A recent McKinsey & Co. study showed that companies with more diverse leadership teams from a gender, race, ethnicity, and age perspective outperform their competition. The study specifically revealed:
- Companies in the top 25 percent for racial and ethnic diversity are 35 percent more likely to have financial returns above national industry medians.
- Companies in the top 25 percent for gender diversity are 15 percent more likely to have financial returns above national industry medians.
- For every 10 percent increase in racial and ethnic diversity on the senior executive team, EBIT rises 0.8 percent for companies in the U.S.
It is no longer a question of whether diversity makes sense for executive leadership teams and boards, it does. And with a bill pending in the New Jersey legislature similar to a law that went into effect in California in 2018 that would require many public companies in the state to have at least three women on their boards by 2021 — with one required to be in place by 2019 — the time is now for New Jersey business leaders to consider how they can ensure that their diversity recruitment efforts are successful.
While most companies already have good intentions when it comes to diverse leadership hiring and are aware that differences in race, gender, ethnicity, thought and experience are all important contributors to innovation and success, they often fall short of their aspirations. In my experience working with C-level executives and boards, the root cause of this dynamic is that most companies tend to be reactive when filling senior-level leadership roles, typically waiting to initiate a diversity search until after an active opening exists.
Time is the enemy of diversity. The longer a position is open, the more the opportunity costs add up, and the less likely companies will patiently wait for a strong diverse slate. Because there are fewer diverse candidates in the marketplace, they are more difficult to identify, and the competition to retain and attract them is intense. If there is pressure to fill an open position because of an unexpected departure, a promotion or termination or, as will be the case if the current New Jersey bill is enacted a law requires the addition of female board members, finding diverse talent quickly can become a significant challenge.
Many companies find themselves in this position because they have not established a proactive, anticipatory, and ongoing external succession program at the board and executive level that emphasizes diversity of all kinds. Companies can convert their diversity aspirations into a competitive advantage adopting programs that enable them to meet and build relationships with well-qualified, diverse candidates well before an actual opening or need exists. Such a program ensures that a company is better prepared for unexpected departures and has a pipeline of outstanding diverse candidates at the board and executive level when these positions become available.
Another benefit of this pipeline of leadership talent is that it is often a catalyst for upgrading
mediocre talent (diverse or otherwise) that may exist within the organization. When a company leader meets an outstanding candidate, he or she can be opportunistic about finding a place for that individual.
We have observed that companies are reluctant to initiate a traditional search to upgrade mediocre talent due to the risk associated with doing so. Will the search firm present top-notch, diverse candidates who will actually be an upgrade over the current talent? Will the direct reports be unsettled by the thought or threat that a new boss may be coming from the outside? To be prudent, direct reports, upon discovering there is an active search for a new boss, may begin to circulate their own resumes for fear that the new boss will bring in his/her own team.
This sort of disruption can degrade the performance of the team and ultimately the business.
The beauty of a program, like the one we have developed called the Leadership Pipeline, is that it is not a traditional search process. It is non-threatening and easy to keep confidential. It is possible that no one will be hired or invited to join a board for a year or two if an opening does not occur or an upgrade opportunity does not present itself. On the other hand, we have observed that when some companies meet a 9 or 10 on the scale of 1-10, leaders are empowered to upgrade their 5-6 management talent.
Recruiting outside diverse board members adds another dimension. The McKinsey study referenced above, which looked at more than 400 companies employing over 20 million people, also demonstrated that the demand for outstanding diverse business leaders far exceeds the supply. It is up to business leaders to proactively fulfill their diversity aspirations and effectively compete in this challenging environment by recruiting differently and more effectively.
The key to the program’s effectiveness, and what makes it unique, is the rigorous and disciplined process for follow-up tracking and engagement with the most interested and qualified candidates.
In a recent article in The Wall Street Journal regarding the gender and diversity gap, Sheryl Sandberg and Rachel Thomas noted: “Progress isn’t just slow — it’s stalled.” They went on to state that: “Companies need to take bold steps to make the race fair.” To win this race, consider a more proactive approach to your leadership pipeline.
Howard Fischer is president and CEO of Howard Fischer Associates, a leading executive and board search firm that works with companies of varying sizes throughout the country. Howard consults with CEOs, boards of directors, and senior executives nationwide to help them identify, evaluate, and attract senior executives and board members.