Diversity Within Boards of Directors: Exploring the Concept, Purpose, and Key Pillars

Incorporating age diversity as a component of corporate governance can lead to a more well-rounded and effective board of directors, ultimately contributing to the success and sustainability of a company.

Diversity within boards of directors has become an increasingly important topic in recent years. The benefits of having a diverse board are numerous and can positively impact a company’s performance. Age diversity is one aspect of board diversity that has gained attention in recent years. A study by KPMG found that having a diverse age range on a board can bring fresh perspectives, new insights, and enhanced decision-making capabilities.

Exploring the Concept

The concept of diversity within boards refers to the composition of a board with regards to characteristics such as gender, ethnicity, age, and professional background. The purpose of achieving diversity is to bring a range of perspectives and experiences to the decision-making process. The key pillars of diversity within boards are inclusion, equity, and belonging. By creating an inclusive environment where everyone feels valued and heard, boards can foster equity and belonging, leading to improved decision-making outcomes.

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Age diversity specifically brings benefits such as a broader range of experiences and perspectives, increased creativity and innovation, and a better understanding of emerging trends and technologies. Companies with an age-diverse board also tend to have better financial performance.

Diversity within boards, including age diversity, is crucial for the success of any organization. By embracing the concept, understanding its meaning and purpose, and focusing on the key pillars of inclusion, equity, and belonging, boards can achieve better decision-making outcomes and improve overall performance.

Purpose of Diversity in Boards

Diversity within boards of directors can bring a variety of benefits to organizations, including improved decision-making, increased innovation, and better representation of stakeholders.

Here are the top 5 purposes of diversity within boards of directors:

1. Improved decision-making

A diverse board can bring a range of perspectives and experiences to the decision-making process, leading to better and more well-rounded decisions. Boards with more diverse members were more likely to challenge management and to consider a wider range of options when making decisions.

2. Increased innovation

Diverse boards can also lead to increased innovation, as members with different backgrounds and experiences bring new ideas and approaches to the table. Boards with more diverse members were more likely to encourage innovation and to embrace new technologies and business models.

3. Better representation of stakeholders

Boards that reflect the diversity of their stakeholders are better equipped to understand and respond to their needs. This can lead to improved customer satisfaction, increased employee engagement, and better relationships with the broader community. Boards with more diverse members were more likely to consider social and environmental factors in their decision-making.

4. Enhanced reputation

A diverse board can enhance an organization’s reputation and help attract and retain top talent. Studies found that companies with more diverse boards were more likely to be seen as socially responsible and to have better employee engagement and retention rates.

5. Compliance with regulations

Many countries and industries have regulations or guidelines related to board diversity. Having a diverse board can help ensure compliance with these requirements. Various researchers found that companies with diverse boards were likely to comply with regulations related to age diversity on boards.

Top 7 Key Pillars of Diversity Within Boards of Directors

A diverse board brings varied perspectives and experiences to decision-making, which can ultimately lead to better outcomes for the organization. Here are the top 5 key pillars of diversity within boards of directors, according to KPMG’s Age Diversity Study in March 2017:

1. Age Diversity

The first key pillar of diversity within boards of directors is age diversity. An organization’s board should represent a range of ages and generations to ensure diverse perspectives and experiences. Older directors can bring wisdom and experience, while younger directors can bring fresh ideas and new ways of thinking. Having a mix of ages can also help to bridge the gap between different generations within the organization and ensure that the board is better equipped to navigate the changing business landscape.

Age diversity is an essential component of board diversity. The average age of directors in the S&P 500 companies was 60 years old, with only 15% of directors being under the age of 50. Having a diverse age range within the board can bring different perspectives and ideas, which can ultimately benefit the organization. Additionally, research has shown that companies with a diverse age range of directors are more likely to have higher financial performance. The S&P 500 index is a showcase of prominent names in the U.S. business landscape, and any inclusions or exclusions to this index can signify significant market shifts.

2. Gender Diversity

Gender diversity is another key pillar of diversity within boards of directors. Women are often underrepresented on boards, despite the fact that they make up half of the population and the workforce. Having women on the board can bring a different perspective to decision-making and ensure that the board is better equipped to address issues that affect women in the organization and in society as a whole. Gender diversity also sends a strong message about the organization’s commitment to diversity and inclusion.

Gender diversity has been a major focus for many organizations in recent years, and for good reason. Only 20% of directors in the S&P 500 companies were female. However, research has shown that companies with more women on their boards tend to have better financial performance. In fact, a study by McKinsey & Company found that companies in the top quartile for gender diversity on their executive teams were 21% more likely to have above-average profitability.

3. Ethnic and Racial Diversity

Ethnic diversity is another important pillar of diversity within boards of directors. Having directors from different ethnic backgrounds can bring a wealth of experience and different perspectives to the boardroom. It can also help to ensure that the organization is better equipped to address issues related to diversity and inclusion and to serve a diverse customer base. Ethnic diversity can also help to create a more inclusive workplace culture, which can lead to higher levels of employee engagement and retention.

Ethnic and racial diversity is also crucial for board diversity. The KPMG study found that only 4% of directors in the S&P 500 companies were non-black, indicating a lack of ethnic and racial diversity within the board. Research has shown that companies with more diverse boards tend to have better decision-making and innovation, leading to higher financial performance.

4. Industry Diversity

Industry diversity is important for bringing varied perspectives and experiences to the board. The majority of directors came from a finance or accounting background, with little representation from other industries. Having a diverse range of industries represented on the board can help the organization adapt to changes in the market and bring fresh perspectives to decision-making.

5. Geographic Diversity

Geographic diversity is also important for bringing varied perspectives and experiences to the board. Having directors from different regions can help the organization better understand local markets and adapt to regional differences.

6. Skills and Experience Diversity

Another key pillar of diversity within boards of directors is skills and experience diversity. It is important to have directors with a range of skills and experiences to ensure that the board is well-rounded and able to make informed decisions. For example, a board may benefit from having directors with expertise in finance, marketing, or technology. Having directors with different backgrounds can also help to ensure that the board is better equipped to address a wide range of issues that affect the organization.

7. Industry and Sector Diversity

The final key pillar of diversity within boards of directors is industry and sector diversity. Having directors with experience in different industries and sectors can bring a wealth of knowledge and experience to the boardroom. This can help the board to better understand the competitive landscape and to identify new opportunities for growth. Industry and sector diversity can also help to ensure that the board is better equipped to address issues related to regulatory compliance and risk management.

8 Key Acts on Diversity at Boards

Little Dispersion in Average Age of Directors among S&P 500 Company Boards

• There is little dispersion in the average age of directors between different S&P 500 company boards. The average age of all boards was 62.4. Looking at the variance, fewer than 25% of companies had an average age of the board as a whole of less than 60.6 years, and fewer than 25% of all companies had an average age of the board as a whole of more than 64.4 years.

Representation of Decades on S&P 500 Boards and Standard Deviation Analysis

• Within individual boards, more than half (55%) of the S&P 500 boards have three decades represented on their boards, most commonly directors in their fifties, sixties and seventies. Looking at the standard deviation of the average board reveals a tighter cohort. The median standard deviation of ages at S&P 500 company boards was 6.9 years, and 50% of all boards had a standard deviation of dispersion of between 5.7 and 8.2 years.

Limited Variations in Board Age Diversity by Company Size and Industry Segment

• In general, board age diversity does not vary significantly by company size, or by industry segment. Information technology firms do have the youngest median board age at 61.3 years, but that is only about a year less than the median of all S&P 500 firms. Real Estate firms boast the oldest median board age, at 63.4 years, a year more than the index median.

Information Technology Industry Boasts Most Age Diverse Boards, Utilities Industry Least Diverse

• Boards in the Information Technology industry have the most age diverse boards (a standard deviation of 8.1 years), while Utilities companies have the least age diverse boards (standard deviation of 6.1 years).

Longevity of Publicly-Traded Companies and Its Impact on Board Age Diversity

• Companies which have been publicly-traded for more than 50 years have the least age diverse boards (standard deviation of 6.5 years, compared to the index average of 7.2 years).

Age Difference between Directors Based on Tenure on Respective Boards

• Directors who have served on their respective boards for less than three years are, on average, 8.7 years younger than directors who have been on their respective boards longer than 10 years.

Majority of Directors with Tenures over Ten Years Joined Boards in Their Forties or Fifties

• The vast majority (77%) of the directors studied with tenures over ten years joined their respective boards when they were in their forties or fifties.

Director Turnover and its Impact on Age Diversity of Boards

• More director turnover, as measured by the number of director changes made between 2014 and 2016, did not result in more age diverse boards in most cases.

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