New report encourages high-growth companies to ‘shoot for the moon’ and develop a diverse board to improve results
With the right board, the sky’s no limit: Ernst & Young LLP reveals diversity pays off; companies with women on boards more likely to challenge the status quo and lead companies to success.
For high-growth companies, getting the board composition right is crucial to growth and success. Ernst & Young recently unveiled Shoot for the moon: With the right board, the sky’s no limit, which offers high-growth companies leading practices and tips on how to build a well-rounded board to help shape the direction of a company and improve its results. The report is a series of perspectives including Diversity Improves Results, which provides guidance on formalizing a diverse board structure, how to be successful with the right board members at your side, and ultimately, how to improve company results with a calculated board composition.
“Diversity in skill sets, experience, expertise, viewpoints and gender can lead to a stronger, more effective board,” said Bryan Pearce, Director, Entrepreneur of the Year and Venture Capital Advisory Group, Ernst & Young LLP. “High-growth companies with a diverse board are more likely to challenge the status quo and to think about things in a different way – two very useful traits in today’s demanding and rapidly evolving business world.”
Ernst & Young reports that as companies start to build their boards it’s important to consider diversity as a way to embed different perspectives in the direction and operation of the company. In terms of gender, research shows companies with women directors outperform those without.
Diversity improves results:
In a ranking of companies based on the average number of woman directors from 2004 to 2008, companies in the top quartile outperformed those in the bottom quartile by 26 percent, as Ernst & Young’s 2012 Getting on board report notes. Over the past six years, companies with women on the board also showed better average growth (14 percent vs. 10 percent) and a higher return on equity (16 percent vs. 12 percent).
In other key findings, Credit Suisse Research took a look at the performance of close to 2,400 companies with and without female board members from 2005 onwards and reported that in a like-for-like comparison, companies with at least one woman on the board would have outperformed stocks with no women on the board by 26 percent over the course of the last 6 years. However, in a recent Catalyst Census study, results indicate that women held only 16.6 percent of board seats at Fortune 500 companies in 2012. Additionally, in both 2011 and 2012, less than one-fifth of companies had 25 percent or more women directors, while one-tenth had no women serving on their boards.
“With research evidencing a positive correlation between greater diversity and a corporation’s growth performance, U.S. companies with more homogeneous boards may be missing a major opportunity to add fresh talent to their leadership mix and drive growth,” said Pearce. “Ernst & Young continues to advocate and raise awareness around the advancement of women into leadership roles, and ultimately, to help equip companies with the tools and networks needed to close the diversity gap.”
The art of diverse selection:
- Prioritize diversity. In building your board, consider diversity as a way of bringing a broad range of perspectives to bear on all decisions.
- Put on your customers’ shoes. Diversity on the board can also help management better understand a diverse customer base. Ensure people who are living the experience of your customers are at your table.
- Embed varied life experiences. Directors with different life experiences are more likely to approach the issues before the board from a fresh perspective. A diverse board is more likely to challenge established thinking and the status quo.
- Think growth. Diverse boards aim to help companies hit growth goals, bring added value to the company, and ultimately, drive top and bottom lines to help management consider how their company can be the best it can be.
“A diverse board can be a valuable resource when it comes to diversity in hiring, financing alternatives and in diversity supplier situations,” said Tom McDonnell, CEO for the Ewing Marion Kauffman Foundation. “Once you’ve achieved that diversity, you have to have a homogenous board from a standpoint of where the business is going, what its business lines are and what are the metrics for that business.”
This report is the second in a series of perspectives from Shoot for the moon, which focus on topics such as board diversity, communication and recruiting. The full paper also explores why and how high-growth companies are likely to be more successful with the right board members at their side, and offers advice from successful entrepreneurs and investors, including how to build the right board, getting the board composition right, the art of director rotation and overall approaches to board communication to encourage open and honest dialogue and shared results.
About Ernst & Young’s Strategic Growth Markets Practice
Through our Strategic Growth Markets (SGM) practices, Ernst & Young guides high-growth companies to market leadership worldwide. Our multidisciplinary teams of dedicated professionals provide perspective, advice, and insights to help our clients accelerate their growth. Ernst & Young is the undisputed leader in guiding Russell 2000® companies, IPO-bound companies and Forbes’ largest private companies. We deliver assurance, advisory, tax and transaction advisory services to thousands of companies in numerous, selected industries.
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SOURCE: Ernst & Young