Why Meeting the SEC’s Board Diversity Rules Benefits Your Organization

Written by

The SEC rule 5605(f) requires companies to have at least two board members who are diverse, including one who self-identifies as female and one who self-identifies as an underrepresented minority.

While many companies may view this with skepticism – or merely as another box to check without meaningful implementation – these reactions entirely miss the significant benefits diversity can bring to board of directors (BODs).

Now more than ever, boardrooms need diversity of thought to address new challenges in organizations that are increasingly technology driven. Properly implemented, these diversity requirements will enable organizations to meet those challenges head-on.

The Status Quo Perpetuates Groupthink

Candidates for new board roles tend to be found within the current BOD’s network. If 90% of new board members are already connected and friendly with one another, it’s likely that they have similar interests and backgrounds, perpetuating the homogeneity of the board.

People of the same race, age, gender, experience, and socioeconomic status are more likely to have similar approaches to problem solving. They may miss the importance of new opportunities and perpetuate policies or decisions that are not working well or haven’t adapted to new business needs.

The SEC rule makes it a requirement to search for new board members differently. To do that, you must expand the search to your extended network and their connections.

Instead of helping your close friends and thus maintaining the status quo, look for board candidates who will enable you to better understand and address the changing needs of your organization, your customers, and your industry.

While hiring new board members for diversity may create some level of discomfort, board members need to take a step back and look at their purpose, which is to serve the company's best interests overall.

True Diversity is Good for Business

Every industry is becoming more intertwined with technology, which brings new challenges, particularly related to cybersecurity. To address them, it’s important to have a variety of viewpoints, experiences, and expertise across the organization.

Adding diversity to the board provides an opportunity to bring in fresh insights, a keener understanding of technology, and an understanding of global markets and customers.

While gender and racial diversity are essential components of the SEC ruling, true diversity extends beyond the usual categories of ‘minority’ or ‘female.’

It encompasses different ages, socioeconomic backgrounds, nationalities, abilities, experiences, and so much more. Mentoring and nurturing individuals in these communities can build a pipeline of talent to serve as future board members.

"True diversity extends beyond the usual categories of minority or female."

This holistic understanding of diversity provides the board with access to a wide range of perspectives, driving improved problem-solving and creativity, which leads to better business outcomes. Research shows that companies with diverse boards tend to have higher financial returns and may be better at risk management.

Understanding Technology and Cybersecurity

Digital transformation may seem like a buzzword, but it’s undeniable that organizations rely on technology to build and deliver applications and services, service customers, process data, and more.

To be successful, boards must become more technically astute and have a better understanding of cybersecurity. These two elements can impact a company's reputation and long-term viability. In the past, organizations have sometimes been less than transparent about breach disclosures or how they are managing cybersecurity risk.

The SEC issued new rules in July 2023, and have been in effect since September 5, highlighting the importance of cybersecurity in public companies because it directly impacts an organization’s ability to meet shareholder needs.

Currently, it’s quite rare to have someone on the board who understands cybersecurity, but given the number of breaches and amount of data impacted, public companies need someone at the board level who has this knowledge.

A truly diverse board must include tech-savvy members to ensure technology strategies align with business goals and that potential cybersecurity threats are proactively managed. A board that understands the importance of cybersecurity may well be a company's strongest asset.

It’s Time to Bring New Perspectives to the Table

On the surface, many may think that the SEC requirements are solely a way to bring more equity to the boardroom, but it actually does far more than that. Cybersecurity may seem completely unrelated to diversity, but these initiatives are fundamentally intertwined.

To do cybersecurity well, you need new perspectives on the board to meet the challenges of an increasingly technology-driven world.

Some diversity initiatives may have faltered recently, but that doesn’t mean the SEC’s diversity ruling is not the right way forward. It only means that boards need to be ready to embrace new, different board members and the positive, but potentially uncomfortable, changes they will bring.

As important as the new board welcoming diverse members, the board chair must set people up for success. There are a few key steps a chairperson can take to move these initiatives forward:

  • Put new board members on the proper committees, ones that are aligned to their expertise and value.
  • Ensure that new members are being heard and their ideas acknowledged.
  • Discuss these ideas with board members and other experts to determine whether the ideas can be implemented or not — and if not, ask why.

Taking these steps helps you ensure that your efforts to improve diversity at the BOD are serving the purpose of strengthening the organization as a whole and enabling it to make better decisions moving forward.

The SEC’s rule 5605(f) provides us with an opportunity to transform our organizations by embracing diversity of thought, experience, and backgrounds. It’s the right thing to do for your business – and it will ultimately benefit your bottom line.

What’s hot on Infosecurity Magazine?