Four effective ways for a board to steer its way through a crisis
In times of difficulty, knowing when to get involved and learning to master your emotions are essentials skills to prevent making a bad situation worse....
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by Didier Cossin Published 31 May 2022 in Governance • 5 min read
Over the past two decades, reforms in corporate governance and increased attention from activists and shareholders have changed the composition of most boards. Since 2008, when Norway took the unprecedented step of mandating a minimum of 40% female representation on the boards of public limited companies, initiatives such as the UK’s Hampton-Alexander and Parker Reviews have moved diversity up the corporate ladder and into the boardroom – with some success.
According to the 2021 Spencer Stuart Board Index, 61% of FTSE 100 companies had at least one board director from a minority ethnic background (this has since risen to 89%), and 51% of non-executive directors were women. The FTSE Women Leaders Review published in February 2022 shows that there are only six FTSE 350 companies with tokenistic “one and done” boards – down from 74 at the end of 2018.
These statistics look encouraging, but the reality may be more nuanced – not least because diversity can be defined too narrowly. As our understanding of diversity continues to evolve, we will see variations between regions and generations. Focus on ethnicity, for example, is a greater emphasis in Anglo-Saxon countries. In Switzerland, for instance, there might be more of a focus on linguistic or religious diversity.
To really foster innovation, creativity and debate, true diversity should encompass geopolitical views, ESG, social background and, importantly, age. On sustainability issues, climate risks and social equity, the views of the younger generation are fundamentally different from those of the older generation.
One statistic that has stayed fairly constant while other measured areas of diversity have risen, is the number of foreign board members. The Spencer Stuart Index shows that foreign directors account for 34% of all board members, and has remained between 30% and 34% for the past decade despite increased globalization and connectivity. A resurgence of nationalism and protectionism may be a factor here, alongside a sense of unease from a turbulent geopolitical environment.
Following Russia’s invasion of Ukraine, Russian entities will be unlikely to have international diversity for some time. Then, of course, there are the effects of the pandemic. Such complex times are likely to lead some organizations to take a prudent approach.
There is also a strong push against diversity of viewpoints. Higher performance does not necessarily follow from increased diversity, but difficulties that result from communication barriers are a likely side effect. At some point diversity becomes too painful, because it becomes impossible to align and make a common decision.
Consider the example of a company with 27 board members from different nations, speaking different languages and bringing their own translators and assistants to meetings. With 60 people in the room, what is the chance of an effective decision-making process? With too many disparate voices, boards may also run the risk of losing the common ground and shared values that underscore the company’s culture.
Ultimately, there needs to be a functional diversity. The best boards have this, but there are limitations. Key to well-managed diversity is a powerful chair who can encourage equal participation while still bringing powerful discussions to clear conclusions.
Another factor that risks skewing the reported diversity figures is the perceived lack of depth within the talent pool, which leads to companies selecting from the same short list.
In France, where gender quotas on corporate boards were implemented a decade ago, journalists have dubbed this select group of women elected to serve on multiple boards the jupes dorées, or ‘golden skirts.’ And a study from Deloitte has shown that women on boards hold a higher number of board seats than their male counterparts – particularly in Australia, the US and New Zealand.
This is a big issue, and not just because of the small pool. Even among the women chosen there is little diversity, because these are likely to be women who have adapted to a white male-dominated environment. Instead – or in addition – we should be looking at the minority women who will speak their own minds, think their own thoughts and challenge the status quo in their own ways.
Part of the blame here lies with the executive search firms, which default to their tried-and-tested contacts. The chair of the board, meanwhile, bears responsibility for developing contacts and connections across diverse groups. And here there is a problem: women hold just 8% and 9% of chair positions in US and UK respectively.
In a decade’s time, diversity advocates are likely to be disappointed by the rate of progress in the boardroom.
Society and even governments can see the case for change, but corporate boards tend to be more cautious. And the system itself is not geared up for rapid progress, with the pace of change governed by the rate of turnover in board positions. A comparison of Deloitte’s global reports on female representation in the boardroom in 2019 and in 2022 shows that at the current rate of change, we will not reach parity until at least 2045.
Of course, there will always be outliers, for whom diversity and a strong sense of social responsibility is not linked to financial success. Weapons manufacturers, for example, will probably still be successful, regardless of their boardroom diversity. Or consider the boards of private equity firms, which typically lack diversity but whose success is based on short-term transformations requiring board alignment in decision-making.
At the other end of the scale, there will be the best-in-class companies that create value rather than profiteer from the world, are better stewarded and accept that business legitimacy is part of their success. These organizations will take diversity to a higher level, moving on from the current focus – gender, ethnicity, sexuality, nationality and language – to a broader definition that incorporates geopolitics, personalities or neurodiversity, and social backgrounds. As a result, these businesses will attract the best talent. And run well, they will also attract investment.
Founder and director of the IMD Global Board Center, the originator of the Four Pillars of Board Effectiveness methodology and an advocate of Stewardship.
Didier Cossin is the Founder and Director of the IMD Global Board Center, the originator of the Four Pillars of Board Effectiveness methodology, and an advocate of stewardship. He is the author and co-author of books such as Inspiring Stewardship, as well as book chapters and articles in the fields of governance, investments, risks, and stewardship, several of which have obtained citations of excellence or other awards. He is the Director of the High Performance Boards program, the Mastering Board Governance course, The Role of the Chair program, and co-Director of the Stakeholder Management for Boards program.
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