Blogs & Comment

The eight traps of boardroom diversity

Companies are trying to build more diverse boards, but in doing so, they often fall victim to various traps.

(Photo: Ariel Skelley/Getty)

There are myths and vested interests in the movement toward boardroom diversity now underway in several countries.

In this post, I’ll consider the “traps” and embedded myths, and in a later post propose solutions.

1. The “Defining diversity downward” trap

“Diversity” itself as a word is used to shape the debate. The Australian Stock Exchange has a succinct definition: “‘Diversity’ includes gender, age, ethnicity and cultural background.” If diversity is undefined by a regulator (such as in the United States), or there is inadequate guidance provided to companies, then firms can define diversity to suit their own agendas, such as diversity of perspective, training or educational background. This can lead to a board comprised of almost all white males claiming to be diverse when it’s not.

2. The “Business case” trap

You’ll hear the following both from those arguing against diversity, and from those attempting to advance it: “Show me the business case.” Peer-reviewed empirical evidence has shown mixed results when it comes to the effect female board members have upon corporate financial performance. Then again, the effect of boards as a whole on financial performance is also mixed. Engaging in this debate is a distracting, non-winning proposition. The case for diversifying boards should be based on how it affects debate and decision-making within the boardroom, and on the full use of available talent and equity arguments (read: it is the right thing to do). It shouldn’t be based on downstream financial outputs.

3. The “Be careful” trap

When women or minority directors are advanced, sometimes the response is “Be careful, as we need qualified directors.” This assertion lacks any empirical support whatsoever. Proponents of this myth should bear the burden of establishing how women or minority directors are not “qualified” to sit on boards, and indeed what it means to be qualified to sit on a board.

4. The “Entrenchment” trap

Stanford researchers contend that only 2% of directors who step down are dismissed or not re-elected, out of a total universe of 50,000 directors. In other words, 98% of directors retire voluntarily. This needs to change so there is greater board renewal and turnover. Term limits of nine years are now instituted in the United Kingdom, Hong Kong, Singapore and Malaysia. North American regulators should consider the effect prolonged tenure has on director independence.

5. The “We want a CEO” trap

The expressed preference for CEO-directors (current or former) is based on a myth unsupported by research: that CEOs make better directors. (It may also be that CEOs prefer like-minded and sympathetic supporters.) Giving primacy to CEOs also has the effect of excluding diverse directors.

According to a study, 80% of directors believe active CEOs are no better than non-CEO directors. CEOs tend to be stretched, bossy, poor collaborators, and do not listen. Only 46% of directors believe former CEOs are above average.

6. The “It’s whom you know” trap

This summer, I’m teaching a corporate governance course at Harvard University. One thing we’re looking at is executive recruitment vs. director recruitment. In the former, a short list of candidates is interviewed prior to making a choice, but in director recruitment, candidates are instead ranked (one, two, three and so on) and not interviewed. In the latter option, the first candidate is approached for a board position. The second and third candidates are approached only if the preceding candidate says “no.” This practice has the unfortunate effect of excluding unknown but highly qualified candidate directors. Everyone loses when directorship is based on patronage, favors or nepotism. The board is weaker as a result.

7. The “Prior experience” trap

There is no evidence of which I’m aware confirming that first-time directors are less effective than long-serving directors, or that the latter are more effective. The focus should be on underlying competencies, attributes and track record of accomplishment. Governance is a learned sport, just like anything else. And it’s not rocket science. Search firms and nominating committees should focus their efforts on validating and assuring competencies and intrinsics necessary to be a good director—integrity, leadership, mindset, industry track record, value creation process, shareholder representation, communication, commitment and specific functional skills. Do not use an arbitrary metric of prior experience that may or may not relate to the above.

8. The “Pipeline” or “Shallow pool” trap

The last myth states that women and minority candidates have not made it to levels with enough seniority and that the director talent pool is too shallow. I see no evidence that this is the case. Perhaps boards are not looking hard enough. In my experience, which includes resumé and profile assessment of some of the most senior C-suite professionals in North America, many of these candidates are markedly superior to the lesser-qualified incumbent directors. Perhaps the “pipeline” is full with qualified director candidates, and it is more than anything an issue of the recruiting mindset. As Deepak Shukla writes, “From my experience, every time I have attempted to start a discussion thread on the Institute of Corporate Directors’ group (mainly comprised of sitting board directors) on the subject of diversity, I have been greeted with a cold shoulder and an utter lack of responses!”

Next week I will propose solutions to address all of these problems, including action that should be taken by shareholders, search firms, nominating committees, industry associations and regulators to make boardroom diversity a reality.