An effective board is one which leads the company, both now and for the future. The board must not look just at the current environment, but also at future risks and opportunities.
In the past, the business environment was slow to change, with boards following an accepted structure and seeking fairly defined skills. Increasingly, however, we are seeing massive changes in the way companies do business. The opportunities and threats of new technology, globalisation and rapidly changing customer buying behaviours are forcing companies to become better at what they do.
Boards must reflect this. They need a wider range of experience and skills, to represent the markets and customers which their companies serve. Boards must be diverse in every way – gender, cultural background and age.
When we consider boardroom representation, it is not simply a question of the number of women around the table. Diversity is much wider than that, encompassing all aspects of the human experience. However, focusing on the issue of women on boards is a good way to illustrate the issues.
The proportion of female graduates matches and in some cases exceeds, that of men. I talk to many companies who recruit equal numbers of male and female graduates. Will this ultimately filter through to the boardroom?
Whether it does will depend very much on the culture within the company. We need to be realistic about the challenges and accept that in many companies, the culture works for men and against women.
We all face challenges in our careers, but there are some which seem to impact particularly on women’s elevation to senior roles: the norms for what is measured as success, and the rules for promotion.
Barriers facing women
Research suggests that there are three key barriers for women in reaching the boardroom:
The ‘double burden’ of trying to combine work with home, particularly when women have children or the responsibility of caring for elderly relatives
The conflict with the ‘anywhere anytime’ model which has been adopted by so many companies
The reticence of some women to put themselves forward for the big roles
So we should not lose sight of the fact that the problem is not just a lack of women on boards, but also a lack of women making it through to senior positions. The key issue here is the culture within the organisation.
There is much research out there to show how diverse boards perform. We seem to understand that these boards perform better. But is this true? Or is it just that better-run companies will tend to make more money, and they are the same ones which tend to have the better recruitment policies?
A comment from the Financial Reporting Council’s recent document on board diversity sums up the disadvantages facing companies which lack board gender diversity: “
The FRC shares the view of those respondents that considered that a lack of gender diversity around the board table may weaken the board by encouraging ‘group think’; that low percentages of women on boards may demonstrate a failure to make full use of the talent pool; and that boards with no, or very limited, female membership may be weak in terms of connectivity with, or understanding of, customers and workforce and offer little encouragement to aspiration among female employees.”
Where there is no doubt is that the board is all about people. It is about getting the right people on the board, with a diverse range of experience. And that means broadening the talent pool in every way.
Areas for improvement
I would suggest that there are four areas where we can focus efforts to improve board diversity.
First, the role of the chair is key. Perhaps the main driver of board performance is the effectiveness of the chair. The chair can inspire a good board to become an excellent one. The chair needs to mould the team to ensure that performance is achieved, and is in line with the challenges faced by the company. If the chair understands the benefits of a diverse board, then they will be committed to achieving board diversity.
If the chair wants a board full of public school educated, ex-rugby playing British men, then so be it. They will not have all the skills necessary to respond to the rapidly changing global environment.
Second, we need to challenge the nomination committee. Changes to the UK Corporate Governance Code, due to come into force later this year, state that:
‘A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. This section should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives.’
The nomination committee has a key role to play in the diversity of a board. The wording of any candidate specification can immediately reduce the scope for increasing diversity. For example, specifying that the candidate must have been a CEO of a FTSE 250 engineering company is clearly going to restrict the shortlist to a narrow group of people. Asking for industrial experience in mining or oil exploration may increase the potential cultural diversity but restrict the opportunities for women.
Even terms such as length of service may discriminate against younger candidates or women who might have fewer ‘years of service’ due to a career break. I would urge any company to think carefully before putting together the specification for a role, and to make sure that the wording encourages diversity. We also need to carry on this thought process at interview, with diverse interview panels and carefully considered questions.
We should be broadening out our selection process to attract a more diverse candidate. We should be actively looking for people who have international and cultural experience, a variety of experience and career paths and, most importantly, different viewpoints.
After all, if we look specifically at non-executive directors, what are the most important skills? I would argue for ‘challenge’. And how do we achieve constructive challenge, if not through a diversity of viewpoints and experience?
Third, companies need to encourage their headhunter to work harder. Some headhunters are lazy, fishing in a limited pool and recycling the same old candidates. They often take the safe option of putting forward only candidates who have already done the job, or are in a similar role. This just encourages more of the same.
Instead, headhunters must be pushed harder. They should be encouraged to look around for new sources of candidates, in different places and sectors. For example, there are many excellent candidates in either public sector or voluntary roles who could make a valuable contribution to a board, with their different viewpoints and varied experiences.
Fourth, we need to develop new talent through mentoring. It is a paradox: we want to increase the diversity of boards by attracting a different sort of person. Someone who has not necessarily been on a board before, but who does have experience and skills to make a difference. On the other hand, what they lack is the board experience which would make them effective.
The solution to this is to set up mentors, at all levels of the organisation. A mentor can smooth the path for a newly appointed board member, general manager or functional specialist so that they become effective more quickly. Mentors can come from inside or outside the organisation.
Increasing diversity at the top of an organisation means focusing not only on the immediate appointments, but also on the talent stream coming through in the future. Ultimately, we should be aiming for a more diverse organisation as a whole, an organisation that more accurately reflects the customer and operational base of the company.
We are starting to see some progress in boosting diversity. According to the Cranfield Female FTSE Board Report, in the 12 months to January 2012:
47 women took up new roles at FTSE 100 companies, and this included 27 women who had no prior FTSE 350 Board experience
This increased the percentage of women to 15%, up from 12.5% two years ago
The percentage of female non-executive directors in the whole FTSE has risen from 15.6% to 22.4%
Encouraging progress, but still a long way to go. And I would highlight the figure for female executive directors – still only 6.6%. This reinforces the fact that the biggest obstacle to the progression of women lies in the very heart of the organisation. It’s no good just tackling boardroom diversity; we need to be looking at how to encourage a more diverse talent pool coming up through organisations.
Are quotas the solution?
The Davies Report challenged chairs to announce their goals, and called for FTSE boards to have a minimum of 25% female representation by 2015. On the other hand, the FRC have backed away from specifying quotas on the basis that, when looking at diversity as a whole, it is too hard to specify quotas, and that they did not want to single out women.
But some European countries do have quotas – and recently, the EU Justice Commissioner Viviane Reding hinted that quotas might be the solution.
If we do impose quotas, then we will increase the number of women in senior positions. Hopefully, at the same time, we change the way recruitment is carried out so that it is done in a more diverse way.
There is always the risk that a woman is appointed to a position not because she is the best person for the job, but because she fills a quota. We really only want to appoint the best person for the job. So how do we decide who is best? Two key criteria are performance and fit.
Women can demonstrate that they are as good as, or better than, their male counterparts. However, fit is a bigger issue. What is ‘fit’? It is how well that person fits into the existing culture and dynamics of the board. What if the culture and dynamics are not right? What quotas can do is to catalyse a change in company culture so that there is a better fit for future women.
I believe that quotas in place for a time could be a force for good. They might encourage companies to change their behaviours and cultures so that they become more diverse in every way. Not just at board level, but all the way down the organisation.
Lord Davies called for companies to set ambitious targets. The evidence over the last couple of years shows that we are making progress. However, there are still key areas where dramatic change is necessary. In particular, we need to see more diversity in the pool of executive directors. And that requires a fundamental change inside each organisation.