How to Make Your Board Smarter

Homogenous boards are at-risk boards, and as more organisations rethink the composition of their boards to better suit the times, cognitive diversity is what counts. Here’s our guide on how to get it, what it delivers and practical actions boards are taking to make the change. Catherine Fox with Narelle Hooper.

If the directors on your board, the leaders of your organisation, all fit a similar profile, but you’re insisting that appointment and promotion is “on merit”, then it’s time to expand your idea of merit, because you have a problem.

As organisations have to deal with more complex and global issues, cognitive diversity — the perspectives and mental models people bring to decision-making — are growing in importance. Many investors and superannuation funds are now analysing the composition of boards and management teams and calling to account those companies with little or no diversity around the boardroom table. Investors see lack of diversity as increasing risk and a brake on performance.

There has been an increasing focus on diversity in board positions and leadership teams, with more organisations setting targets to increase the number of women in a still largely male domain (women still comprise only 26 per cent of ASX 200 boards). However, the conversation needs to become a far more nuanced one.

“A lot of people talk about diversity of thinking, but we’re not quite sure what that looks like,” said Juliet Bourke, a partner with Deloitte human capital in a recent TedX talk. “Is it a maverick, is it a millennial or is it someone from the marketing department? Because we’re not sure, we take a scattergun approach.”

Instead, the conversation needs to reflect a discipline to mixing things up in the boardroom. As a shorthand, it goes something like this:

To get diversity of perspective you need to ensure you ask a different set of questions. Lack of diversity around the table increases the chances of errors in complex problem-solving and decision-making. To maximise diversity of thinking, the evidence is that you must have visible difference (different racial backgrounds/mixed gender). Without this discipline, organisations expose themselves to biases or blind spots that increase the likelihood of errors. But there’s an art to getting this right and specific issues ust be considered. Diversity doesn’t just happen by appointing a woman or a maverick.

The cognitively diverse board basically has a wide range of information processes and thinking styles around the table says Judith MacCormick FAICD, CEO of BoardFocus Advisory and an AICD course facilitator. That may come from different backgrounds and thinking styles rather than certain ratios of men and women or people of different ethnicities. It’s about finding people prepared to listen to different, sometimes opposing, viewpoints.

“My doctorate [organisational behaviour] found that organisations that better accommodate and work with contradictions do so much better”, she says. “I’m seeing it in some of the boards I work with. I love it when board members say ‘this person is way out there’ and then they start to listen and realise this person is also making them think differently and challenging their assumptions.”

As a result, boards dominated by the typical director (white, middle-aged and male) are beginning to stand out like the proverbial sore thumb in Australia’s business arena as leaders recognise the link between diversity, performance and risk mitigation and more complex problem-solving. The 30% Club is pushing for a third of board directors being women to mix up board thinking.

Many government boards already mandate 40-40-20 or 50/50 gender split and an increasing number of companies are now setting targets.

Diversity has tangibly delivered better outcomes around the board table for retailer Woolworths, says its chair Gordon Cairns, who is also a chair of Origin Energy and a member of the Male Champions of Change group.

“Corporate Australia is so much more aware of the issue. They are stepping up to change. It’s hard to ignore that change in boardrooms and you get generational change at the top of boards, which helps. Institutions themselves now ask the question: What diversity of skill sets do we have on the board? The Woolworths board is wonderful because we have 50/50 and if you shut your eyes, you wouldn’t know if it was a man or a woman making the point. Interestingly, the highest-performing people on the board are the women — board assessment is done every year externally. We shouldn’t be aiming at 30 per cent (women on boards) — it should be 50/50.”

The growth edge

Broader perspectives bring more and different questions, which lead to better decisions, says James Fazzino MAICD, chair of Manufacturing Australia, and former CEO of chemical company Incitec Pivot Limited (IPL).

Fazzino led an active program to increase diversity throughout IPL, ensuring the diversity agenda was part of, not separate to, the company’s business strategy and worked closely with the board.

“Increased diversity led to more effective interactions with senior and middle management, particularly on site, as people sought to understand functions or areas outside their traditional experience. Of course, diversity on the board often leads to diversity in the company as a whole, delivering further benefit.” (Fazzino was replaced by Jeanne Johns, who is also on the board, in late 2017).

Fazzino believes diversity is Manufacturing Australia’s — and Australia’s — growth edge in the war for talent. “Most of the problems in businesses were technical. Now there are complex but different problems and answers. These days, the problems are adaptive and there are multiple answers, or you need to experiment to find the answer. Diversity allows a shift into the adaptive space.”

Fazzino says boards can start by asking management what three questions aren’t being asked by the board. “Make these part of the key experience criteria for recruitment, then recruit from the broadest possible talent pool, including non-traditional backgrounds.”

Both Cairns and Fazzino have had a relentless focus on reporting diversity progress and ensuring it is a regular part of the agenda. His company also looked outside the usual pool of experienced candidates, says Cairns. “I could see a number of potential directors didn’t have a recognised board portfolio. Our attitude was, if you continue to look at people who have been on boards for a number of years, you will never make progress — we have to look at directors in the development stage. We have Jillian [Broadbent AO] who is very experienced and Holly [Kramer] who was just starting her board career.”

Engaging the C-Suite

“We have to hold the senior management and CEO to account on this issue”, says Cairns. Executives at companies he works with have to routinely report on how they are doing with gender diversity. For example, Macquarie Group is making sure there are equal numbers of men and women on recruiting panels and as many women interviewed as men.

Most leaders making progress in executive ranks also emphasise the importance of consistent reporting on metrics. “Prioritising regular reporting enables you to demonstrate progress towards achieving gender balance within the organisation,” says John Mulcahy MAICD, Mirvac chair, in Chief Executive Women/AICD’s Boards for balance report. “You need to measure progress in order to make an impact. Executives are very busy people, so reporting and reviewing of progress keeps the issue front of mind and ensures it remains on the agenda.”

Sometimes persistence is also needed. Origin CEO Frank Calabria was desperately aware he had too few women on his executive team, Cairns says. “We were looking for a new person and he point-blank refused to take a man. He said he was prepared to wait until he could get a woman, although clearly not making sacrifices on quality, and confident he could get one. I’ve never found a case where we’ve had to compromise on talent to get women in.”

When he started targeting better diversity about five years ago, Fazzino shifted from a focus on individual attitudes to implementing a systematic change in how the role of women was framed. The unwritten rule was that women could do functional — Legal, IT, HR, finance, corporate affairs — but not technical roles — manufacturing, logistics or engineering. “We reframed the rule and at the same time redefined the role of leadership. We said we wanted to change from working in the business to working on the business. We didn’t need leaders with 30 years of technical expertise, who had worked their way up and done every job on the side. We said it was OK and safe to appoint women.”

The result was women moved into leading management positions throughout IPL and are now running its largest high-explosives plant globally, the largest stand-alone explosives emulsion plant in Australia, and fertiliser distribution sites, including its largest export facility globally. The number of women in the executive team rose to 33 per cent in 2017, and 26 per cent of senior management positions and the majority of high-potential female talent was either in expanded roles or were promoted during 2016–2017.

None of this would have happened without the board’s imprimatur and direct involvement, says Fazzino. Taking direct action to change the system delivered a leap in diversity. Meanwhile, the question boards should be asking now, he says, is how can we assist our companies and ensure business transformation to help in the future?

Different views can make some board members uncomfortable because their assumptions may be questioned, but diverse thinkers can also galvanise boards, he says. “I see this on boards and from chairs when they get a woman on. They say, ‘Everyone worked so much harder’, because it’s seen as a challenge or it’s unsettling when somebody new starts talking about something like cyber-risk threat.” Decision-making in the era of disruption.

While some critics suggest greater diversity can slow down decision-making, MacCormick says focusing on the efficiency of board processes was right for the industrial age, but not in an era of disruption where trial and error is often needed rather than black-and-white answers. She points out that US academic and author Professor Bob Garratt talks about the “learning board” — where people can admit they don’t know everything.

“We hear a lot about collaborative boards, but they need to be less afraid of conflict. You can be friendly, but still have creative abrasion. You need to look outside traditional ponds for your directors.”

Once you start looking for different skills and cognitive diversity, you naturally find more ethnically diverse, women and older or younger directors, she adds. Otherwise, the research shows, boards tend to appoint people just like themselves. “Boards know the pressure is building and business is being disrupted, but they still talk about change management. Change is continuous and learning boards need to be appointing and really listening to people who are not like them at all.”

Push and pull strategies

Making a difference to the diversity picture involves both “push” and “pull” strategies, Cairns says, which ensure there is demand and supply of different candidates.

The AICD’s Chair’s Mentoring Program has helped mentor more than 250 women by senior chairs and directors. AICD’s annual WA Director Pipeline Program has also benefited aspiring directors become more board ready.

Cairns has worked with professional services firm EY sponsoring a group of women finding it hard to get interviewed for roles.

“There are a lot of talented women in corporate Australia desperately trying to get onto boards. But they are not well-networked nor do they know the chairs of listed companies. It’s building a cohort where they can help each other and as a result, once they get onto the boards, they have a network.

“We have to have a ‘pull’ strategy — the forces asking boards to be more diverse; and a ‘push’ strategy — the kind of work we do with EY to develop a talent pool, so we don’t get the chestnut: ‘There are not enough women’.”

Cairns also has a blunt message for the laggards: you will be embarrassed for not doing anything with attention to diversity on the increase.