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Women on Boards: “If that’s all there is [to boardroom diversity] my friends, then let’s keep dancing.”

[musical accompaniment for your reading enjoyment]

 

For the record, I am a firm believer that women tend to have distinct cognitive biases from men, offering a healthy and natural counterbalance in the boardroom (and in society).  In fact, I would like to see at least 3 women and 3 men on every board (more of either gender, even if the numbers are uneven is probably fine), in order to help validate and legitimize their perspectives.

However, my big concern with focusing excessively on the issue of women on boards (and even social minorities) is the inherent risk of trivializing more profound diversity considerations, politicizing the process, polarizing the participants, and thereby undermining the overriding objective.  The value of boardroom diversity (in the broader sense of the term) is not simply a matter of social equity (and recently also legal liability), but more importantly one of economic efficiency, because it reduces transaction costs.

Board members are expected to provide direction on increasingly complex factors affecting the corporation. Complex systems are unpredictable and full of uncertainty, with unknown cause-effect dynamics.  Board members are therefore valued more for their good judgment than the validity of their decision-making.  Boards that shun uncertainty, in favor of simplified, familiar solutions become rigid.  Conversely, those that embrace uncertainty by being open to new possibilities become dynamic and more adaptable.

The broader concept of boardroom diversity addresses the means by which boards obtain information from a sufficient variety (see requisite variety: “the minimum number of choices needed to resolve uncertainty”) of sources (or perspectives) to reduce (rather than avoid) uncertainty.  These diverse inputs could come from many different places, such as various levels of management, employee assemblies, company site visits, regulators, consultants, educators, researchers, advisory councils, industry associations, investor roadshows, customer forums, supplier panels, accreditation providers, rating and benchmarking publications, corporate ombudsmen, whistle-blowing services, community town hall assemblies, and online social media; all comprising a comprehensive corporate governance system.

Gender diversity in the boardroom, although important, on its own is entirely insufficient for reducing uncertainty and improving boardroom performance.  Clearly, openness to diversity must be rooted in the boardroom.  Directors need to be inquisitive, open to new possibilities, accepting of conflicting or unpopular cognitive biases, capable of abstracting from numerous considerations, and adept at synthesizing concepts.  This would suggest that, by contrast, the ideal personality profile for a board member should not be so diverse, but instead more narrowly defined, such as the Myers-Briggs’ Conceptualizers – Intuitive Thinkers, or more specifically the INTJ personality type (see also requisite organization: “matching employee capability to job complexity”).  If so, it might be useful to assess the typical personality type of current board members (which I would guess to be Myers-Briggs’ Traditionalists – Sensing Judgers), in order to optimize board member nominating criteria for improving board receptiveness to diversity; something “traditionalists” would be reluctant to do.  So offering homogeneous members of nominating committees a selection of heterogeneous boardroom candidates is unlikely to have much impact on board diversity.

The full potential of diversity can therefore only be realized by changing the systemic factors that preserve rigidity (see adaptive capacity).  This can be accomplished only in part by exerting external forces, such as regulatory quotas or investor suasion, which are likely to improve simple diversity metrics (i.e. gender and visible minorities), but possibly at the expense of realizing the full economic benefits of boardroom diversity.  We therefore need to be clear about our objectives.  Are we promoting diversity for reasons of social equity or business value?  If both, then the former objective needs to be codified as a policy consideration when defining strategy for the latter, accompanied by a business justification.  For example, an Asian board member could easily be business-justified to support strategic initiatives in Asian markets.

Contrary to conventional wisdom, boardroom diversity is not the responsibility of nominating committees. Rather, it is the responsibility of the governance committee.  Whereas the latter is responsible for defining board policies, nominating committees are responsible for complying with them.  The fact that most publicly listed companies combine the nominating and governance functions into one nominating and governance committee actually undermines the governance committee’s policy making responsibility by relegating diversity considerations to the nominating function.  I was pleasantly surprised to learn that, according to the Spencer Stuart Board Index 2011, 61% of S&P 500 boards have some kind of diversity policy.  However, knowing that human nature resists self-restraint, I was not surprised by the study’s finding, “Diversity is on the agenda, but the reality seems to suggest otherwise;” suggesting that nominating and governance committee members were generally reluctant to tie their own hands with highly prescriptive nominating criteria, preferring instead to retain flexibility in exercising their judgment.  There is likely a built-in, systemic disincentive for nominating and governance committees to codify stronger policies for board composition; tending toward simplistic generalizations and platitudes on visible (politically acceptable) diversity criteria, over specifics about the more fundamental and nuanced performance aspects of boardroom diversity.  Moreover, as diversity is a broader, structural consideration for resolving uncertainty in boardroom decision-making, it is clearly a governance committee responsibility; distinct from the nominating function.  Boardroom diversity initiatives should therefore begin with chairs of governance committees.

Despite its exalted virtues, boardroom diversity is fraught with risks of not only disrupting the status quo, but actually backfiring (see Why Diversity Can Backfire On Company Boards) to cause boards to become dysfunctional.  Governance committees should, therefore, mindfully initiate diversity initiatives by designing and orchestrating conditions for boardroom receptiveness in advance of introducing “diverse,” new board members.

Nevertheless, I applaud CalSTRS and CalPERS’ support for GMI’s Diverse Director Datasource initiative (3D).  It not only facilitates the process of implementing boardroom diversity programs, but also broadens the contextual platform for reforming our corporate governance systems with a more comprehensive boardroom diversity mandate.  In fact, I feel honoured and encouraged that my own director candidacy profile was recently accepted by 3D; notably for the diversity of my perspectives on how to fix the boardroom, rather than any visible diversity characteristics.

It’s time for dancing lessons my friends.

 

 

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