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How diverse should company boards be?

By Michael Armstrong | February 5th 2020
By Michael Armstrong | February 5th 2020

In recent years, governments, regulators and corporate governance groups around the world have been developing initiatives to increase the representation of women on boards. Debate continues about the effectiveness of measures taken to address this and other board diversity issues. Rather than simply reacting to such measures, boards should lead the trend.

Prompted by the global financial crisis that began in 2007, and the increased awareness of corporate governance weaknesses in the subsequent period, there has been plenty of reflection on board composition.

According to the Gender Equality in the Workplace Report by the Nairobi Securities Exchange (NSE), Equileap and New Faces New Voices, 12 per cent of listed firms in Kenya are headed by women, compared to a global average of 5.8 per cent. According to the survey, the rate of women in executive positions stands at 22 per cent, exceeding the global average of 15 per cent. Those in senior management and total workforce are also above the world's average.

Company boards around the world have been put under the microscope and there is a view the shortcomings in the companies such as lack of inclusive policies could be connected to a lack of diversity at board level. This begs the question of how can boards start leading the way. The debate is no doubt influenced by what people can see from outside.

However, we need to recognize that people outside the boardroom will consistently use external signs to assess board effectiveness because boards mainly operate behind closed doors. Boards should accept that a board with members whose individual profiles look very similar would raise doubts about its ability to think outside the box.

What board membership requires depends on what a company aims to achieve. Historically, corporate governance thinking on board composition has emphasized the need for an appropriate balance between executives and non-executives and for procedures to ensure that boards have the skills, experience, independence and knowledge of the business to enable them to discharge their responsibilities effectively.

However, companies that do well in the long term are often aware of the wider business environment. It helps companies to achieve long-term success if they address wider responsibilities, such as achieving a business purpose, behaving in a socially acceptable way, meeting legal and regulatory requirements and stating how responsibilities are met.

In addressing this range of responsibilities, boards need to formulate and explain how board diversity can help. And this surely has to be specific to each company if it is to achieve diversity in substance, not just in appearance.

Increasing diversity at the top level of companies and organizations comes with its own benefits and challenges. An open attitude to diverse opinions can contribute to a rigorous board which is capable of exploring a wider range of alternatives, to be critical or to simply say “Hang on a minute” or “Why?”

Diversity can help companies be better accepted in a society that is also increasingly diverse. A board that embraces diversity will see business threats and opportunities through the eyes of their different stakeholders and reduce the risk of cultivating a mob mentality.

There are challenges, too. For example, there is a practical limit on how many people can be brought to a board, and a company needs to consider how to capture the viewpoints of those who are not represented. Diversity is not easy to achieve in terms of building a pipeline of diverse and talented individuals across an organization to allow internal recruitment.

There are also challenges that are set in attitudes deeply rooted in society. For example, if certain groups are fundamentally disadvantaged in the education system, it will be difficult in the short term for companies to identify suitable members of those groups for board positions or to make sure that they are properly represented in the company's talent pipeline. But these issues should not deter companies from trying.

Boards also need to consider diverse viewpoints because diversity does not end at getting the right people on the board. A diverse board does not automatically allow diverse viewpoints to shape its behaviour and decisions.

Its members need to develop mutual respect and recognise that an open exchange of diverse viewpoints is not a barrier to progress. It can help them reach better-shared conclusions but only if they work as a team, serving the interests of the company and sharing responsibility for its decisions.

Diversity can contribute to board effectiveness. But this requires the board members to work hard to enable those benefits. It cannot be enforced from the outside – the initiative must come from within.

The writer, Michael Armstrong (FCA), is the ICAEW Regional Director for the Middle East, Africa and South Asia. 

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