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Article | Executive Pay Memo North America

How board members play a key role in supporting inclusion and diversity

 

Inkludering og mangfold|Governance Advisory Services
COVID 19 Coronavirus

By Andrea Walsh , Ryan Resch and Jacob Custer | June 26, 2020

Inclusion and diversity is more than just the “right thing” to do — it can help companies be more agile and lower human capital risk.

Amid the uncertainty of the COVID-19 pandemic, environmental, social and governance (ESG) issues remain important with an increasing and immediate focus on social issues relative to other longer-term environmental considerations. Within social commitments, the primary consideration has been primarily human-capital-related issues given the impact of the pandemic on employee health. Our last article took a broad view of how organizations and boards that take human-capital-related strategic actions are better positioned to demonstrate sustainability amid business uncertainty. Here, we will take a deeper dive into an increasingly relevant topic in our current environment: inclusion and diversity (I&D).

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About our series

In this time of business uncertainty, a strategic focus related to human capital can help organizations minimize risk, promote a more equitable work experience for all and also demonstrate stability to key stakeholders.

I&D at the forefront

As we write this, many are engaged in serious conversations about racial injustice and fair treatment of all cohorts in society. Considering organizations are a microcosm of society, we know that race will continue to be a key topic within many organizations in the months and years to come. Similarly, gender has been a focus for decades and has received a great deal of attention in recent years, particularly around pay fairness and women in leadership roles.

It’s important to note, however, that I&D is broader than race or gender alone:

Diversity is the full range of differences and similarities of employees in an organization — both visible and invisible. In addition to race and gender, these can be differences in thinking, communication styles, gender expression, religion, sexual orientation, disability, generation, socioeconomic status and national cultures.

Inclusion is a behavior — it’s about recognizing and valuing the different perspectives and backgrounds each person brings to the table and providing an equal experience at work for all employees, regardless of who they are, what they look like or where they come from.

Previously, we touched on the multitude of business benefits of I&D in addition to creating a more equal and equitable employee experience. Investing in I&D brings:

  • Decreased operational and human capital risk
  • Increased levels of collaboration and innovation
  • Better agility in the face of uncertainty
  • Greater diversity of thoughts and perspectives

When boards and executive teams commit to I&D strategy and actions, they are increasing the likelihood of reaping these benefits, resulting in greater success for the organization, shareholders, customers and employees. The reason why is simple: If diverse thoughts and perspectives are encouraged in an inclusive environment, innovation and collaboration can develop faster as people feel more comfortable sharing ideas. This helps the organization become more agile while also decreasing both operational and human capital risk. In addition, as potential employees increasingly consider an organization’s I&D approach when making employment decisions, I&D progress can lead to higher engagement — resulting in higher attraction and retention of key talent.

The board’s role in I&D

Board members play a major role in supporting I&D in four key areas: board composition, education, executive leader accountability and executive compensation.

  • Composition of boards themselves. Diversity starts from the top and should be modeled at the board level. Boards should be transparent about how they weigh and assess diversity during their selection of members, with some U.S. states requiring public companies to disclose board diversity in annual reports. Specifically, boards can commit to ensuring a certain percentage of their nominees are women or minority candidates and review board diversity as part of their annual assessment process.

Many organizations are now ensuring that their board composition mirrors that of their customer base in an effort to embed more of their consumer views into the board discussion. The extension of this has translated into greater diversity and representation, particularly of color and generation. Similarly, boards and leaders can consider diversity among senior management and work to ensure that the right strategies, programs and practices are in place to increase diversity throughout the organization. We anticipate that boards will continue to be under pressure from investors and other stakeholders to demonstrate real and measurable progress in greater diversity among board members and senior management.

  • Directors can take responsibility for educating themselves on what I&D actually means both inside the organization and in the external market. Beyond learning foundational definitions, education may also involve researching and understanding systemic racism and the history of the battles for gender equality — and how both manifest in society and organizations. It’s about more than just hiring a certain amount of Black, Indigenous and people of color (BIPOC) or women employees; rather, directors should dig into the underlying issues that have resulted in discrimination and work to understand what these groups face today, which may include:
    • Investigating how systemic racism and the potential for conscious or unconscious bias might appear in organizations’ talent programs and processes
    • Researching historical workplace discrimination for LGBT+ employees and what the recent landmark Supreme Court decision on Title VII of the Civil Rights Act means for employers
    • Examining the range of I&D issues that have been amplified by COVID-19, including women and minorities being disproportionately unemployed compared to men, as well as BIPOC, the disabled and elderly groups being at an increased risk of illness due to preexisting conditions

It is only when leaders at the very top truly understand the range and breadth of existing I&D issues that they can exemplify desired behaviors, think differently and create inclusive environments that result in a better culture for everyone. Doing so often requires the most seasoned or senior professionals to be vulnerable and admit they may not always know how to best approach the process or conversation. Getting comfortable with being uncomfortable and promoting employee voice is key to a healthy company culture.

  • Boards are increasingly finding ways to hold executive leaders accountable and take greater responsibility and oversight of I&D progress. This starts with a review of the overall I&D strategy and an assessment of the underlying programs and practices, and then includes regular review of quantitative and qualitative metrics to track I&D progress. It is easier to measure diversity statistics and use dashboards to assess progress along a number of dimensions and at different levels, regions and business units. Without these measures, organizations do not have the ability to identify the true pain points and look for opportunities to address.

  • An increasing number of organizations are adding I&D metrics to executive compensation plans. For example, in a review of incentive plans within S&P 500 companies, a growing amount of tracked human capital metrics related to I&D as a component of their annual incentive plans. In our study of 2018 disclosures, we found that 18% of S&P 500 companies included an I&D metric. Our research indicated that there are a number of ways for I&D to be included:

    • Separate measure with specific diversity targets that would apply to all incentive plan participants, recognizing that everyone has a role to play in making meaningful change
    • Diversity targets included within the individual performance assessment of executives, with a greater emphasis among executives most directly responsible for making progress
    • Broader accountability for developing and executing the I&D strategy, including visible leadership and/or sponsorship of I&D councils and programs, which is then a factor when making year-end pay decisions (and is more of a qualitative assessment)

While these approaches can help measure diversity progress, organizations are also looking at how to measure inclusion better through employee listening strategies with specific inclusion dimensions. Leaders have to recognize the importance of I&D across multiple stakeholder groups. Not only do they have an opportunity to mitigate operational and human capital risks, they also have an opportunity to take action and drive cultural and systemic change. Boards and executive teams can help accomplish this primarily by leading by example. When a diverse individual joins an organization and finds that they are represented by leaders at the top, it will be a key indicator to them that I&D is taken seriously.

If not now, when?

As COVID-19 and broader societal issues further propel I&D, companies have a responsibility to protect the diversity of their people and find opportunities to advance change within their organizations. Boards and executive teams will need to recognize that all employees — and specifically underrepresented employees — deserve a company culture that is not known for bias or exclusion, but for dignity and belonging. If there was ever a time for boards and organizations to realize the urgency of protecting and strategically addressing I&D, it is now. After all, effective change is about being proactive and strategically thinking about the future versus reacting to a situation that has been neglected for too long.

Authors

Head, Willis Towers Watson Chicago’s Talent Line of Business

Managing Director, Executive Compensation (Toronto)

Associate, Communication and Change Management (Chicago)

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