Level 2 Diversity

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Corporate boards are pursuing identity diversity in their membership like never before. But, as most directors know, elevating a corporate board in an era of sweeping and rapid change demands, above all else, true diversity of thought. Even that’s not enough: It also requires productive harnessing of that greater variety of thought inside the boardroom.

“This is the kind of diversity that tends to be important and can be served by gender and racial diversity—but not necessarily,” says Peter van Oppen, who has served on a dozen corporate boards, including Level 3 Communications, and is currently a board member at Impinj and Group Health Foundation. “It’s a question of diverse perspectives. What you need is people who have an adequate ability and stature to be crap detectors and counselors, and bring different perspectives.”

Strategy consultant and board advisor Lars Sudmann says boards “want to have diversity that represents society correctly. But what’s not being addressed enough is what I call ‘Level 2’ diversity, which is when you really have a diverse background of worldviews. Then, by definition, people will have diverse ideas, and that will lead to conflict and discussion.”

The diversity dividend may be quantifiable: A board is 17 percent more likely to achieve “gold medal” status when its non-executive directors possess independent perspectives, according to a new study by search firm Russell Reynolds Associates, which defined top-performing boards as those at companies that outperformed relevant total shareholder return benchmarks for at least two years in a row.

Basics First

Of course, smart directors have always welcomed a broad set of perspectives. “Diversity of experiences, insights and ideas among board members delivers creative value for the organizations they serve,” says Donald Maruska, a management consultant who was the founder and CEO of three Silicon Valley companies.

Diversity also “helps boards avoid major missteps,” he notes. “Stupid mistakes in judgment, corporate responsibility or market acumen occur when organizations lack the needed perspectives and the ability to correct. Boards have the power. They need the diversity of perspectives to exercise that power effectively.”

Even ensuring a wide swath of experience, expertise and “traditional” diversity on a board by itself doesn’t necessarily deliver true diversity of thought. “The ideal combination is a variety of backgrounds and experiences while at the same time… [sharing] the proven character trait of being open for exploring new ideas and thoughts,” says Sudmann. “This can add another layer of complexity to board deliberations, but it can avoid groupthink. You can get a complete picture.”

Rusty O’Kelley, global head of the board advisory practice for Russell Reynolds Associates, agrees. “The most important quality of a good board member is to have good judgment,” he says. “That’s before you get to skills and experience. Can they look at a multitude of new and different challenges that they haven’t been expected to deal with before?”

Looking to bring greater diversity of thought to your board? Some ideas:

1) Map Your Needs

Maruska suggests laying out a company’s complete “ecosystem,” including all the customers, employees, shareholders, suppliers and regulators that influence it, as well as every other conceivable constituency. “This will at least help them in identifying the perspectives they’re going to need,” he says. “And you can get beyond just identifying potential board members with certain interests and figure out how their vantage points will help in that company’s ecosystem—not just, ‘This is my experience and expertise,’ but, ‘Here’s how I can help considering our given business ecosystem.’”

Many corporate boards have sophisticated matrices for matching the skills and experiences of board members against corporate strategy. These methods are a way to map out where you stand against the needs or goals you’ve defined, says Dale Jones, CEO of the recruiting firm Diversified Search. “The way you get diversity of thought isn’t limited to those factors but at least you can look at what knowledge might be missing—digital or regulatory experience, or someone familiar with rural markets, for example. Then you can determine what’s missing and try to close the gaps.”

The board roster of Walmart, for example, makes it pretty clear how the company perceives the makeup needs of its board. Five of its 12 directors have retail experience, such as Steve Reinemund, retired chairman and CEO of PepsiCo. Five have technology or e-commerce experience, including Sarah Friar, CEO of the online social network Nextdoor. All 12 are global or international business veterans; and four of the 12 represent “gender and racial or ethnic diversity,” including Carla Harris, vice chair and head of multicultural client strategy for Morgan Stanley, and Marissa Mayer, former CEO of Yahoo.

Still, some boards struggle to welcome even the basic diversity offered by individuals with, say, domain manufacturing or digital or marketing experience as contrasted with experts in traditional financial and administrative areas. Some also strain to see the value in unusual resumés.

“But you may want someone who’s been in charge of something abroad who brings a different dimension than their area of substantive background, for instance,” advises Stewart Landefeld, a governance expert who is a partner with the Perkins Coie law firm in Seattle.

2) Seek More Than Skills

Boards must be forward-looking and inquisitive, so Patricia Bedient, board member of Alaska Air Group and Suncor Energy, advises seeking “strategic thinkers: people who have intellectual curiosity and agility. They can take concepts and formulate the right questions to ask [management], and discern and evaluate the answers.”

Diverse viewpoints also enable boards to be more effective at providing checks on management. “CEOs definitely can get gut-hooked on their own ideas,” says Maruska, who was CEO of Health Advantage, Sun Medical Technologies and Spectra Biomedical. “They come to the board already feeling as a point of pride that they’ve figured it out, and they’re giving an answer to the board all tied up in a bow. But what the public is doing now is asking for boards to do more than bless the CEO’s nicely wrapped package.”

Board members who have demonstrated resilience when facing business adversity, for instance, can be invaluable. “Every board at some point is going to deal with issues, hopefully not huge,” Bedient says. “Having people who’ve been through situations often can be very important. They see it, they aren’t going to be spooked by it and they’re likely to ask the right questions with the right intentions instead of trying to affix blame.”

Accomplished leaders from outside of the business world can also add valuable diversity of thought in boardrooms, as well as the confidence to back up their convictions. Van Oppen’s fellow directors included a U.S. senator “who looked at things differently and didn’t reinforce groupthink,” as well as a three-star Army general from Desert Storm.

“He couldn’t necessarily read a balance sheet,” van Oppen says. “But an HR decision came up, and he wanted to do what was right. He was ready to take the hill. I valued his willpower to do what he thought was right and not be overly influenced by externalities that were mostly superficial.”

3) Empower the Nom/Gov Committee

Obviously, proactive diversity-recruiting efforts begin by definition with the nom/gov committee. They can lead a board’s continual membership-refreshment efforts—and, in the process, provide constant pressure for diversifying the roster.

“If you are a nom/gov chair, you want to make sure you’re not going just to the usual suspects and network of known relationships to board members but that you’re reaching out to broad organizations with a bigger pool,” says Paul Winum, senior partner for board and CEO services at leadership-development firm RHR International.

4) Go Beyond the Pros

Search firms conduct deep analyses of board candidates for their clients, delving behind titles to dig into specific business experience, such as whether a candidate has transformed a company or worked in a startup, as well as probing personal backgrounds. “Some of the best talent have their heads down, but we’ve identified them as individuals who could add value on a corporate board,” Jones says. “We can present the opportunity to them because they have the skill sets or knowledge or experience that our clients need, and some turn out to be the best board members.”

Boards, however, will also want to go beyond the pros. “In many cases, search firms have limited Rolodexes,” Winum says. “They also have conflict-of-interest rules that prohibit them to source [director] candidates from companies where they have placed executives.”

In conducting DIY searches, van Oppen advises employing “peripheral vision about what’s going on regionally and nationally, including lists of transactions in the relevant business community, keeping an eye out for people. Don’t be too heads-down. Move toward non-traditional candidates. They’re there; you just have to find them.”

It’s also OK for boards to seek diverse thinking from the outside on a contract basis as they attempt to ramp it up internally. “It’s unrealistic to assume that a board, no matter how well constituted, can have [all] the diversity needed to grapple with rapidly changing challenges and opportunities,” Maruska says. “Boards can tap special-purpose advisory units or linkages with other organizations or interest groups to get diversity of input to fulfill their responsibilities.”

Boards should also consider asking management to bring in subject matter experts to supplement any gaps. “In a company that has crossed the chasm and is well into its growth curve, a board’s job isn’t to outguess or even to supplement the company’s expertise,” says van Oppen. “If you want a China expert or a supply-chain expert, companies can hire them.”

5) Codify the Need 

One way boards can devote themselves to recruiting a diversity of perspectives is to build the priority into corporate bylaws. Prodded by conservative gadfly Justin Danhof, for example, four companies—Walmart, Gap, CVS Health and PepsiCo—recently began stipulating that their board-recruitment efforts include seeking “diverse perspectives” or “viewpoints” in candidates, in addition to varied backgrounds.

“Our goal with this is to help corporate board members and leaders overcome progressive groupthink,” says Danhof, director of the Free Enterprise Project, based in Washington, D.C. “The left has gotten them very heavily into bean counting in the gender and racial makeup of boards. But let’s consider ideology as well as part of the makeup of who somebody is.”

Danhof’s concern raises the issue of directors not knowing what they don’t know. This may be a matter of overreliance on “safe” sources of relatively homogeneous members, such as when a majority hail from Harvard Business School. It could be geographic ignorance, such as the board of a tech company based in California not understanding the viewpoint of Americans in the heartland even though it’s an important market.

“Particularly with issues of the complexity of environmental and social responsibility issues, you need diverse viewpoints because there will be a continuum of [perspectives] in the general population,” Winum says.

Walt Disney CEO Robert Iger’s threat to pull movie-making from Georgia after the state passed a stricter anti-abortion law could be viewed as an extreme risk in that regard, given that “family-values” customers are an important target market for Disney. “Someone on the board has got to be pushing back and asking, ‘Is this a long-term or a short-term perspective?” van Oppen says. “‘And where does this lead us?’”

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