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Lack of diversity in America’s boardrooms is holding companies back. But there’s a growing movement to fix the problem.

illustration of diversity, three woman at a laptopCEOs report to corporate boards, and research indicates that the makeup of those boards matters.

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  • Most corporate boards don’t represent the US population and lack diversity, research shows.
  • But companies with more diversity among the executive ranks have been found to outperform peers.
  • Bessie Watts of Vista Equity Partners, a large investment firm, is working to diversify more boards.

Behind almost every Fortune 500 CEO is a group of powerful people calling the shots: the executive board. And the makeup of those boards matters. Their worldviews and personal backgrounds shape the actions of the heads of companies, who report to boards.

But despite an increase in the racial diversity of directors on corporate boards over the past few years, most boards still aren’t representative of America’s population. Instead, they’re mostly male and mostly white.

Of 5,403 board members at Fortune 500 companies, 69% were male and 78.5% were white, according to analysis by Mogul, a recruitment platform that seeks to place executives from underrepresented backgrounds. More than a dozen companies had no board members of color, according to the report, which relied on 2021 data.

America’s economy is missing out as a result, with McKinsey research in 2020 finding that companies with diverse leadership performed better than their peers. But some business leaders are working to diversify boards, among them Bessie Watts, the director of the external-board-of-directors program at Vista Equity Partners, a global investment firm.

Along with a few partner organizations, Watts launched a program in August to help companies interview and select more board members from underrepresented backgrounds.

“If you look across public and private boards, and all boards in general, we’re not where we want to be,” Watts told Insider. “The reality is I am a Black woman. That is my existence. I want to see boards that represent the census.”

Bessie WattsBessie Watts of Vista Equity Partners is working on a program to increase the pipeline of board members from underrepresented backgrounds.

Courtesy of Bessie Watts

Watts is working with the National Association of Corporate Directors, whose members consist of more than 23,000 board directors, and the Society of Human Resource Management. The initiative gives people from underrepresented backgrounds access to 12 months of resources to prepare them for board service, educating them on business-leadership practices, CEO selection, and corporate governance.

In 2021, she helped appoint 33 board members at Vista Equity Partners’ portfolio companies. She said the firm was on track to meet or exceed that number for 2022 and hoped to soon help support hundreds of board candidates.

“If we don’t continue to diversify the board pipeline, we’ll just sort of have the same 20 people or so just continuing to be board-appointed,” Watts said. “I’m sure they’re wonderful, but I think we can widen the pool.”

Board members from different backgrounds bring unique perspectives

The move to diversify boards has been gaining traction over the past few years. 

In his widely read annual letter to shareholders, Larry Fink, the CEO and chairman of BlackRock, the world’s largest money manager, in 2018 highlighted the importance of board diversity.

“Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking are less likely to succumb to groupthink or miss new threats to a company’s business model,” Fink wrote. “And they are better able to identify opportunities that promote long-term growth.”

The conversation continued to grow in 2019, when a group of more than 180 top CEOs came together to declare the purpose of a corporation was to, in part, embrace diversity. Nationwide protests after George Floyd’s murder in 2020 fueled even more research and conversation on the topic.

In 2021, the Securities and Exchange Commission approved Nasdaq’s rule mandating that all companies that list on Nasdaq have at least two directors who are women or people of color, or explain why they don’t.

The McKinsey analysis, which looked at 2019 data, found that when it came to profitability, the quartile of companies in its sample with the most gender diversity in leadership were 25% more likely to outperform companies in the bottom quartile of gender diversity. Companies in the quartile with the most ethnic diversity at the top were 36% more likely to outperform their peers in the bottom quartile for ethnic diversity, per the same analysis.

And according to findings from a 2021 analysis published in the The Academy of Management, companies with more women in leadership were more open to change and more interested in developing research and development within their companies, two strategies that could benefit many businesses.

More CEOs are embracing not just the moral case for board diversity, but the business case, as well, Watts said.

“We’re working with all different types of CEOs from varying backgrounds and experiences. And what I have just seen is a lot of excitement and enthusiasm around our program,” Watts said. “We’re able to meet and help support board members with valuable new insight.”

Read the original article on Business Insider