With board diversity currently a hot topic in the corporate world, traditional boards made up of homogenous groups of individuals are having to take an honest, hard look at themselves and consider the advantages offered by heterogeneity in the boardroom.
To remain relevant in an increasingly competitive world, directors cannot ignore the crucial role that diversity plays in governance, particularly in the boardroom. “Companies that fail to dip into the ever-deepening talent pool of diverse, well-educated and ambitious individuals run the risk of limiting value creation, compromising sustainability and undermining their long-term competitiveness,” according to a Deloitte article on diversity in the boardroom.
Today, diversity in the boardroom is not merely a conversation about having the right gender and ethnic mix on boards. It is a dialogue that extends to having the optimal mix of skills, expertise and experience among board members, as well as the consideration of factors such as the age, geographic location and independence of members.
Having the optimal mix of skills, expertise and experience is critical to ensuring that the board as a collective is equipped to guide the business and strategy of the company.
Traditionally, boards recruit from C-suite executives. While C-suite experience is invaluable, business unit heads, regional leaders, academics, entrepreneurs, government leaders and other non-C-suite members can create a wider, more diverse pool with some highly talented individuals, who could bring interesting and insightful perspectives into the boardroom.
Fresh perspective
Age diversity, specifically, is often overlooked in the boardroom. Board members tend to be older, as many boards equate age with experience. While older members do provide a wealth of experience, younger directors introduce a fresh perspective into the boardroom, particularly in this age of disruptive innovation.
In addition to making sense from the competitiveness point of view, there has been an influx of regulatory reforms that encourage diversity in the boardroom, specifically gender diversity. The EU introduced a directive on improving the balance of males and females among non-executive directors of companies listed on the stock exchange by setting a binding minimum target of 40 percent females among non-executive directors.
Gender quotas have also been promoted via legislation in many European countries. In 2005, Norway became the first country to introduce board gender quotas when the Norwegian Public Liability Companies Act was amended to require 40 percent representation of both genders on boards. Similar law reforms have since been adopted in Spain, Italy and France.
One of the largest influencers of diversity in South Africa has been broad-based black economic empowerment legislation. It embodies government’s efforts to empower historically disadvantaged people, particularly black people, women, the youth, the disabled and people from rural communities.
With regard to independence, mechanisms – such as the Companies Act, King III and the JSE Listing Requirements – include requirements to bring the objective view into local boardrooms. For example, King III recommends that the board should comprise a balance of power, with a majority of non-executive directors, the majority of whom should be independent.
Shareholder activism has also increased significantly in recent years. Shareholders are more vocal about the changes they want to see in a company’s board composition.
The principle argument in favour of a diverse board is the wide range of perspectives each individual brings to the boardroom table.
A diverse board better understands its customer base and the environment the business operates in. As a result, the board is better placed to seize opportunities for innovation, which ultimately creates value for the business.
Having a wide range of perspectives in the boardroom also means guarding against group-think and a silo mentality. In addition, incorporating independence into the boardroom brings an unbiased view distinct from that of shareholders and management, which provides reassurance to external parties that the company is being run in an effective manner.
Expensive task
The benefits of having a diverse board must be weighed up against the costs of doing so. Finding the appropriately skilled individuals, who also match other desired elements of diversity, can be a time consuming and expensive task.
Where a company does find appropriately skilled individuals, it may initially find that board members need to earn each other’s trust in decision-making. This may initially result in a longer decision-making process, reduced cohesion and additional conflict. If not managed properly, this may lead to dissatisfaction and distrust in the boardroom.
Heterogeneity also reduces over time as members become more familiar with each other, which can lead to the group-think phenomenon. To counteract this, regular board refreshment is vitally important.
An optimally diverse board is primarily built on the foundation of a skills-based framework. Once the appropriate skills, expertise and experience have been identified, other elements of diversity should then be woven into the framework to allow for effective and robust decision-making and discussion in the boardroom.
Deloitte’s recommend that an optimal framework is formulated by the nomination committee and approved by the board. Shareholders can also influence the framework through stakeholder engagement with the board. Once the framework is in place, it should be periodically reviewed and refreshed as the company develops. It should be seen as dynamic and tailored to the environment that the company operates in at a given time.
In addition, the current composition of the board should be evaluated against the optimal framework on a regular basis, preferably annually. This assessment should be linked to board refreshments, director tenure, succession planning and board recruitment initiatives.
While there are some challenges associated with having a diverse board, many of them can be viewed as temporary. They will be far outweighed by the benefits of having a rich melting pot of diverse perspectives around the boardroom table.
* Johan Erasmus is a Deloitte director.
** The views expressed here do not necessarily reflect those of Independent Media.
BUSINESS REPORT