Build Diverse Boards to Grow the Company’s Value

Given the challenges and opportunities facing businesses today, an effective board should comprise individuals who have the diversity of experience, expertise, and backgrounds to envision the company’s greater potential in the global marketplace and ensure that the organization has the leadership and culture to achieve success. Additionally, directors should be qualified to focus on what matters most, including the dynamic social, economic, and environmental factors that are critical to value creation within a company.

Diverse Boards Elevate Value Creation and Reduce Risks

As shown in e.l.f. Beauty’s Not-So-White-Paper, the benefits of more diverse boards include the following:

• a 15 percent higher return on equity in S&P 500 companies;
• a 50 percent reduction in earnings risk, measured by earnings per share within one year, in S&P 500 companies; and
• fewer large-scale discrimination lawsuits against companies with a board that has three or more directors who identify as a woman or a minority, according to studies referenced in the report.

Furthermore, the report finds that the “benefits of board diversity are most likely to occur when there are at least three members of underrepresented communities on boards.” These conclusions are based on the development and analysis of a new database, created by e.l.f. Beauty with researchers at North Carolina Agriculture and Technical State University. The database consists of accurate, self-reported board diversity data for more than 4,100 US-based public companies, as well as publicly reported financial data.

The benefits of board diversity are apparent. As described in the book A Better World, Inc.: Corporate Governance for an Inclusive, Sustainable, and Prosperous Future, boards with directors from diverse backgrounds are more likely to understand a broader set of market opportunities to grow the company’s value. For example, sources cited in the book indicate that in the United States alone, companies could tap into an additional $300 billion of value annually by expanding access to goods and services and creating offerings that are better tailored to the needs and preferences of Black households. This would be in addition to consumer expenditures by Black households that totaled approximately $835 billion in 2019.

Furthermore, the presence of women on boards reduces earnings risk. As noted in Harvard Business Review’s article “Research: How Women Improve Decision-Making on Boards,” women directors are less worried about how they are perceived, more focused on accountability, and more comfortable asking questions for a deeper understanding of the issues being addressed by the board.

Progress in Diversifying Boards Is Evident, but Slow

Some companies have become more intentional about building highly effective boards of directors with diverse backgrounds. According to sources cited in A Better World, the percentage of women on boards rose from 19 percent in 2014 to 32 percent in 2022. The percentage of people from historically underrepresented groups grew from 12 percent to 22 percent.

Yet, more progress is required. According to the Not-So-White Paper, a publicly traded US board is typically 78 percent white, 73 percent men, and 58 percent white men. Furthermore, boards with higher gender diversity scored lower than average on racial diversity, and boards with higher racial diversity scored lower than average on gender diversity. Among the top 100 companies with gender diverse boards, 59 percent of the total seats were held by women and 27 percent by people of color. Among the top 100 companies with racially diverse boards, 80 percent of total seats were held by people of color and 23 percent by women. This suggests that people choose those who are most like themselves; this is a barrier to better balance.

Recognizing that putting diverse individuals in seats of power will require the partnership of other companies, e.l.f. Beauty’s goal is to help double the rate at which women and people of color are added to the boards of US-based, publicly traded companies by 2027.

Accelerating Progress in Diversifying Boards Is within Reach

There are a number of ways that boards can improve their composition, including by considering the following recommendations and questions:

1. Consider changing demographics, the market opportunities they present, and the potential to grow valuable human resources. Does the board have the experience and expertise to imagine the company’s greater potential in the global marketplace?
2. Examine the extent to which the board’s composition is dynamic enough to meet fast-changing world conditions. What board practices might make it possible to recruit new directors with the relevant experience and expertise, such as term limits, mandatory retirement, or increasing the size of the board?
3. Review and revise the process of identifying and recruiting new directors. Does the board and its search firm have broad enough networks? Are there women or people of color chairing or serving on the governance and nominating committee?

Companies seeking to grow value in the coming decade will need to be highly strategic in constituting their boards and elevating the right people into leadership positions. Diversity will be fundamental to meet the interests of investors in value creation. 

e.l.f Beauty is a NACD partner, providing directors with critical and timely information, and perspectives. e.l.f. Beauty is a financial supporter of the NACD.

Alice Korngold is a C-suite and board advisor, visiting professor, and author. She recently published, A Better World, Inc.: Corporate Governance for an Inclusive, Sustainable, and Prosperous Future.