the idea of developing trust with your stakeholders. There’s also the innovation and diversity of thought that you can bring onto your board. McKinsey has produced study after study showing how there is an increasing correlation between gender and ethnic diversity and the financial outperformance of companies.

Boards may not want to move on every aspect of the diversity audit as you describe it. So, how should board’s decide which diversity issues – race and ethnicity, diversity of thought, skills and experience, etc. – are the most important to address? 

You’ve got to start somewhere. Maybe you start with the composition of your own board first. Look at your own board members, to see that you are diverse, not just demographically, but also cognitively. That’s step one as I see it. 

Next, you should conduct some sort of diversity diagnostic. It could be data about recruitment, or remuneration or pay parity. Basic diversity data for the entire company could be a starting point, such as what is our percentage of women representation? What’s the representation of under-represented groups? What’s the representation of a variety of different aspects of diversity and how do you define those aspects for your company? And what aspects of diversity do you want to focus on? That type of diagnostic could really help. In an ideal world, I would include an analysis of customers and suppliers too.

After that, create an equality impact assessment. This will help you ensure that you have policies, programs and decisions that don’t have biases built it and are fair to everyone. One way to do that is to prepare a report that states that all the policies have been impact-assessed, and have all senior management sign off on it. I would also encourage boards to prioritize correcting any gender pay gap, and ethnicity pay gap. 

So, to recap, there are the five areas boards should prioritize – 1) the board’s own composition; 2) looking at just the data on diversity and underrepresented representation, based on the recruitment practices; 3) remuneration; 4) looking at the equality impact assessment for your policies; and then 5) the gender pay gap, and ethnicity pay gap.

How can boards conduct a diversity audit without being biased? Must companies bring in an outside organization to conduct an audit without bias?

If you want a complete objective and unbiased view, you’ll want to bring in subject matter experts who can show you alternative best practices. They can bring in diversity research and show you how companies are doing this, or the latest research on that. So, you don’t have to try to solve these issues by yourself. 

For example, when I came on board at Medidata, I did an audit internally. I looked at employee demographic data, percentages of attrition, recruiting, but I also the measured equality impact by doing a listening tour. So, getting an unbiased view could be as simple as doing a listening tour with your Employee Resource Group. You can ask them, what are the practices that are working well? How do they view the diversity within the company? What is getting in their way? Are they getting the support that they need to be able to bring their full authentic selves to work? 

After doing my internal assessment, I realized that I had so much valuable information that was not being published in our annual report, which meant there was no data transparency to the employees. Then they told me, “We can’t even tell you whether we are improving or not, because we don’t even know where we stand.” That statement had impact. After showing them the data, they said there were some policies around our paternity policy which was not conducive to mothers. So, we got a lot of value from that. 

Engaging an external party also is really a good step if you have the budget, time, and energy to spend on the process. As a board, you’re not going to get into the details, but engaging subject matter expert that specialize in diversity audits to research best practices and provide a realistic, unbiased picture is a great idea. It can provide a real, unbiased look at your state of the affairs. 

What types of data are most important to collect when conducting a diversity audit, and what should you do with this data?

There’s so much to choose from. What is the breakdown of men versus women? How do you stand with underrepresented groups? What defines underrepresented groups? You’ll want to collect data with elements relating to gender representation, representation of underrepresented groups and representation of people of color. And you’ll want to track your progress, positive or negative. 

You can collect data on hiring. What does your hiring funnel look like? What is the success of that funnel? How many candidates do you have for different positions and do you have a strong pool of diverse candidates? Which aspects of the hiring process do you have to fix – including recruitment, training, promotion and retention. Do you have more attrition for women? Do you have more attrition for underrepresented groups? And do you have pay parity?

The diversity audit should also help you make an aspiration goal as part of a commitment to improve diversity and equity at your company. You’ll need the support of senior management to do this. Using data from the audit, you can determine where you are regarding pay parity, gender representation, or promotion and training. So, you look at all the qualitative and quantitative data, analyze it carefully and it will identify patterns that will tell you where you are against the industry benchmarks. Then you can set your aspirations and goals and see how far you are from meeting them. After that you would develop an action plan, with specific actions that are intended to address any gaps – whether it’s bringing on more board candidates with different skills, or developing strategies for attracting and retaining diverse board members and internal staff. You can work with an external consultant to get unbiased support, then on an ongoing basis, track your progress, and course correct as needed. 

What is the final argument directors should use to convince management and the board to conduct a diversity audit?

There is a business case for conducting a diversity audit. If they don’t do it, they’ll be in breach of their fiduciary duty. While it’s a nice thing to do from a compliance perspective and a business reputation perspective, they have a fiduciary duty to increase and improve shareholder value. Research has proven this time and time again, and companies have proven it works too. When Satya Nadella became CEO of Microsoft, the company made concerted efforts to increase diversity at all levels and its stock price more than doubled since he took over in 2014. That made a lot of money for investors. That’s increasing shareholder value. Salesforce, has a chief equality officer and Salesforce Foundation, and the company remains highly profitable and is number one in their space. American Express, increased representation of women and underrepresented groups in leadership positions, and over the past few years, it has outperformed its peer group in financial performance. For me, companies are in breach of their fiduciary responsibility if they’re not conducting a diversity audit, in full scope, and making progress. 

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