Why diversity matters in the boardroom
Over the last few decades, the business world, like society in general, has changed rapidly and businesses have become more complex in the face of globalisation, significant advances in technology and heightened regulation. As a result of these and other developments the scope of board oversight has increased dramatically.
As boards look to navigate the increasingly complex and dynamic issues that companies now face it has become even more essential to have directors with different experience and backgrounds so that the board can draw upon a range of perspectives in understanding opportunities and assessing risks and challenges. Board diversity is about having alternative and complementary views that, in the end, lead to better decisions and innovation.
The need for increased diversity in the boardroom is now well recognised in the United Kingdom. The Financial Reporting Council Guidance on Board Effectiveness (2011) comments that: “Diversity in board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors, and breaking down a tendency towards ‘group think’.”
However, what does diversity really mean? Some define diversity in terms of demographic attributes such as gender, ethnicity or age, while others consider experiential attributes such as skills, experiences, accomplishments and education. Regardless of the definition utilised several studies have already shown that diversity in the boardroom has resulted in real value for both companies and their stakeholders.
The UK Government-commissioned Davies report,
Women on Boards, was published in 2011. This report made a strong case for greater diversity on boards and recommended, in particular, that there should be a greater proportion of women on the boards of FTSE 350 companies (Financial Times Stock Exchange).
The report presented several reasons in favour of greater boardroom representation for women, including:
* There is research to support the view that companies with a strong female representation at board and top management levels perform better than those without such representation.
* Tapping into the underutilised pool of highly qualified female talent at board level is vital if companies are to remain competitive.
* Women are responsible for the majority of purchasing decisions by households. “Having women on boards, who in many cases would represent the users and customers of the companies’ products, could improve understanding of customer needs, leading to more informed decision-making.”
However, the report indicated that there were a few problems to be overcome in order to appoint substantially more women to boards:
* Supply of suitable candidates: Although women make up a large portion of university graduates and employees, companies are not promoting enough women to senior management positions, and women with senior executive experience should be suitable boardroom candidates. Companies should, therefore, recognise their role in developing the potential of women throughout the “corporate pipeline”.
* Demand for women directors: There is a tendency to recruit from a narrow circle of potential candidates; however, there are women who are capable of serving on boards who are not currently getting those roles. Efforts should be made to widen the search for non-executive directors, outside of traditional talent pools, when making board appointments.
Assembling a high-quality board of directors can be a difficult task. Best practices for board succession planning include using a matrix to identify the skills, expertise, attributes, and experience necessary to support a company’s strategic plans. Additionally, achieving “diversity of perspective” should be a key objective in board appointments in order to offer increased depth and breadth of insight and experience which is aligned to the strategic needs of the company.
Janelle Muschette Leiba is an attorney-at-law.