The Connection Between Board Diversity & the CEO

by Kevin Smith

The topic of board diversity has been bubbling about the credit union industry for quite a few years now, and with good reason. A healthy, diverse board can have a dramatically positive impact on an organization’s performance. But I recently ran across a new angle to this argument worth considering. There is a recent study that suggests the level of board diversity at the CEOs previous position affects performance at your organization. In other words, if you have a newer CEO, who came from another organization, the diversity of his/her previous board will impact current performance. The more diverse the previous board was, the better the performance. The less diverse … the more likely the CEO is to leave the job within three years.

This information is certainly relevant to us. The credit union world has been dealing for the past few years with the high levels of long-serving CEOs who are coming to retirement. (I heard apocalyptic predications about this until 2007. Then the economy tanked and many CEOs had to put off retiring for a few more years.) But we’re back to heavy levels. And this study raises another consideration you prepare succession plans, or as you vet candidates for an opening position.

In the paper “Why Do Some Outside Successions Fare Better than Others? The Role of Outside CEOs’ Prior Experience With Board Diversity,” David Zhu and Wei Shen of Arizona State University set out “to explain why new outside CEOs can better manage their relationship with the board if they previously served on boards that were more diverse than the focal board.” Their analysis was of 188 outside CEOs from Fortune 500 companies. Their measures of diversity were: gender, ethnicity, age, Ivy League background, education level, area of expertise, and industry background. Zhu and Shen found that the more diverse the past board was, the more successful the CEO would be in the new role.

Credit union directors listen up! This reinforces, in my mind, that diversity among the board is a value to your current CEO. But for those of you who may be looking to fill the CEO seat in the near future, consider what additional questions you will ask your candidates based on this information. Keep in mind that even if your candidates aren’t CEOs looking to make a lateral move, but executives on the rise, these folks will still likely have had a formative experience with a board, which may affect how they do.

We can add this to the laundry list of benefits shown to hold true with more diversity. Over the many years that I’ve been worked in the industry, I have seen some positive change in this direction … but not much.