Research by Goizueta’s Asa Griggs Candler Professor of Finance, Wei Jiang delves into the implications of corporate board inertia on diversity and innovation and explores effective strategies to achieve balance in the boardroom.
Back in the 1990s, U.S. mega-firm Blockbusters dominated the global market in home movie and video game rentals with just shy of 10,000 stores worldwide, and revenues of $5.9 billion at its peak. In 2000, Blockbusters’ leadership faced a business opportunity: to acquire fledgling streaming company, Netflix, for $50 million. Weighing their options, the board decided to pass. What happened next has been thoroughly documented by business scholars, press, and other media. By 2005, Blockbusters had lost 75% of its market value. Just five years later, the firm went bankrupt. Today, Netflix is valued at around $200 billion.
Boards have a huge responsibility to provide the best counsel possible to CEOs. And in times of disruption, innovation, market volatility, and uncertainty, that counsel should come from as broad a palette of expertise, insight, understanding, and perspective as possible. See the bigger picture, and you are less likely to pass on critical opportunities to shift course, evolve, and expand into new markets. Limit your perspective, restrict the diversity of input, and your decisions are more likely to become reactive. It’s no coincidence that the board advising Blockbuster CEO, John Antioco, was essentially homogeneous—all male, all white, and all of them fundamentally committed to bricks and mortar. It’s little wonder that this board was more resistant to change and innovation.
The lessons of Blockbusters and others are clear. To weather market changes and grow your organization, you need your board members to represent different cohorts, different models, and different points of view. Organizations are increasingly embracing diversity at their very highest echelons in order to capitalize more on its well-understood promise. But progress remains slow. As recently as 10 years ago, for instance, women made up less than 10 percent of all U.S. corporate boards. Only in 2019 did the proportion of female board members climb north of 15 percent for all U.S. publicly listed companies for the first time.
So What’s Behind this Glacial Pace of Change?
Research by Goizueta’s Asa Griggs Candler Professor of Finance, Wei Jiang, situates the blame squarely on what she describes as “slow turnover”—a sort of inertia in the boardroom that is directly tied to the length of time that incumbent directors remain in their positions.
Board members can enjoy a tenure of 10 years or more, says Jiang, making it hard for firms to introduce new voices and perspectives in a way that is as dynamic and prone to change as market forces. Analyzing two decades’ worth of data from BoardEx and Wharton Research Data Services, Jiang finds that these long tenures compare unfavorably with turnover rates among CEOs for instance.
“Looking at the data, we see that around 25 percent of board directors hold on to their seats for 10 years or more; with 8.5 percent of them remaining in place for up to 20 years. That translates into an average turnover rate of just 8.9 percent for public firms in the U.S., which compares with an annual CEO turnover of closer to 13 percent,” says Jiang.
In other words, you have a situation where only one or two people change within the board over the course of a decade.
Wei Jiang
This slow turnover rate leaves a very narrow door for embracing diversity, Jiang says. With societal and marketplace change radically outpacing the makeup of most boardrooms, it raises difficult questions for organizations wondering if decision-makers elected 10 years ago are still the best qualified for the job today—or tomorrow.
Accelerating Diversity in a Purposeful and Sustainable Way
One measure adopted by firms eager to accelerate board diversity has been the introduction of quotas: pushing diverse candidates beyond their natural representation to meet diversity targets as incumbents retire. But Jiang cautions that this practice is innately unfair to others without a diverse profile.
Quota systems produce results by skewing election processes to favor women, for instance. But you have to ask if this is consistent with a goal of fairness. And whether you end up with one demographic unnaturally overrepresented as a result.
Wei Jiang
There is another dynamic at play within election processes that can change the diversity of the boardroom, but effectively as a sort of unintended consequence, Jiang finds. Proxy fights happen when activist shareholders challenge corporate governance for greater control over organizations. When these kinds of unfriendly contests arise, she says, they impact the turnover rate, leaving the door open for women or underrepresented candidates to come in.
“Again, the data shows that wherever you have a proxy battle contesting elections, turnover effectively doubles. In these situations, you end up seeing the number of women and minority directors increase by around 10 percent. This is a kind of unintended consequence, and not because activist shareholders have a clear-cut diversity mission or agenda.”
And while proxy contests can drive boardroom diversity, they are essentially extreme measures predicated on conflict that can affect morale unfavorably.
To accelerate diversity in a purposeful and more sustainable manner, Jiang recommends instituting voluntary turnover at the board level. She says a good approach might be to cap or limit tenure by introducing what she calls milestones.
“Most companies don’t impose limits on board directorships. And human nature is such that simply inviting board members to nominate themselves or others to stand down voluntarily is probably a big ask psychologically,” she says.
A better option is to have committee members agree to hard or soft caps on terms, and to couch tenure in terms of milestones in order to neutralize any sense of stigma for directors who stand down after a few years.
Wei Jiang
Jiang points to the example of France, where directors lose their “independent” status after a few years. She also cites instances in other European organizations, where directors are required to take a hiatus as shorter terms end, but can stand for re-election in future years—especially where re-election is contingent on competing with alternative candidates nominated by the board.
Regardless of the method, achieving regular turnover is the key to releasing the bottleneck holding women and minority directors from corporate board-level leadership, says Jiang. And it’s imperative to get this right.
“If you don’t increase turnover, you risk becoming too blinkered and homogenous in your perspective from the top. To see opportunities in all of their facets, you need decision-makers from diverse cohorts and different backgrounds. Had Blockbusters been able to see the potential for disruption in the shape of Netflix, who knows how differently their business might have fared.”
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