Goldman Sachs’ new board member diversity rule misses the mark

Goldman Sachs CEO David Solomon recently said the investment bank won’t take companies public that don’t have at least one board member from an underrepresented group. The main focus will be on female board members, he told CNBC, because companies that have gone public in the last four years with at least one woman on their board of directors performed “significantly better” than those without. The new rule is set to go into effect in the U.S. and Europe on July 1.

While the move is significant, what Solomon and Goldman are doing is not a novel idea, nor is it the best version of an outdated idea. It reminds me of something Salesforce CEO Marc Benioff said a few years ago at Dreamforce:

Overall, diversity is extremely important to us. Right now, this is the major issue [gesturing to the room/crowd]. I think when we feel like we’ve got this, you know, a little bit more under control, then I think that one is gonna surface as the major thing we’re focusing on. We’re not ignoring it, it’s something that we support, it’s something that we’re working on, but this is our major focus right now, is the women’s issue.

At the time, Benioff failed to address the complexity of diversity, which is what Goldman Sachs is doing. A “focus on women” does not take into account the intersectional identities many people have. And it’s those intersectional identities — whether it’s being a black woman, a trans man and so forth — that bring both intellectual and financial value to the table. By focusing on women, as Solomon said, Goldman Sachs is setting itself up to exclude women of color, as they are oftentimes left out of women-focused initiatives. This outdated and misguided strategy, where diversity equals more (white) women, needs to be squashed.

While this requirement will likely increase returns for Goldman Sachs and operate as a forcing function to boost diversity at startups, it needs to go further. By focusing on a broader definition of diversity, Goldman Sachs could be more inclusive and make its returns even greater.

It’s common knowledge that diversity is good for business, thanks to McKinsey & Company. Companies in the top quartile for ethnic diversity at the executive level are 33% more likely to have above-average profitability than companies in the bottom quartile, according to McKinsey’s 2018 report, “Delivering through Diversity.” Essentially, the same goes for gender diversity, with companies in the top quartile for gender diversity being 21% more likely to have above-average profitability than companies in the bottom quartile.

But the lack of people of color on boards is perhaps a more urgent issue. Late last year, a Crunchbase study found that 60% of the most funded VC-backed startups don’t have a single woman on their board of directors. But there are even fewer black people, let alone black women, on boards. A 2018 Deloitte study found that of the Fortune 100 companies, white men held 61.4% of board seats, white women held 19.1%, men of color had 13.7% of board seats and women of color had just 5.8% of board seats.

That same year and heading into 2019, a handful of tech companies added black people to their board of directors. In 2018, both Airbnb and Facebook added former American Express CEO Kenneth I. Chenault to their respective boards of directors, while Slack brought on Edith Cooper, who had most recently served as the global head of human capital management at Goldman Sachs. Last year, Amazon appointed Rosalind Brewer to its board of directors and Facebook appointed Peggy Alford.

Those appointments came after much pressure from both the Congressional Black Caucus and civil rights leader Rev. Jesse Jackson. In general, pressure from legislators, investment banks and VCs seems to be one of the more effective ways of increasing diversity. In California, a new law is set to go into effect next year that will require all public companies with six or more board members to have at least three female directors. If only there could be a nationwide mandate that included race.