Diversity on the board
Increasingly, regulators, shareholders, and other stakeholders expect the Board of Directors to reflect the diversity of its broader stakeholder group and even society in general. A growing number of jurisdictions are encouraging – and some, particularly in Europe are mandating – quotas regarding the percentage of women required on the boards. In Norway, diversity in the boardroom is not only encouraged but required. In 2003, the government required that at least 40% of the Directors of listed companies should be women. Companies were given five years to comply. The figure is now 42% and a group of Norwegian women, nicknamed “the golden skirts”, have become multiple board directors.
Apple was compelled by shareholders to amend its Nomination Committee Charter by including the following “The Nomination Committee is committed to actively seeking out highly qualified women and individuals from minority groups to include in the pool from which board nominees are chosen.” The move followed objections from shareholders who said they were disappointed that the iPhone maker has only one woman on its eight-member Board.
In Nigeria, Banks have signed on to the Sustainable Banking Principles under which they have committed to appointing at least 30% female Directors and 40% Management staff from 2014. Details of gender positions are to be disclosed in their Annual Reports.
However, while regulators and stakeholder groups are focusing on increasing the percentage of women on Boards, diversity entails many more perspectives including ethnicity, age, experience, education, and professional expertise. Section 13.2 of the SEC Code of Corporate Governance enjoins public companies to develop a written, clearly defined, formal and transparent procedure for appointing Directors. The written criteria for selection should reflect the existing strengths and weaknesses on the Board, required skills and experience, its age range and gender composition.
In an article published by the Harvard Business Review in June 2011 titled “Defend Your Research: What Makes a Team Smarter? More Women”, the authors postulate that there is little correlation between a group’s collective intelligence and the IQs of its individual members. But if a group includes more women, its collective intelligence rises.
Greater diversity can help contribute to better decision making by the Board because it reduces the risk of “group think” or “expert” overconfidence that may be found among more homogenous Boards. Such Boards may also be able to generate new ideas faster, or bring ideas together in new and better ways. According to recent studies by Credit Suisse and Catalyst, increasing gender, generational and cultural diversity to a Board improves financial performance and good corporate governance.
In the light of the economic, regulatory, technological, and other changes occurring across industries and markets, Boards are facing additional challenges. Boards whose Directors had the appropriate range of expertise and experience only a few years ago may no longer be optimally aligned to address the depth and range of issues facing their organizations today. Consequently, many Boards need to review their composition much more frequently than in the past.
It is recommended that the Board should have a written Diversity Policy with clearly defined and measureable objectives. The Board Nomination or Governance Committee should be charged with the implementation of this Policy, which should be reviewed periodically in the light of changing circumstances. The Policy and its implementation should be disclosed in the company’s Annual Report and on its website.
In making Board appointments, the Board is enjoined to consider diversity in its widest sense and ensure that appointments are made on merit and having regard to an appropriate balance of skills, experience, independence and knowledge required on the Board. It is imperative for the Board to ensure that relevant skills, experience and personal integrity are not sacrificed on the altar of gender quota.