In the world of corporate governance, diversity of the board of directors is a topic that receives considerable attention. Companies headed by diverse boards are generally considered to be more successful in the increasingly global and complex business environment. As per one of the principles of the recently revised UK Corporate Governance Code, both appointments and succession plans should “promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths”. What are the practical benefits of improved diversity for your organisation?
Diversity – gender and beyond
Boosting diversity in the boardroom is often associated with appointing more women as directors. The recent report released as part of the UK government-backed Hampton-Alexander review provides a good example. The report revealed some of the worst explanations given by the Chairs and CEOs of FTSE 350 companies for not appointing women to their boards - e.g. ‘women don’t fit’, ‘all the good ones have already gone’ or ‘most women don’t want the hassle’.
The report shows that even though the number of companies with all-male boards has dropped over the years, there is still room for improvement. This holds true for other aspects of diversity as well – diversity of age or ethnic diversity. The Parker report revealed that only 1.5% of directors in FTSE 100 boardrooms are from a minority background.
However, apart from such noticeable disparities that are relatively easy to measure, diversity can also be considered in a wider sense – do directors display different competencies, experiences, mindsets, philosophies of life? Such a broad approach falls under the umbrella of cognitive diversity – members of the board displaying different thought processes, and thus tackling problems from various standpoints. For what reasons is this trend worth encouraging?
The diversity of thought – better returns for your company
Directors representing a variety of backgrounds can bring fresh insights and perspectives to the boardroom. This can stimulate healthy debate, and lead to innovative solutions. As per the FRC Guidance on Board Effectiveness: ‘Diversity in the board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors and breaking down the tendency towards “groupthink”.’ If all directors represent very similar mindsets and expertise, ‘groupthink’ can be become a norm at the board level. In the ever-changing business environment, this can hardly be a competitive advantage.
Investors’ perspective matters
Another reason for improving board diversity relates to managing shareholders’ expectations. Listed companies face growing pressure from institutional investors to take greater account of this issue. For example, Legal & General Investment Management (LGIM), an asset manager responsible for almost £1 trillion, announced that it would vote against boards whose diversity initiatives are ‘lacklustre’.
Similar trends can be observed amongst individual investors. In the US, SHE is an exchange-traded fund comprising shares in companies with women present at the CEO, board or senior leadership levels. In the UK, a recently launched ‘GIRL’ fund allocates more to companies that have achieved higher levels of gender diversity. With investors able to filter out listed companies with few women on boards, companies’ focus on enhancing diversity may gain momentum.
Better relations with other stakeholders
Companies with non-diverse boards can be seen as unrepresentative of their staff, customers, and communities in which they operate. It is often argued that to understand these groups and to engage with them effectively, the board should, to some extent, reflect them. Thus, more balanced boards are seen as more attuned to the needs of their clients and employees, which in turn improves the company brand and reputation.
Greater board diversity works for the long-term benefit of organisations. Different perspectives in the boardroom can lead to stronger connections with investors, customers, business partners and clients, as well as stimulate innovation, improve risk management and prevent the dangers of ‘groupthink’.
In the words of Malcolm Forbes, owner-publisher of Forbes magazine, ‘diversity is the art of thinking independently together’. Is this art practiced widely enough in the boardrooms of top companies?