The Implications of Diversity for Corporate Boards of Directors Essay

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Updated: Feb 25th, 2024

“I can do things you cannot; you can do things I cannot; together we can do great things” (Leaf 2018, p. 87). These words, originally spoken by Mother Teresa, represent the core idea behind diversity and its benefits to business and the international community at large. The progress of human civilization is associated with the ability to share ideas and improve upon existing ones through cooperation and conversation. With the rise of trade and information technology, conversation and cooperation were enabled at a larger scale. In the 21st century, it is possible for a person from the UK to have a conversation about contemporary issues with people from Berlin, Japan, and South Africa, exchanging ideas and promoting mutual growth.

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When it comes to business, however, the subject of diversity becomes more polarizing. The very word ‘diversity has become associated with two major paradigms: Race and gender. According to Terjesen, Couto, and Francisco (2015), corporate business boards in most western countries are comprised solely of white men, with the percentage of female directors ranging from 5.6% to 16.9% in the time period between 1990 and 2014. The situation is better in non-executive boards, where female representation reaches up to 30%, but the overall growth rates remain low (Gordon 2016). Racial representation of minorities in western companies remains low, at around 7.7% of the top 100 Fortune board seats, illustrating that the overall composition of business boards remains relatively homogenous (Harjoto, Lacksmana & Lee 2015). Although diversity in the board of directors has the potential to enhance its decision-making capabilities significantly, if implemented without measures to improve inclusion, it might impede coordination, responsibility and lower the degree of cooperation and trust between board members and company employees at large.

What are Diversity and Inclusion?

In order to explain why diversity in the boardroom is meaningless without inclusion, these concepts must first be defined. Diversity as a concept stands for individual differences between people based on various parameters, such as racial and ethnic makeups, gender and sexual differences, religious and political beliefs, socio-economic positioning, age, physical and mental capabilities, and personal experiences (Green 2019). Inclusion, on the other hand, stands for the capacity of human beings to recognize the value of individual differences between one another and the ability to include others as equal members of their respective communities (Mor Barak 2015). As it is possible to see, diversity and inclusion go hand in hand, with one definition representing the differences and the other – the ability to accept these differences. If a board is not diverse, it cannot reap the benefits of different perspectives and points of view. If it is not inclusive, it will fail to capitalize on good ideas coming from differences in opinion.

Benefits of Diversity and Inclusion in the Boardroom

The concept of beneficial diversity is directly tied to the concept of the free market, which the modern globalized economy is based upon. Free markets that are found on the basic values of individual human rights and property rights help facilitate cooperation between different groups of people by providing shared gains (Arizpe 2014). Individual tastes, backgrounds, experiences, and circumstances affect the perceptions of values that people place on goods and services. Therefore, diversity becomes a required component in any business in order to understand and realize the full value of a venture. Market exchange enables companies and individuals to benefit from these differences by catering to them, creating specialized products to satisfy their target audiences (Arizpe 2014).

In addition, diversity and free markets foster innovation by promoting competition between different groups of people. When faced with opposition, individuals and organizations have to ask themselves about what it is that others do better, thus pushing for innovation and learning from other people and Culture through evaluation, imitation, and application of skills (Arizpe 2014). Trade hubs and cities located in geographically advantageous locations have been historically known as centers of innovation. Greece and Italy are considered to be cradles of western civilization. Historically, both countries were placed on the edge between the East and the West, benefitting from cultural and economic exchange.

In the scope of corporate governance and board composition, diversity offers significant advantages to the company. Having a broader gender and racial makeup of the board enables the evaluation of proposed strategies and products in regards to all potential customer groups. If all other qualities are considered equal, a woman would have greater insights about cosmetic products aimed at women, while an Arab board member should have better insights into what is acceptable or not acceptable to an average Muslim buyer. Different experiences might help create unorthodox approaches to certain problems affecting the company. For example, a Japanese-born board member helped introduce the concept of Kaizen to Nestle, a Swiss multinational food and drink company, successfully implementing a quality improvement practice popular in Japan (Klimczuk-KochaƄska 2017).

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Negative Sides of Diversity

While many types of research and news articles focus on praising diversity and highlighting the potential benefits of improved creativity, diversity comes with a set of prerequisites in order to be successful. Inclusion is a critical component in the success of diversity in business. Historically, groups, tribes, and organizations were formed by like-minded individuals with a set of shared goals, values, and responsibilities (Smith 2017). The homogeneity of the group ensured high levels of trust and cooperation between group members, significantly improving productivity and reducing power abuse and theft (Smith 2017). At the same time, any individual with diverse opinions, origins, and background outside of the group was viewed with potential distrust. These tribalistic ideas have been cultivated in the human mind from the dawn of time and present a challenge to overcome. From the early years, children are taught to focus on the family and distrust strangers. These notions translate into the real world as well – anything new and unfamiliar is viewed with suspicion at best and hostility at worst.

Diversity requires a powerful conscious effort on behalf of everyone involved to accept diverse opinions and view them based upon merit rather than stereotypes. It requires acknowledging the presence of inherent biases of one’s way of thinking, a conscious willingness to change, and a degree of critical thinking and self-reflection (Trittin & Schoeneborn 2017). These qualities are relatively rare among people, even in high positions of power. It highlights the importance of an inclusive mindset, as, without it, diversity can be seen as divisive and destructive, affecting the board of directors and the company in general.

Putnam (2007) states that groups and communities with high rates of diversity are characterized by greater amounts of social disagreements, discord, economic efficiency in combination with high levels of crime, reduced civic trust, and poor engagement levels. In the scope of the company, these findings mean that a business whose employees and directors with low levels of inclusivity are likely to fight among each other than to succeed in reaping the benefits of a diverse roster of employees or board directors.

Forced Diversity in Companies and Directorial Boards

There are a plethora of reasons as to why the push for gender and racial diversity in the workplace and the director boards is such a controversial issue in modern society and politics. Feminist researchers claim that the primary reason for discord lies in the dismantlement of the traditional patriarchal power structure existing in many industries as a result of the historical oppression of women and minorities. Williams (2016) states that white men are apprehensive towards independent women and minorities in the position of power and aim to undermine their successes in the workplace through disobedience and subterfuge. However, many types of research in this area focus on attacking the opposing point of view without taking in the historical and economic sides of the diversity problem.

As it stands, the most prominent approach to increasing gender and racial diversity in the boards is through quotas. A quota stands for a certain percentage of seats, workplaces, and representative spots dedicated to a certain gender or minority group (Sumner, Turner, & Borrow 2018). National corporate codes of 16 countries in Europe endorse quotas, whereas, in Sweden and Norway, companies are legally forced to maintain such (Engelstad et al., 2015). In Norway, for example, a company with a roster not comprising of 40% women both in the employee and management staff is denied the legal status of an LLC. Such an approach forms the backbone of resistance to diversity in companies for a multitude of reasons.

One of the biggest ethical and theoretical arguments against enforced diversity is that it encroaches on the basic principles of the free market. The practice establishes the equality of outcomes rather than opportunities, which is met with hostility from other members of organizations and communities. It also robs the companies of their right to self-determination.

The majority of arguments for enforced diversity are not based on the effectiveness of the approach. Current research revolving around the effectiveness of gender quotas is inconclusive at best and negative at worst. Engelstad et al. (2015) state that since the introduction of obligatory 40% gender quota in Norway, the number of locally-registered LLCs was halved, indicating an exodus of businesses from the country. There is a multitude of reasons for that, with one of the most obvious ones being that there are not enough qualified cadres among women and minorities willing or capable of occupying the position.

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Williams (2016) states that just 50-60 years ago, most women were primarily housekeepers, while men were the breadwinners. From a historical perspective, half a century is a very short time. Only 2-3 generations have passed, during which the number of women in the workforce kept growing. At the current rates of natural growth, it is estimated that the number of men and women in the workforce ought to balance itself out in the next 30-40 years.

These rates, however, as demonstrated by Gordon (2016), are not considered fast enough, resulting in a demand for affirmative action from companies and governments alike. They are expected to hire more women and place them in positions of power regardless of the available candidatures or even their desire to be represented in a specific field of employment. Hur et al. (2017) indicate that the percentage of women in male-dominated areas is slowly growing; the majority of respondents prefer the areas typically associated with the female gender, such as education, medicine, social sciences, and various desk jobs. Although the tendency can be explained through the lens of social constructivism, denying these women their right to choose would be dishonest and dangerous.

From this issue arises another conflict between forced diversity and a free-market economy. The position on the board of directors requires specific knowledge, qualities, and experience in order to make decisions for companies and businesses effectively. Gender and race, while certainly contributing to diversity, are not the primary factors affecting the accuracy of decision-making. Knights & Omanović (2016) highlight these flaws of diversity mismanagement, claiming that the positioning of a gender-appropriate candidate with poor expertise is detrimental to company growth and competitive advantage. In a highly competitive globalized economy, the majority of for-profit business organizations cannot afford to hire an incompetent representative of a minority group for fear of their competitors ousting them. At the same time, in the face of a shortage of cadres, especially in male-dominated areas of industry, such as engineering, mineral excavation, construction, and other physically-intensive trades, Norway companies are forced to either expand their roster to allow quota members in, or forced to “scrape the bottom of the barrel” in hopes of finding suitable candidates (Engelstad et al. 2015).

The perceived incompetence of candidates born out of cadre shortage and enforced diversity policies grow the internal discord and discontent among the existing employees. A directorial board member’s authority may be undermined by the perceptions of being a ‘diversity hire’ rather than a respected member hired for his or her knowledge, experiences, and capabilities as a board member. Wiersema and Mors (2016) provide examples of reactions towards gender quotas from board members across the world, and the overwhelming impression is that diversity quotas do not command respect and are seen as demeaning and undeserved. As a result, it is unlikely for fellow board members and employees to take their fellow board members seriously, creating an atmosphere of exclusion and separation rather than inclusion.

Potential Solutions for Effectively Increasing Diversity in Director Boards

In order to harvest the power of diversity in business and affect the decision-making process in a positive way, several issues need to be understood and realized. The most important fact to be taken from this paper is that diversity in business is not valuable for diversity’s sake alone. The primary goal of any enterprise in a competitive economy is to grow and make a profit. Diversity can help with that by providing innovative ideas, unorthodox decisions, and important insights into the nature of customer groups (Ozturk & Tatli 2016). At the same time, forced diversity contradicts the competitive goals of a business and has numerous flaws, as discussed above. While all companies should be on the lookout for talented and experienced board members among underrepresented gender, racial, and ethnic groups, they must also ensure that diversity goes hand in hand with inclusion.

In order to increase the levels of corporate inclusion, thus enabling companies to appoint diverse executive boards, the organizations and societies must be prepared for it (Mester 2018). Educational reform should ensure the dismantlement of stereotypes regarding certain positions and professions, encouraging girls to pursue careers in male-dominated areas while offering boys the chance to try their hand at ‘feminine trades,’ such as education, medicine, and social work. Inclusivity training among the employees could be conducted in order to prepare them for future changes and increasing the acceptance rates of women and minorities in areas where they have not been seen before (Donnely 2015). Lastly, companies should make an effort to provide training and education to their employees in order to prepare them for roles in senior and executive management (Donnely 2015). These measures are based on empowering rather than on a zero-sum game of promoting historically oppressed groups of people at the expense of others.

Conclusions

Diversity is one of the most widely-discussed topics in contemporary management. Having a diverse board of independent directors can propel a company forward by offering new insights, ideas, and skillsets that could be useful to the company. However, many identify diversity with the diversity of race, ethnicity, and gender alone. They miss the primary purpose behind the practice, which is to promote a diversity of good ideas. In order to achieve such diversity, the company would need to foster an inclusive corporate culture while achieving professional growth in all of its employees. Only when the issues of disruptiveness, exclusion, and cadre shortage are solved would the true potential of a diverse directorial board finally emerge. Forced diversity, especially at the top, is more likely to produce instability and poor economic performance.

Reference List

Arizpe, L 2014, Culture, diversity, and heritage: major studies, Springer, London.

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Donnelly, R 2015, ‘Tensions and challenges in the management of diversity and inclusion in IT services multinationals in India’, Human Resource Management, vol. 52, no. 3, pp. 199-215.

Engelstad, F, Hagelund, A, Dauber, AS & Bögenhold, D 2015, Cooperation and conflict the Nordic way: work, welfare, and institutional change in Scandinavia, De Gruyter, Berlin.

Gordon, S 2016, , Financial Times, Web.

Green, L 2019, ‘How to unlock the true power of diversity and inclusion’, Australasian Law Management Journal, vol. pp. 1-3.

Harjoto, M, Laksmana, I & Lee, R 2015, ‘Board diversity and corporate social responsibility’, Journal of Business Ethics, vol. 132, no. 4, pp. 641-660.

Hur, H, Andalib, MA, Maurer, JA, Hawley, JD & Ghaffarzadegan, N 2017, ‘Recent trends in the US Behavioral and Social Sciences Research (BSSR) workforce’, PloS one, vol. 12, no. 2, p. e0170887.

Klimczuk-KochaƄska, M 2017, ‘Importance of creativity of employees in adaptation of food companies to innovative trends in the world’, Human Resources Management and Ergonomics, vol. 11, no. 1, pp. 50-64.

Knights, D & Omanović, V 2016, ‘(Mis) managing diversity: exploring the dangers of diversity management orthodoxy’, Equality, Diversity and Inclusion: An International Journal, vol. 35, no. 1, pp. 5-16.

Leaf, C 2018, Think, learn, succeed: understanding and using your mind to thrive at school, the workplace, and life, Baker Books, Grand Rapids, MI.

Mester, LJ 2018, Why I want you to study economics: increasing diversity, inclusion, and opportunity in economics, Web.

Mor Barak, ME, 2015, ‘Inclusion is the key to diversity management, but what is inclusion?’, Human Service Organizations: Management, Leadership & Governance, vol. 39, no. 2, pp. 83-88.

Ozturk, M. B., & Tatli, A. (2016). Gender identity inclusion in the workplace: broadening diversity management research and practice through the case of transgender employees in the UK. The International Journal of Human Resource Management, vol. 27, no. 8, pp. 781-802.

Putnam, RD 2007, ‘E Pluribus Unum: diversity and community in the twenty-first century’, Scandinavian Political Studies, vol. 30, no. 2, pp. 137–174.

Smith, C 2017, Making sense of project realities: theory, practice and the pursuit of performance, Routledge, New York, NY.

Sumner, R, Turner, A & Burrow, AL 2018 ‘Diversity and Inclusion as Essential Elements of 4-H Youth Development Programs’, Journal of Youth Development, vol. 13, no. 4, pp. 68-80.

Terjesen, S, Couto, EB & Francisco, PM 2015, ‘Does the presence of independent and female directors impact firm performance? A multi-country study of board diversity’, Journal of Management & Governance, vol. 20, no. 3, pp. 447–483.

Trittin, H & Schoeneborn, D 2017, ‘Diversity as polyphony: reconceptualizing diversity management from a communication-centered perspective’, Journal of Business Ethics, vol. 144, no. 2, pp. 305-322.

Wiersema, R & Mors, ML 2016,, Harvard Business Review, Web.

Williams, V. L. (2016). The patriarchy prescription: cure or containment strategy. Georgetown Journal of Law & Modern Critical Race Perspectives, vol. 8, no. 61, pp. 71-79.

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