A key feature of corporate boards in western countries is that their members are predominantly white males from similar corporate, social and educational backgrounds.
Such homogeneity does not reflect the modern perspective on stakeholders or the changing nature of the business world. Diversity is important, so what impact is it likely to have on issues of corporate governance and how can increased diversity on boards be achieved?
The business case for diversity
Diversity refers to the characteristics by which individuals categorise their social identity or are categorised by others. The most obvious of these are sex, race, age and ability/disability. But there are many other differences that individuals bring to their jobs, such as their human capital qualities (education, skills, work and other experiences, personalities, managerial style, thinking style, learning style, judgment and values) and their social capital (access to resources from their social and business networks).
Diverse board appointments, including of women and ethnic minorities, make best use of the entire talent pool. Women have different experiences of the workplace, marketplace, public services and community to men, and this perspective allows insights that facilitate deeper discussion and creative solutions. Similarly, individuals from ethnic minority backgrounds offer a unique perspective on cultural differences. In turn, this can facilitate the building of long-term relationships in a rapidly globalising world.
Board heterogeneity may mean that new people take longer to settle. But if the culture is welcoming and open, there can be group-level learning that has a positive impact on team behaviours and outputs. Nanette Fondas and Susan Sassalos, US-based gender diversity experts and business writers, say that women directors prepare conscientiously for board
meetings and are especially keen to make an impact, in part because they are aware of the increased scrutiny of their performance due to gender stereotyping. In a study of 115 large US companies, they found that boards with women directors had significantly more influence over management decisions than all-male boards.
The presence of women directors can lead to more civilised boardroom behaviour, a more interactive and transformational board management style and sensitivity to other perspectives, such as employee and community concerns, business ethics and environmental impacts. Studies have consistently shown that women directors have a positive effect on recruitment and retention of women employees, symbolising the possibility of advancement.
Proponents of the business case for diversity advocate that modern boards should be representative of their customer and employee base. So, companies employing many women or those selling products targeted at women are likely to be challenged about lack of diversity on their boards.
In the US, such challenges are starting to come from stakeholders such as large pension fund investors. In the UK, female shareholders have started to make similar comments at annual general meetings, and chairmen need plausible answers. While some merely see this as feminist activists pushing their cause, it should lead chairmen and CEOs to consider why fewer women than men have not made it to board level in their organisations after 30 years of equal opportunities. The “women are still in the pipeline” theory should be well past its sell-by date – and it reflects badly on leadership.
Barriers to change
The business world has been slow to recognise the talent of women other than in support roles. Part of the reason is that those in power tend to appoint people like themselves. Thus, leaders become stereotyped as male, with masculine ways of leadership.
Aspiring women have to break down these obstacles, but with fewer female role models, some turn to a masculine style, emulating successful men. But leadership should encompass both masculine and feminine styles for the advantages of diversity to be achieved.
Women’s contributions are often invisible – they are good organisational citizens but tend not to promote their contributions and, thus, are not recognised as potential leaders. Moreover, their different ways of doing things are sometimes seen as weaknesses by male counterparts.
If women are not offered challenges, then their ability and confidence do not develop and they will be less qualified for promotion. When they do break through to senior roles, they are often marginalised, cut off from social support, and risk being seen as only representative of women rather than as individuals. Many turn away and seek satisfaction from other parts of their lives. Thus, much talent is wasted by companies who do not facilitate a return to the high-flying career track for women after maternity leave or after a year or two of part-time work.
Research consistently reveals a wide divergence between how women perceive the obstacles to becoming directors and the views of senior males. Senior women identify persistent sex-role stereotyping and the old boys’ club nature of top management. Meanwhile, male CEOs see it as a lack of relevant experience and the pressures of family commitments. What is more, they think that the best women will eventually appear in the pipeline.
The Higgs Report
The Higgs Report of 2003 made a series of recommendations on the role of non-executive directors, including how to improve diversity. Although the report focused on UK companies, the broader lessons of how things have developed since its publication are relevant wherever there is persistent homogeneity in the boardroom.
More female directors
The 2004 Female FTSE Report, an annual assessment of women’s progress in the boardroom, revealed there were 110 women directors on FTSE 100 boards, compared to 84 in 2002. But when it comes to executive positions the barrier has not been lifted, and women account for only 4 per cent of all executive directors in the FTSE 100.
Initiatives to address the pipeline question are also growing. For example, Sir Roy Gardner, CEO of Centrica, a UK energy provider that topped the 2004 Female FTSE Index with a 33 per cent female board, has been championing diversity strongly and the company now has 13 women just below board level.
Sir Roy is one of 24 FTSE 100 chairmen and CEOs who work with Women Directors on Boards, a consortium of senior women from industry, academia and government. Each FTSE 100 leader volunteers to mentor a woman executive from the “marzipan” layer (for example, deputy directors) of a non-competing company, and nominates a senior woman from their own company, with a view to supporting preparation for non-
executive positions. Both mentors and mentees in this innovative scheme network as groups, to share experiences and identify best practice.
Evaluating board skills, knowledge and experience
Assessing the balance of board skills, knowledge and experience “is an obvious but frequently neglected part of ensuring that the right people are appointed”, according to John Roberts and Philip Stiles of the Judge Institute at Cambridge, and Terry McNulty of Leeds Business School.
The Female FTSE Report showed that 84 per cent of top companies now have a process to review regularly the balance of skills, knowledge and experience of their directors, and particularly when appointing a new director. Diversity should be one of the indicators but companies with all-male boards were significantly less likely than companies with female directors to review regularly the balance of skills and experience of their board.
The director appointment process
The appointment process has become more transparent. By late 2004, 77 per cent of FTSE 100 companies had put details of the appointment process in their governance statements online, including terms of reference for the nomination committee. Some even noted the appointment process of individual directors, to show due diligence.
Another feature of governance statements is formal approval of use of search consultants, reported by 72 per cent of top companies. Search consultants are actively engaged in identifying talented women and ethnic minority directors, as well as potential directors from the wider sources of public and voluntary organisations.
But in March this year, Korn/Ferry International’s Annual Board of Directors study across 14 countries reported that new “diverse” appointments were still coming from the “familiar corporate club” circles. Luke Meynell of Russell Reynolds Associates, an executive recruitment company says that, as the role of non-executive directors becomes more complex, “[it] looks less and less like one that people without specialist knowledge can take on”.
To some extent, this could be addressed by training non-executive directors, but this raises another challenge for would-be directors coming from other sectors. There has been an increase in companies reporting induction for new directors, up from 63 per cent in 2003 to 81 per cent in 2004, and 69 per cent also reported offering ongoing training.
Training would be good for women and minority directors to get off to a good start and to be integrated in team development. An inclusive board that welcomes diversity is more likely to tap into the additional resources that the newcomers bring, as well as learn from their differences.
Diversity and good governance
In the Female FTSE Report, 13 indicators of good governance were studied in relation to gender diversity. Businesses with women directors, especially those with multiple directors, had significantly higher governance scores overall (see figure 2). There was a strong correlation between female representation with review of board performance and balance of skills, knowledge and experience, as well as with board independence measures, board development processes and succession planning.
Of course, this does not prove a causal link between appointing women and better corporate governance. But it does show that the companies that have instigated the structures and processes recommended by the Higgs Report for better corporate governance are those that benefit from diversity.
How to manage diversity for better corporate governance
To achieve improved diversity, there are three key areas that companies must address.
• Change the culture
It is not enough to say that a company values diversity. The real benefits that diversity can offer come when individuals are valued and differences respected, when access to developmental opportunities is open to all, and when different voices are allowed to make a contribution from which the organisation, including the board, can learn. This is not a “tick-box” exercise. It requires genuine understanding, openness and a positive attitude to change. Therefore, chairmen and CEOs need to champion the change and hold managers to account for their own diversity management performance.
• Review the director appointment process
To move things forward, any unintentional bias against candidates with diverse characteristics needs to be identified. This includes review of the composition of the nomination committee, the involvement of search consultants and the final selection interview. Are the listed requirements really essential? Do they discourage applications from those with non-traditional backgrounds or from women? Are the search consultants charged with actively seeking diverse candidates? Are those creating the shortlist only choosing people like themselves? Is the interview long and friendly enough for women candidates to relax and overcome stereotyping based on first impressions? Are the candidates offered feedback to help them retain their place in the talent pool? Is mentoring offered to new directors?
• Manage the pipeline
If the pipeline is treated as a supply chain, then sustainable change can occur at executive levels that in turn leads to a wider talent pool for non-executive director positions. Talent management and leadership programmes can help. Women’s corporate networks are starting to show results, with senior women engaging in mentoring and networking events, helping talented women to show their potential to their corporate leaders.
Conclusions
Diversity is valuable, but only those with the appropriate skills, knowledge and experience should get a directorship; it makes little sense to lower standards to address a lack of diversity on boards.
Action is needed to ensure that the best talent from across the whole pool is stretched, challenged and prepared for leadership, and that the appointment process is genuinely open and based on merit rather than on informal connections. Only then will the diverse ways of being, thinking and doing help boards to govern more independently and effectively.
Val Singh is senior research fellow at Cranfield School of Management. She is co-author of the Female FTSE Index, an annual report that charts progress of women on to top UK corporate boards.
