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Industry leaders are applauding a decision by the Securities and Exchange Commission Friday giving the green light to a new proposal by Nasdaq that requires companies on its exchanges to meet gender and racial ethnicity targets.

Company boards that fail to meet diversity, equity and inclusion requirements will have to explain in writing their reasons why under the new rules.

Diversity in thinking and decision-making is usually associated with better decisions beyond just having one woman or one person of color on a board, observers say. A lone diverse board member may not make a big difference because those people may find themselves isolated and it may be difficult to get their points across, observers point out. Boards are typically not large and comprised of about 10 to 12 people, so getting diversity right is a challenge.

SEE: Survey finds commitment to racial justice at work is fading away (TechRepublic)

“The SEC proposal is significant because it is an institutional acknowledgment that boards have been insular and that these groups, which hold real power in the business world, have not been open to differing viewpoints,” said Stephanie Woerner, a research scientist at the MIT Sloan Center for Information Systems Research. While Woerner isn’t sure how consequential this rule alone will be, “it is a step forward.”

“More than skin deep”

The boardroom needs to be as diverse as the markets the organization serves, the employees it hires and the communities it operates in to understand differing viewpoints, said Bob Zukis, CEO of Digital Directors Network. “It also needs to be cognitively diverse to deal with the many complex issues facing companies, such as with the digital and cybersecurity challenges facing every company, so diversity in the boardroom is more than skin deep,” Zukis said.

Diane Hessan, who serves on several corporate boards, agreed, saying the SEC ruling is not about meeting a moral obligation but ensuring that people reflect the constituencies a company serves. People want to work in an organization where they can feel they belong, she said.

“I have heard people tell stories where someone will say ‘I decided I didn’t want to work at a company because there’s no diversity,’ or customers who say, ‘I don’t want to do business with a company that doesn’t respect having a lot of different people and different voices at the table,” said Hessan, who is also CEO of Salient Ventures, an angel investment firm.

Jeff Ray, CEO of video platform provider Brightcove, said it is a sad commentary that Nasdaq had to come up with this type of proposal.

“It’s a shame we have to set goals and targets to get people to change,” he said. “You shouldn’t have to wait for a regulatory agency to force you to do things. It can induce artificial behavior.”

Brightcove’s board has nine members, five of whom are female and two who are persons of color, he said. It’s a good business decision because “it’s very hard to build great products and services if you don’t look and sound and act like your customers.”

Ray said he welcomes the opportunity to wrestle through a problem with a diverse board rather than having “one narrow view of a white male.” He added that “if you really care about getting it right with your products and services, you need to be able to walk a mile in the shoes” of your customers.

One piece of advice Ray now follows that came from Brightcove’s two newest board members is that if the company is in the final stages of interviewing a diverse candidate, “it means a lot if the CEO reaches out and talks to that candidate,” he said. “That’s something I didn’t know. Now, I regularly reach out to diverse candidates and talk to them about what it means to work at Brightcove.”

Daphne Jones, who sits on three public boards, said diverse board members bring a unique background and vantage point that reflects where they have been.

“While the majority of white board members may see unengaged people in their organization, a minority board member will see the struggle that those same people have in being their authentic selves–or their worry that their Black son or Black daughter may be killed on their way home from school or work,” said Jones, who is also director of Destiny Transformations Group, a management consulting firm.

Minority board members will see marketing opportunities or product opportunities in new markets that may have been overlooked by the majority, Jones added. She recalled, for example, when she worked at Johnson & Johnson and asked the consumer division why Band-Aid bandages were beige and they were referred to as “flesh” color.

“My flesh isn’t beige, so how can that be ‘flesh’ color? The need to bring Band-Aids out in a variety of flesh tones was brought to their attention,” she said. “Their gender or ethnic diversity brings a greater dimension of advantage and richness of conversation that won’t happen in a board room with homogeneity.”

The number of racial minorities on Fortune 500 boards rose only 1% between 2018 and 2020, Jones noted. “But between July 2020 and May 2021, 32% of newly-appointed board members in the S&P 500 were Black, up 11%,” according to data from ISS Corporate Solutions.

How to create a diverse board

Developing a more diverse board starts with an eye toward growing and improving the business, said Brightcove’s Ray. “Make it aspirational. It should be this is an awesome way for us to expand our reach and depth and understand the potential for our company and ourselves,” he said.

It also starts at the top, and the CEO must demonstrate a willingness to change the makeup of a board, Ray said. “People will see through a CEO who’s doing it just to check a box. If the CEO really cares about the company they will set an example.”

Jones concurred, adding that “it has been shown that diversity in the ranks of a company drives greater revenue, market share growth [and] fewer financial restatements,” among other advantages.

She stressed that the culture of the company should be reflective of a company that embraces diversity. Jones also suggested that leadership ask itself some pointed questions. For starters, even if its board isn’t diverse yet, does the rest of the company—from senior management on down–reflect a diverse culture?

Further, are there policies, pay practices, a succession pipeline and other actions taken to support diversity? she said. For that matter, how is the company defining diversity?

Leadership must also consider whether there is racist language or behavior in the office and managers/leaders ignore it, she said, and if the company is hiring diverse employees–only for them to leave three months later.

“Is the environment receptive and accepting to people who look, think, learn, perform ‘differently’?” Jones said. “If not, that will give a clue on the challenges the board may have as it seeks to drive diversity at that level. And without that culture of diversity and growth mindset, that lone diverse board member will have a lot of work to do to help govern a new age of diversity awareness and accountability in companies.”