This is the Risk of Not Diversifying the Boardroom

“Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians… And diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time.”[1]

With trends like digital connectivity, changing demographics, and globalization shaping markets, the only thing somewhat notable about this finding is how big a lead diverse companies have over their non-diverse counterparts. It’s in statistics like this where board diversity is becoming more and more crucial to business sustainability. This is true of all kinds of entities, including community banks.

Banks can’t presume that even having deep roots in a particular region means they have an unchanging client base. And yet, many community and regional banks still have boards of directors composed of majority shareholders. While there absolutely is a role for these dedicated, long-time influencers, leadership must shift more toward representing the mixed composition of a more diverse population.

In an excellent piece focused predominantly on the need for gender diversity in American banks, MUFG Union Bank US CEO Stephen Cummings states plainly that the need for diversity initiatives in banks is not driven by a desire to be (more) “fair or politically correct.”[2] He notes that online banking has lessened the gender factor at the point of purchase. But he makes the larger point that women represent the greatest opportunity for banks seeking to build lasting and profitable relationships with growth minded customers. And that requires having women in the C-suite and boardroom who can genuinely empathize and build relationships with these highly educated, entrepreneurial decision makers.

The Root Causes of a Diversity Imperative

Examining the root causes of this diversity mandate means looking at a number of factors. The massive millennial generation coming into adulthood is one. Globalization is another. Online banking and the impact of Fintech is a third. The rising prevalence of women and minority owned businesses—as Mr. Cummings noted—is yet another.

They’re all important in that they mean that your bank is serving an increasingly varied customer base with wider-ranging needs, expertise, perspectives, and cultural expectations. By not taking the steps to ensure the composition of the board and leadership reflect this variety, banks put profitability and growth at risk.

The good news is that we’re already seeing a positive ripple effect for the financial institutions that have already done the work to expand the types of leaders within their organizations. In other words, diversity is self-fulfilling. More diverse companies build a deeper, smarter talent bench, which improves customer relationships, which raises profitability and employee satisfaction, which leads to growth and profitability, which helps to attract more talented leadership—and so on.

What this suggests is that the first step banks can take to ensure they are positioned to grow and compete is to assess the unique experience, insight, and backgrounds of their stakeholders. Then consider the markets and products they want to pursue. And then work to attract a diverse talent base that connects with the diverse perspectives, experiences, ages, genders, races, and expertise of the people and businesses they seek to represent.

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[1] Why Diversity Matters, McKinsey & Co., January 2015

[2] When Will Banks Get How Important Diversity Is?, Stephen Cummings, American Banker Magazine, October 2015