Making the Case for Diversity on Bank Boards
Do bank boards that are ethnically, gender and age diverse offer an advantage both in recruitment and in strategy development? Asset managers BlackRock and State Street Global Advisors certainly think so; both routinely vote against nomination of new directors on boards without female representation. Their point: Diverse boards will be less prone to groupthink, more attuned to the needs of today’s consumers and employees, more alert to opportunities for growth, and less likely to overlook threats to the business.
Companies with greater gender diversity in their leadership outperform their less diverse competitors, have higher returns on capital, and are credited with better employee engagement and retention. Even so, corporate America is still grappling with how to make U.S. companies and workplaces more reflective of the diverse makeup of our country, but banking appears to be doing substantially better than most other industries.
Banks and credit unions recognize the advantages of seeking out directors with skill sets that will significantly contribute to oversight and management of the organization. This isn’t new. What is new is the acknowledgment that traditional qualifications for directors such as financial and operational skills and industry experience are fading as the sole prerequisites for a seat in the boardroom. And while board diversity matters, concentrating on only one form of diversity may not meet the need.
To build an understanding of and response to the increasingly complex issues and opportunities facing financial institutions today, the very concept of diversity needs a makeover. No longer referencing solely race and gender, diversity on boards should also include experts in new technology, cybersecurity, marketing, innovation and international business, as well as those with recruiting credentials who can help find talent needed across the organization.
Take Advantage of Diversity
Diversity will not have much impact on boards where members’ perspectives are not regularly elicited or valued. Boards with an egalitarian culture will be in better position to take full advantage of the contrasting experiences and insights that diversity delivers. In contrast to hierarchical boards, more egalitarian boards encourage information to be shared openly, with little “back channeling” or meeting outside of the formal meeting to raise concerns. They are more likely to accept and integrate differences of opinion.
Several reasons are cited to explain why companies with more diverse boards seem to perform better. One is that diverse boards often better mirror customer and client bases. Eastern Bank’s success story is a case in point. Based in Boston, Eastern Bank is America’s oldest and largest mutual bank. Since 2003 Eastern has placed great importance on diversity and inclusion among its directors, trustees and shareholders. They progressed from an overall board composed of 92% white males to, as of 2018, a board with 50% of the 140 members being people of color, women or individuals from the LGBTQ community. In addition, their board members reflect a vast array of professional backgrounds, skills and expertise.
Eastern’s board diversity didn’t just materialize on its own. It evolved thanks to sustained commitment from senior leadership, in particular the bank’s current chair and CEO, Robert “Bob” Rivers. He believes there is a direct connection between Eastern’s unique board diversity and its rapid growth. Specifically, it has helped Eastern improve its strategic decision-making, recruiting, innovation and connection with the community.
Be Aware of Potential Obstacles
Long tenure and the absence of a mandatory retirement age can work against the strategy of diversifying boards. Ideally, mandatory retirement guidelines or term limits will be in place, but industry pundits agree that most financial institutions should not rely on retirement to provide the opportunity to invite diversity into the boardroom.
Broadening the range of professional backgrounds considered for board member positions is easier to achieve when boards avoid filling open seats with people already in their personal and professional networks. If board vacancies are filled with a “who do we know” approach, the opportunity for diversity can be waylaid if board members only know people like them.
Tokenism is often an unintended obstacle that can dilute the overall initiative by solely focusing on percentages of diversity on the board without further consideration of the specific skills the new diverse members can bring to the board’s decision-making responsibilities.
In particular, the lack of women in the C-suite exacerbates this effect. Women remain severely underrepresented in banks at this level, with women CEOs representing just 4% of the industry, according to an analysis by S&P Global. This spreads to women in the banking boardroom, as well, because when the search is underway for a new board member with banking expertise, it frequently begins with those CEOs and others at the highest level. Without more women in those positions, the selection pool is significantly limited.
Several Ways to Meet the Challenges
As an executive search consultant who works on multiple board of director placements each year, I am often told by professionals, “I want to serve on a corporate board.” I often reply that the only qualification to be on a board is to be on a board, which really means there is no single way to approach board service.
One of the first pieces of advice I would offer is to be an expert at what you do. When our firm is retained to help identify potential directors we are most often given a list of must haves and wants that generally target executives who have successfully operated and led their organization or division in a large corporate environment. Today, demand is particularly high for those who have led in high-growth organizations and industries – executives who have proven they can take companies to new heights of success.
Secondly, be networked in your industry and market verticals. Most of our outreach is done behind the scenes away from the reaches of LinkedIn and other professional networking sites. We make calls and ask for referrals. Notoriety and connections in your area of expertise will greatly increase the probability your name surfaces. Also, network with executive recruiters who work on board searches; offer to be one of their referral sources. Giving recruiters access to your network highlights your value as well.
A last piece of advice – explore one of the many organizations providing board preparedness programs and executive education. Organizations like the National Association of Corporate Directors (NACD) have a host of resources that can point you in the right direction and help prepare you for future board service.
CBIZ Talent & Compensation Solutions along with EFL Associates has extensive experience recruiting C-suite executives for financial services companies. For additional conversation on this article and related topics, or for assistance with talent and compensation initiatives, please reach out at info@EFLAssociates.com.