Board Diversity

Boards have an opportunity to take a broader view of diversity that can improve decision-making and lift organisation performance.

In Australia, the focus of organisations, the media, and business and regulatory bodies has predominantly been on gender diversity. Considerable progress has been made in this regard. The proportion of women on ASX 100 boards has doubled since 2010, and currently stands at 25.7% of ASX 100 directorships (AICD data as at 31 May 2016). To further hasten progress (particularly in companies outside ASX 100), last year the AICD called for all boards to ensure that 30% of their directors are women, urging ASX 200 companies to meet this target by the end of 2018.

Beyond gender, momentum is also growing, albeit more slowly, in relation to ethnic and cultural diversity. A 2015 study by the Diversity Council Australia and Deakin University looked at the cultural diversity of ASX boards over the past decade. They found that while boards are still generally dominated by people of Anglo-Celtic origins, cultural diversity on ASX boards has increased.

Less attention is paid to other differences between individual board members. These include tangible points of difference such as age, education and socio-economic background, as well as cognitive points of difference such as personality, boardroom behaviours or attitudes.

The case for board diversity

While there is widespread support for diversity in principle, debate continues as to whether and why it matters. Sometimes diversity is viewed as an end in itself. This view has its roots in social justice and draws on principles of equal opportunity and fairness.

Yet dominating public debate is the claim that empirical evidence supports a ‘business case’ for diversity. It is said that diversity improves the capacity of a board to deliver value to an organisation, and that there is a demonstrable link between greater board diversity and improved board/corporate performance.

Numerous studies spanning several decades have investigated the relationship between board diversity and performance. Most of the research focuses on gender diversity. While these studies have had mixed results overall, a number of well-known studies have found positive links between board diversity and various measures of corporate performance.

For example, research by Catalyst (2007) showed that US Fortune 500 companies with the highest percentage of women board directors had significantly increased financial performance (return on equity; return on sales; return on invested capital). A Credit Suisse Research Institute report (2014) found a positive correlation between the level of female representation on boards and in senior management and improved financial and share market performance. An earlier Credit Suisse Research Institute study (2012) also showed that greater gender diversity brings reduced volatility and more balance through the economic cycle.

Imperative in establishing the ‘business case’ for board diversity is an appreciation of how diversity can improve governance and performance.

It is commonly argued that board diversity improves board/corporate performance because diversity enhances group decision-making. A board comprised of diverse individuals brings a variety of life experiences, capabilities and strengths to the boardroom. There is greater diversity of thought and a broader range of insights, perspectives and views in relation to issues affecting the organisation.

Diversity of thought may, in turn, encourage more open-mindedness in the boardroom, help generate cognitive conflict and facilitate problem solving, and also foster greater creativity and innovation. It also reduces the risk of “group think” – where board members’ efforts to achieve consensus overrides their ability to identify and realistically appraise alternative ideas or options in relation to the organisation.

Further, it is likely that the board’s composition could positively influence the rest of the organisation. A board comprised of diverse individuals may reduce the homogenising impact of in-group bias or in-group favouritism on talent election. There is a ripple effect: a diverse board would be more likely to draw on a wider and more diverse pool of potential candidates for any refresh of the board itself and CEO selection. Indirectly, this may inspire greater diversity in talent selection throughout the organisation.

A broader approach to diversity is ultimately needed

While the traditional measures of diversity, such as gender or ethnicity, are important and clearly visible, boards should not unduly limit their understanding of and approach to diversity. Instead, they need to actively consider other differences between individual board members. A broader approach to board diversity may enhance the benefits it provides and enable further incremental improvements for organisations.

The current evidence suggests there may be a broad lack of diversity on Australian boards (noting there is limited data available, which in itself is perhaps an indication that a broader notion of board diversity is not yet fully acknowledged in the discourse on the topic).

In relation to age diversity, for example, only 3% of men and 10% of women on ASX 200 boards are under 50 years old (ACSI, 2015, ‘Board Composition and Non-Executive Director Pay in ASX200 Companies’). Yet the experiences, capabilities and strengths of younger directors are valuable, especially in the case of organisations where labour/skill or consumer markets are dominated by younger people (e.g. digital technologies, online retail, education, etc.).

There is also some evidence of a lack of skills and experience diversity on Australian boards. A recent study found that nearly 40% of ASX 300 board members have accounting and finance experience, while only 4% of those directors have technology expertise (Watermark Board Diversity Index, 2016).

Recent regulatory changes may go some way towards improving certain measures of board diversity. For example, the Third Edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (effective from 1 July 2014) recommends that a listed entity have and disclose a board skills matrix, setting out the mix of skills and diversity that the board has or is looking to achieve (Recommendation 2.2).

A recent KPMG review (2016) of ASX 200 disclosures found that 93% of surveyed companies published a board skills matrix in 2015. However, the nature of the disclosures suggests that boards may not acknowledge nor respect the diverse range of skills that their members possess. KPMG found that functional skills (e.g. finance, legal and/or risk) were considered important for all boards, yet the majority of entities did not consider whether directors had “people skills” (including experience with managing people and teams) or geographic experience (including experience in an international market).

Board skills matrices are valuable in that they require boards to reflect on their composition and, specifically, to identify, measure, and disclose boardroom skills. It has been suggested that matrices could be further expanded to include disclosure of boardroom behaviours and attributes.

It is worth noting that a broader approach to board diversity may take time to achieve, particularly for those boards that still do not have an adequate representation of women nor people from different cultural backgrounds. Vigilance is also needed to maintain any improvements in board diversity. In the UK, for example, there was some concern last year that the ethno-cultural diversity of the FTSE 100 was, in fact, decreasing (The Green Park Leadership 10,000, 2015).

Consideration should also be given to what form and level of board diversity is appropriate at any particular time, having regard to the organisation’s circumstances. In particular, diversity should not come at the expense of board cohesion or a collegiate approach to decision-making. The personalities, boardroom behaviours and attributes of current and prospective board members will be important factors to consider in structuring the board. There is also a risk of diversifying the composition of a board too quickly, without due consideration of the fundamental qualities needed to enable optimal board and organisational performance.

Ultimately, however, it is incumbent on each board to ensure that its structure and composition facilitates diversity of thought in the boardroom, and thereby improves its capacity to deliver value to the organisation it governs. In so doing, Australian boards should aim not to focus exclusively on any one particular dimension of diversity, but instead adopt a broader approach to their composition and processes of renewal.

Louise Pocock is Deputy Executive Director of the Governance Leadership Centre