Insights From An Activist Investor

Assembling a diverse group of directors is a good start, but it takes strong board leadership to create a culture that embraces it.

Publicly traded companies in the United States have been adding more diverse directors to their corporate boards than ever before.

In 2019, a record 59 percent of the directors added to the boards of S&P 500 companies were women or men belonging to a racial or ethnic minority group, up from 50 percent in 2018.

 

While much more work needs to be done to improve board diversity, this is clearly a positive development. As an investor in numerous companies with homogenous boards, it has been our experience that improving diversity can significantly enhance a board’s ability to perform its key functions, particularly when gender, racially and ethnically diverse directors are added who bring new backgrounds, perspectives, and approaches to problem-solving to the boardroom. Many CEOs are facing the most challenging and uncertain business environment of their careers. Having a diverse group of directors to advise them on how to respond to issues and disruptions few have confronted before — including a worldwide pandemic, a lingering trade war, changing consumer preferences, and widespread protests over racial inequality — can be invaluable.

Boards, however, should not assume that they have done all they can to position their company to address these challenges effectively once they have assembled a diverse group of directors. A study we conducted on the impact of board diversity on the performance of boards subject to shareholder activism by our firm revealed that in order to ensure that a board benefits from enhanced diversity in the boardroom, it must have a culture that values diverse perspectives. The benefits of adding diverse directors to a board with strong professional credentials and unique perspectives can be significantly attenuated if they are not comfortable sharing their insights in the boardroom or if their insights are not incorporated into the decision-making process. As one experienced female director we spoke with stated, “You cannot underestimate the importance of a board’s culture. You can have all the diversity in the world, but it won’t matter if you don’t have the right culture.”

Strong board leadership can help a board get the most out of its members by fostering a culture that embraces the benefits of diversity. One of the most effective ways board and committee chairs can do this is by demonstrating a commitment to critically evaluating important decisions and considering a wide variety of perspectives to ensure that the board selects the best course of action rather than adopting the first satisfactory option identified.

There are a variety of techniques that board leaders can utilize to ensure that diverse perspectives are shared and considered during the decision-making process. These include encouraging directors to brainstorm alternative solutions to a problem and encouraging directors to play “devil’s advocate” and challenge a proposed solution before a decision is made. In some instances, a “whiteboard” approach to decision-making may prove helpful, whereby potential solutions are numbered and listed on a large sheet of paper or a whiteboard. Such an approach encourages directors to propose additional solutions to a problem and can help minimize interpersonal conflict by separating recommendations from the individuals who suggested them. Board and committee chairs can facilitate participation by soliciting the views of quieter directors and expressing appreciation when diverse perspectives or alternative approaches to problem-solving are presented. Finally, while vigorous debate and expressing dissent should be encouraged, board leaders should do their best to keep deliberations constructive by focusing directors on their common goal of identifying the best course of action for the company.

As discussion leaders, board and committee chairs are encouraged to experiment with these and other techniques to determine which ones they find the most effective. Ultimately, what is most important is obtaining buy-in from board members as to the importance of considering diverse perspectives during the decision-making process, not the techniques selected to achieve this end. If all directors see the value in this, boards will inevitably facilitate the exchange and consideration of diverse viewpoints just by making an effort to do so, enhancing critical analysis, constructive debate and collaboration in the boardroom.

Despite ongoing improvements in board diversity, a survey of 700 directors conducted by PwC in 2019 revealed that 43% of the respondents found it difficult to voice a dissenting view in their boardroom. An earlier director survey conducted by The Miles Group and the Rock Center for Corporate Governance at Stanford University similarly found that only 46% of the participants strongly believed that their board tolerates dissent. These findings indicate that many boards may benefit from examining their culture to make sure that it is not inadvertently discouraging directors from suggesting alternative solutions to a problem or questioning the consensus view in the boardroom. Only by working diligently to make sure that diverse perspectives are welcomed in the boardroom, drawn out during deliberations and incorporated into the decision-making process can boards ensure that they are taking full advantage of the valuable contributions all of their members are able to make.

Orignal article Published here

...we find that banks with more gender diversity on their board perform better once the composition of these boards reaches a critical level of gender diversity, corresponding to a board female share of around 13-17 percent.

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