If the words diversity, equity and inclusion were not already in senior executives’ minds, Nasdaq’s December 2020 proposal that firms would need to disclose hard figures about their board composition to the market will have changed that. Subject to SEC approval, the tech- focused exchange will require listed firms to have a minimum of one-woman director, and one person who is from a minority, or LGBTQ background, on their boards. Companies which can’t meet this requirement will need to explain why.
Diversity needs to be discussed across the whole of businesses because its benefits will impact all company functions. In September 2020, industry standard setters, the Institute of Internal Auditors of North America, put out a statement saying that internal audit functions have to “embed social equity and corporate social responsibility” in their strategy and culture. If they are not already looking at these issues now would be an excellent time to start.
1. Taking Diversity Beyond The C-Suite
Board games aren’t enough - real change on diversity has to happen at
all levels in an organization
2. If the words diversity, equity and inclusion were not already in senior executives’ minds,
Nasdaq’s December 2020 proposal that firms would need to disclose hard figures about their
board composition to the market will have changed that. Subject to SEC approval, the tech-
focused exchange will require listed firms to have a minimum of one-woman director, and one
person who is from a minority, or LGBTQ background, on their boards. Companies which can’t
meet this requirement will need to explain why.
The next day’s The Wall Street Journal condemned Nasdaq’s proposal, saying it would, “harm
economic growth and job creation”, but the financial paper appears out of touch with the wider
mood. Congress is considering legislation requiring each SEC registered company to provide
board diversity statistics, and to disclose whether it has a board diversity policy in place. In
September New York became the latest US state, on a list including California, to take legislative
action related to board diversity meaning there are now 11 states which have introduced, or
are considering, laws in this area.
Definitions of diversity abound, and one of the more digestible was coined by Netflix’s current
VP of inclusion strategy, Vernā Myers, who said in 2015 that, “Diversity is being invited to the
party; Inclusion is being asked to dance.” Despite the increased focus on workplace diversity in
the time since Myers made her comments, efforts on widening access to parties and
encouraging more people onto the dancefloor remain focused on the C-suite. Nasdaq’s move is
a good example - it’s explicitly aimed at increasing board diversity and doesn’t cover company-
wide implementation of similar goals.
3. Key to successfully instituting cultural change within organizations is taking action at every
level, not just within senior management, and here, the message is less positive. The ECIA's
20201 Risk in Focus report, published in October 2020, saw diversity challenges only squeeze
into the top five risks that internal auditors saw for 2021, and that was under a broader heading
titled Human Capital and Talent Management. This trend of not involving internal audit in
diversity initiatives was reflected in Deloitte’s September 2020, Board Practices Quarterly
Diversity, Equity, and Inclusion Report, in which just 1% of survey respondents said their
company’s internal audit committees have oversight of diversity issues.
This is a missed opportunity – the internal audit function could help diversity and inclusion
initiatives by reviewing their outcomes to see if they are in-line with expectations, and
reporting on the conclusions to the board. One way to ensure that diversity goals become
embedded in the business would be to appoint a Chief Diversity, Equity and Inclusion Officer,
reporting directly to the CEO, but whose job is to have a conversation across the whole
organization.
While diversity and inclusion might intuitively be seen as a role for Human Resources, the HR
function deals exclusively with a firm’s internal workforce, whereas a CDEI Officer can also look
at third party relationships, such as vendors, which sit outside of HR’s responsibilities.
Diversity needs to be discussed across the whole of businesses because its benefits will impact
all company functions. In its submission to the SEC, Nasdaq quoted a raft of reports pointing to
business advantages gained from recruiting out of a broader pool of candidates. Critically a
number of these advantages applied to all firms, both listed and non-listed, as well as those in
the non-profit sector.
The macro case was put by alternative asset specialist, The Carlyle Group. Its 2020 research
found that its portfolio companies with two or more diverse directors had average earnings
growth of 12.3% over the previous three years, compared to 0.5% among portfolio companies
with no diverse directors.
Positive impacts from increasing diversity also come in less tangible form. Firms with a less
homogeneous workforce will better reflect the communities they serve. A 2019 survey by
advocacy group, the Greenlining Institute, which looked at the 10 largest depository banks in
California found that on average, people of color make up 30% of boards, versus 67% of
California’s population. Greenlining’s report observed that if corporate leadership at financial
firms better reflected the communities, they served it would enable them “to effectively build
trust with consumers and make capital and financial services accessible”, a statement which is
also true for firms outside of the report’s core focus area.
This must change and looks like it will. In September 2020, industry standard setters, the
Institute of Internal Auditors of North America, put out a statement saying that internal audit
functions have to “embed social equity and corporate social responsibility” in their strategy and
culture. In recent years, internal audit functions have moved beyond traditional assurance, into
4. areas such as culture risk, giving them the skills to audit an area like diversity. The chief audit
executive should bring it to the attention of the firm’s senior management as part of cultural
audit recommendations or risk assessments.
Corporate management is also better served by diversity. A 2016 study conducted by Pucheta-
Martínez et al. demonstrated the positive impact of increased diversity had on individual
business functions. It concluded that increasing the number of women on firms’ audit
committees “improves the quality of financial information”, with greater female representation
on audit committees reducing the probability of errors, non-compliance or the omission of
information. These issues are of even greater importance than usual with the impact of COVID
on working practices leading to fears of higher levels of fraud as we step into 2021.
Whatever approach companies decide to take one thing is clear - Nasdaq’s move isn’t the only,
or last, requirement that firms will face with respect to diversity and inclusion, and it's vital that
audit functions - and other parts of the business - start to focus on it. If they are not already
looking at these issues now would be an excellent time to start.