TIME TO ACT ON CULTURAL DIVERSITY IN BOARDS
New research shows that Australian boards are allowing their cultural diversity to stagnate, potentially putting themselves at risk of losing out on a raft of benefits.
The 2022 Board Diversity Index, released by executive search specialist Watermark Search International and the Governance Institute of Australia (GIA) in May 2022, found that although ASX 300 boards are on track to reach gender parity by 2030, cultural diversity is stagnating with 90% of directors from Anglo-Celtic backgrounds, a finding consistent with the previous year’s index.
Similarly, research by Women on Boards (WOB), released in November 2022, examined the boards of 232 non-listed organisations such as research, government and sporting bodies and universities. It found that only 12.8% of these board members were non-Anglo-Celtic. Interestingly, universities were shown to have the highest cultural diversity in the study while research bodies had the lowest.
According to the Watermark/GIA index, the percentage of directors who reside outside Australia remains relatively steady at around 33% of the director pool while the split by region indicates a move away from directors who reside in either the United Kingdom or Africa and towards those living in New Zealand. Asia-located directors represent a relatively small proportion of total numbers even though Asian countries occupy six of the top 10 places of international sources of Australian migrants, according to the Australian Bureau of Statistics (ABS).
A big gap to close
These findings are concerning from a governance perspective. While Australia is becoming increasingly multicultural, its companies’ boardrooms are becoming relatively less representative of their customers, employees, investors and other stakeholders. ABS figures show that 27.6% of Australia’s population was born overseas and that the top five countries of birth were England, India, China, New Zealand and the Philippines.
WOB Executive Director Claire Braund takes this further, noting that more than 50% of Australia’s population was either born overseas or are first-generation Australians. “There is quite a gap to close in order to better capture the experience and skills brought by our rich multicultural society on boards,” she notes.
According to the Watermark/GIA report, this situation is not optimal for businesses. “Greater diversity – of all types – boosts business opportunities and prompts better decision-making,” it says. “It brings a richer diversity of thinking and immense potential for innovation and growth.”
Jana Jevcakova, Managing Director and Head of ESG International at Morrow Sodali, believes that failing to move on boardroom cultural diversity could inhibit a board’s innovation and creativity, as well as its ability to identify new opportunities, possibly opening the doors to outside disruptors. “There’s the potential loss of competitiveness,” she says. “If you can’t respond to your customers and don’t ‘speak their language’, you are more likely to lose business.”
Ms Jevcakova urges Australian companies to move quickly on cultural diversity or risk being left behind. Failure to change, she says, could ultimately affect their reputation, business relationships with customers and suppliers, and how investors value them.
In addition to regulatory risks, she says there’s also potential for human capital management issues if companies aren’t able to hire the best talent because of their lack of cultural diversity. Australian boards will also continue to lag many of their international competitors if they don’t move.
In the United States, for example, almost all (97%) of the top 200 S&P 500 companies now have minority directors (defined as Black/African Americans, Hispanic/Latinos, and Asians) on their boards. In fact, 71% have two or more minority directors. Yet, according to the 2022 Board Diversity Index, the US’s wider progress is also slow despite statutory momentum in some parts of the country towards cultural diversity. While white individuals account for about 60% of the US population, they hold 84% of Fortune 500 board seats.
So how can companies boost cultural diversity in their boardrooms when appointing new directors?
Jevcakova advises looking beyond the usual “circle of friends” and established networks. Cultural diversity, she says, should also be made a specific requirement when engaging an executive search firm. In addition, companies should have an explicit cultural diversity policy for hiring executives and appointing directors. “They should also ensure that the interview panel is culturally diversified and review their internal processes to see whether the potential lack of diversity is a systemic issue,” she says.
It’s also important for boards and executives to get training on different cultural practices. “Little things can attract directors with different cultural backgrounds, such as celebrating traditional holidays company-wide, having different foods available for meetings and lunches, and acknowledging certain cultural practices,” says Jevcakova.
That said, the cultural diversity focus should not just be aimed at the board. Ms Jevcakova says the pipeline of executives who later become directors also needs to have diversity. “If we’re creating environments where only certain demographics thrive, we will never have culturally diverse boards.”
More widely, Jana believes it is important to enable people to enjoy their culture in a safe environment across the company, especially if its customers and employees come from diverse backgrounds and cultures. Doing this can help with the pipeline of directors and is a more long-term strategy, she says.
Elsewhere, WOB advises companies looking to address a lack of cultural diversity on their boards to establish a consistent definition of what they consider as culturally diverse. WOB also supports the Diversity Council Australia’s recommendation that organisations should undertake an annual counting culture survey and says this should be extended to boards. In addition, WOB would like to see boards being encouraged to include ethnicity in their board skills/experience matrix to ensure gender and cultural diversity are considered as part of their recruitment process.