ESG Investing

Diversity in Boards of Directors: Nontraditional Backgrounds Bring New Skill Sets

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Companies may talk the inclusive talk, but are they walking the walk when it comes to diversity in boards of directors?

Diligent Institute, the corporate governance research arm and think tank of software company Diligent Corporation, set out earlier this year to assess whether boards are, in fact, appointing directors from nontraditional professional backgrounds. In a July 2021 report, the organization presented its findings: Boards are becoming more diverse in multiple ways, and that diversity is resulting in directors with new skill sets—including expertise in ESG issues.

Ultimately, that could herald good news for anyone interested in seeing ESG become more integral to corporate strategy.

Changing Preferences

Diligent’s decision to investigate changes in new director appointments came after a January 2021 report titled What Leaders Think. Issued jointly with Corporate Board Member, it revealed something noteworthy: For the first time in the survey’s 18 years, directors said that “skill set/background diversity” was more important than CEO experience when choosing board members.

Traditional backgrounds were defined as those who have held the title of CEO, CFO, or COO. Nontraditional backgrounds covered those who have never held those positions but had other professional backgrounds, such as HR directors; leadership positions in the technology, marketing, sales, legal fields; or roles related to environmental, social or governance (ESG) concerns.

Changes in the diversity in boards of directors could help deliver better company performance.

Increasing Diversity

The survey looked at 4,300 public companies in Australia, the UK, and the US and found that there has indeed been an increase in the diversity in boards of directors. The percentage of newly appointed directors from traditional backgrounds has dropped from 59.4% to 56% since 2019; at the same time, the portion of newly appointed directors from nontraditional backgrounds increased from 13% to 18.9%.

In Australia, the decline in traditional board appointments was particularly pronounced—from 59.1% in 2019 to 41.8% in 2021. In the US, the number dropped from 61.1% to 58% in the same time period. On the flip side, appointments of newly appointed directors from nontraditional backgrounds increased from 13% to 18.9% among all surveyed.

Shifting Demographics

At the same time, the results highlight an intriguing difference in the demographic divide between newly appointed directors: Board members from traditional backgrounds are twice as likely to be male. Yet for every discipline aside from sales and legal in 2021, the majority of new nontraditional director appointments are women. For example, new technology appointments increased from 53% in 2019 to 58% in 2021.

The share of women directors with ESG backgrounds has been steadily on the upswing, shooting from 64% in 2019 to 84% in 2021. That aligns with research showing that women comprise an unusually large percentage of top ESG roles at investment companies.

What accounts for the difference in skill sets? The report conjectures that because comparatively few women and people of color have held roles as the CEOs, CFOs, or COOs of large public companies, firms looking to add women and ethnic minorities to their boards may recruit directors from nontraditional professional backgrounds.

“The global pressures on companies to increase the gender and ethnic diversity of their boards has, perhaps unintentionally, had an impact on director skill set diversity,” it suggests.

Benefiting Boards and Businesses

What are the long-term implications on boards? For one thing, these changes in the diversity in boards of directors could help deliver better company performance. As European Central Bank President Christine LaGarde wrote in 2019, “Adding one more woman in a firm’s senior management or corporate board—while keeping the size of the board unchanged—is associated with an 8–13 basis point higher return on assets.”

However, this shift also has the potential to impact the future of ESG in corporate governance. As more people with diverse backgrounds in ESG join boards—and as state legislators support more women on boards and diversity is prioritized in business rankings such as Fortune 500—their experience and perspectives will likely influence company agendas. As a result, ESG factors could play an increasingly important role throughout corporations, becoming more embedded in the fabric of organizational decision-making.

Any company, security, fund or other investment identified herein is provided solely for illustrative purposes and should not be construed as a recommendation or solicitation for the purchase or sale of any such investment.

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