Board Diversity: The Role of Social Networks on Board Appointments, Diversity and Inclusion

In recent years, the importance of diversity on corporate boards has gained significant attention, yet much of the discourse tends to focus on single dimensions of diversity, such as gender or ethnicity. However, directors are inherently multi-dimensional individuals, and thus, board diversity is a complex, multi-faceted concept.

Understanding Multi-Dimensional Board Diversity

The conventional approach to studying board diversity often limits itself to examining one aspect, such as gender or ethnicity, but this reductionist view overlooks the multifaceted nature of directors. Diversity is inherently multi-dimensional; it encompasses various attributes including but not limited to gender, age, nationality, professional experience, and educational background. We can add to that any disability, religious beliefs, sexual orientation, family situation and more. Each of these dimensions contributes to the overall composition and dynamic of a board, influencing its effectiveness and governance.

To address this complexity, we must look at how independent directors are appointed. For years we have known that the most common way to get a board appointment is through your social network. Yet, knowing that, brings up the issue of its impact on board diversity. If your connections are the ones to help you gain a board appointment, how does it affect diversity on boards?

The Impact of Independent Director Appointments on Board Diversity

Independent directors play a crucial role in corporate governance. They are responsible for overseeing management, validating corporate strategies, and ensuring that the interests of shareholders are upheld. Consequently, the appointment of independent directors, and specifically how they get appointed, has significant implications for board diversity and overall governance.

One key aspect of the appointment process is understanding how independent directors are selected and the role social networks play in these decisions. Social connections among directors often facilitate the recruitment process. But what do these social connections look like?

Social Networks and Board Appointments

Data from a paper published by Marie Lalanne on Network-Based Appointments and Board Diversity, reveals that approximately 30% of new appointments have a direct connection with existing board members, and this figure increases to nearly 90% when considering indirect connections.

The recruitment of independent directors frequently relies on informal networks. Social connections are established through concurrent participation in professional organizations, educational institutions, and even leisure activities. These networks are not just a matter of personal preference but reflect deeper patterns of homophily, where individuals tend to associate with those who are similar to themselves.

For instance, top executives and board members often have similar educational backgrounds, having attended prestigious universities and holding MBA degrees, which contributes to the creation of a ‘small world’ phenomenon in corporate leadership. They attended the same universities, are members of the same professional bodies and belong to the same clubs. The thought then comes to mind, how will this phenomenon impact on board diversity?

In practice, this homophily means that directors are likely to use their networks to identify and recommend new board members. This could lead to a perpetuation of existing board homogeneity, as new appointments are drawn from a pool of candidates with similar backgrounds and experiences. For example, if current board members are predominantly from a specific educational or professional background, they are more likely to recommend candidates from similar backgrounds. The pool of directors is small and with networks impacting most board appointments, it is not likely to grow – at least not by very much.

Characteristics of Connected vs. Non-Connected Appointees

Lalanne’s analysis shows that connected new directors tend to have higher levels of experience compared to their non-connected counterparts. Connected directors are generally older, with more years of experience on boards and in executive roles. They also tend to sit on more boards. On the other hand, the research also shows that firms that appoint connected directors are often larger and have fewer executives on their boards, with less busy directors and lower average board tenure.

These findings reiterate the notion that social connections play a significant role in the appointment process, influencing the selection of candidates, the composition and also the homogeneity of boards. The propensity for connected directors to possess more experience and hold multiple board positions indicates that these networks provide valuable information and credibility, potentially making connected candidates more attractive to boards.

While social networks facilitate the appointment of experienced and well-connected directors, they also pose a risk of perpetuating existing homogeneity, which does not bode well for board diversity and inclusion. Understanding and addressing these dynamics is crucial for fostering genuine diversity on corporate boards.

Boards and recruitment firms must understand how board diversity can be enhanced through more inclusive recruitment practices and broader social networks. In this way board diversity will not be a mere tick on the to-do list, it will become a pro-active operation during which diversity in all its forms can be addressed.