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Gender diversity on boards: My discussion notes

I have been asked to serve on a panel in Toronto next week, 20 October, and in NYC on November 12, 2013, to discuss gender diversity on boards.

Here are my discussion notes for both panels if readers are interested: https://dl.dropboxusercontent.com/u/79214614/Richard%20LeblancTorNYCGenderDiversityNotesOctNov13.docx

The links to both panels are here:

https://111213newyork.eventbrite.com/

https://www.wxnetwork.com/board-diversity-a-time-for-women-to-lead/

Richard Leblanc

My submission on gender diversity to the Ontario Securities Commission

There was a consultation paper put out by the Ontario Securities Commission, Canada’s largest securities regulator. See the paper here, which calls for responses on page 20, and deadline was extended to Oct 4, 2013.

Here is my letter in Word, here.

 

Additional notes for Corporate Secretary Think Tank Canada Panel, 2 October 2013, on Gender Diversity on Boards

Additional notes for Corporate Secretary Think Tank Canada Panel, 2 October 2013

Panel: Gender Diversity on Boards, 1:45-3:00pm

Methodology

The following reflects, in no particular order, (i) my work in advising regulators (e.g., OSFI, OSC, AGCO, FiCom, others) in respect of governance (including diversity and director competencies); (ii) interviews with male and female directors concerning diversity; (iii) my advice and assessment of award winning boards known for leading diversity practices; (iv) my work with governance reforms in recommending women to all male boards, and improving director recruitment, assessment and retirement practices. The data collection has included individual director interviews and observing the board in action.

Diversity red flags include, in no particular order:

  1. Self interest by over-boarded and/or over-tenured male (and on occasion, female) Directors who wiggle or refuse to go, buttressed by unsubstantiated anecdotal belief or myth, such as CEOs make better Directors, women are not “qualified,” or there are not enough qualified women Directors to be found, typically within their own networks, etc.;
  2.  Applying industry “experience” to prospective directors and not to incumbent Directors: Blocks women, and regulator has never used word “experience” to my knowledge;
  3.  “CEO” preference, where CEO has never been used by a regulator, nor is this title determinative of director performance, nor is it a competency or a skill: Use “enterprise leadership” or “leadership” instead;
  4. A preference for CEO directors is not evidence-based, including the views of directors themselves: CEOs are seen as dominant, poor listeners, and stretched, and 80% of directors do not believe active CEOs are better directors than non-CEOs: “Are Current CEOs the Best Board Members? CGRP-18,” Stanford University, 2011). Directors who are retired CEOs are not seen as better than average board members by a majority of other directors (ibid.);
  5. Perversion of the competency matrix requirement (NP 58-201 3.12-14), focusing on “experience,” when the regulators (including whom I have advised) use “expertise” (OSFI) and “competency” and “skills” (OSC/CSA); Expertise (my view, not in regulation) = SKEET (skills, knowledge, education, experience and training), meaning experience is but one way to acquire expertise. Competency can be defined as: a cluster of related knowledge, attitudes and skills that affect a major part of one’s job; that correlates to performance; that can be measured against standards; and can be improved via training and development (S. Parry, “Just What is a Competency,” June 1998). Expertise and competency are broad concepts, in other words;
  6. Larger issue permitting self dealing and preference: There is opaqueness and regulatory temperance as to what it means to be “qualified” to be a Director, even on a public company board in Canada. The requirements are minimalist: You do not even need to be financially literate, at least initially, even to serve on an audit committee: You need to be over 18, not bankrupt, and not insane (and found to be such by a court). There are no requirements for continuing education or a code of conduct, unlike other fiduciaries;
  7. Academic evidence is that busy boards (a majority of busy directors on three or more boards) contribute to worse long-term performance and oversight, and that over-tenured directors (beyond nine years) diminish firm value [see my Activist panel notes and references];
  8. Evidence is women augment male director attendance; gender diverse boards allocate more time to monitoring; and “CEO turnover is more sensitive to stock return performance with a greater proportion of women on boards” – in other words, gender diverse boards are more likely to fire a non-performing CEO (Adams and Ferreira, 2008). Note also busy boards (see above) are less likely to fire non-performing CEOs (Fich and Shivdasani, 2006). Keep in mind: The choice of CEO is the most important decision a board makes and has the greatest affect on company performance;
  9. Not recruiting first time directors: Focus on board “experience” (rather than governance expertise) blocks women, whereas 80% of directors serve on only one board and no empirical evidence confirms multiple directorships contribute to performance and oversight (indeed the evidence is the opposite);
  10. Recruiting Directors previously known to the board may be at variance with the Board’s ability to push back (constructively challenge) against each other and Management
  11. “Boards with more directors that didn’t have prior relationships with other directors tend to address affective conflict more quickly than boards where directors had prior relationships.  I believe this is because of the deleterious impact on extra-boardroom relationships – directors with prior relationships don’t address affective conflict because they don’t want their behavior “corrections” to impact the prior business dealings (or relationship) they have outside the boardroom.” (SCharas, PhD candidate, email to the author, whom the author is supervising (disclosure));
  12. In other words, men may be “conflict-averse” (which perpetuates boardroom groupthink and management capture) because there is a greater cost due to relationships (social, economic, political, religious, other etc.) outside of the boardroom, because these Directors, in turn, were recruited because of this relationship and personal knowledge;
  13. “A prior study published in the HBR has found that teams that have women on them out-perform those that don’t for overall team effectiveness.” (ibid., Solange Charas, email to the author, 28 September, 2013) (http://hbr.org/2011/06/defend-your-research-what-makes-a-team-smarter-more-women/).
  14. Lack of robust independent director assessment, with consequences and direct link to re-nomination: perpetuates non/under performing Directors and frustrates renewal:
  15. Blockage of third party reviews of board and director effectiveness, by Manager or a Director: Regulators now are requiring regular third party (objective) reviews;
  16. Boilerplate one sentence disclosure of board effectiveness review;
  17. Lack of Canadian political leadership (until very recently in Ontario): Canada (other than Quebec) is late to boardroom diversification;
  18. Lack of agreement among provinces and stalling of corporate governance guideline development, including director recruitment, expertise and tenure (Canada is one of the few industrial countries that has not updated listed company requirements until before the financial crisis – NP 58-201);
  19. Use of largely binary regulatory guidelines [NP 58-201] governing director recruitment, rather than principles and practices that achieve the objectives of the principles [OSC proposal in 2008]: Leading practices are omitted, and undue deference / influence to those with vested interest in the status quo [read: conflicted], including stakeholders, who may be a vocal minority in the public debate or on a Board;
  20. Gamed or otherwise defective director bios (puffery, positions, roles occupied over a career), rather than disclosure of specific competencies and skills, at board and committee level, underscored by how and when the competency and skill was acquired, and how each competency contributes directly to the value creation plan and oversight of the company and its Management;
  21. Defining diversity expansively / downward to include almost anything (e.g., perspective, thought, viewpoint): Blocks women;
  22. Trade associations, funded by memberships, beholden to status quo members: undue deference to those with vested interests: Blocks women;
  23. Gaming of retirement age (69, 70, 72, now 75) and resistance to term and directorship limits by self-interested Directors;
  24. Resistance to competency matrix disclosure and transparent director nomination and selection practices: inadequate regulatory guidance;
  25. Undue influence of Management on the competency matrix (design and administration), whereas Nomination Committee must be independent (including its work);
  26. Pro forma management friendly governance documents proffered by management counsel or developed by Management (conflict in either case) vs. the Board or Committee or independent counsel, accountable to the Board, not Management;
  27. Gamed or defective director competency matrix (matrix not disclosed; competencies ill-defined, or unbalanced; scale ill-defined; no third party check): permitting fuzziness and back-dooring of preselected candidates, often known to one Director [see above study and “Friends Don’t Let Friends Join Their Board” by Amanda Gerut, Sept 30, 2013 (proprietary – see AgendaWeek.com);
  28. Pre-ranking and not interviewing prospective Directors; Not disclosing origination of a Director (how he or she came to be known to the Board);
  29. Not consulting with major long-term Shareholders on prospective Directors, and institutional shareholders, further, and perhaps more importantly, not having a roster of qualified directors and advancing proxy access;
  30. Search firm who also assists Management (executive search – conflict), or reporting to a particular Director (as opposed to a Committee), or not behaviorally validating Directors through rigorous processes: No code of conduct or industry practices for director search firms; and
  31. Matrix analysis by corporate secretary or general counsel who do not possess independence or expertise to do so.

Richard W. Leblanc, PhD

 

Ontario at last moving towards board diversity

It took Canada’s first female and openly gay Premier, Kathleen Wynne, less than three months to express strong support for gender diversity on corporate boards (see page 291 of the Ontario budget, and a radio interview earlier this week with the Minister Responsible for Women’s Issues, Laurel Broten.

Diversity is not a priority for the Harper government. A committee has been formed to study the issue. Concrete action is needed, not committees or more talk. Numerous countries have pressed forward with diversity legislation since the financial crisis. Canada, with the exception of Quebec, is a noticeable exception. Our numbers are terrible.

Why did Wynne do this?

We have hints in her remarks after she became Premier and in her leadership speech at the Ontario Liberal Convention.

“We are a people rooted in diversity,” she said. “That’s how we came here. That’s who we are.”

“We are all capable of so much… I’ve offered myself to you as leader because of that optimism. Because of that love, that potential, and that possibility. That is what drives me.” [emphasis added].

See at 11:21 here:

“Can a gay woman win?” Wynne went on to say that the Province has changed and that “I do not believe the people of Ontario judge their leaders on the basis of race, sexual orientation, colour or religion. I don’t believe they hold that prejudice in their hearts.” [applause].

“They judge us on our merits, on our abilities, on our expertise, on our ideas. Because that is the way everyone deserves to be judged.”

You could just as easily insert directors and shareholders above:

[I do not believe shareholders judge their directors on the basis of race, sexual orientation, colour or religion…

Shareholders judge us on our merits, on our merits, abilities, and expertise. Because that is the way everyone deserved to be judged.]

For Ontario, where our largest stock exchange is located, this is a welcome breath of fresh air. I have taught and advised 100s of women who are enormously frustrated at the blockage on boards by over-tenured, over-boarded, entrenched pedigree directors. It is high time this changed and “comply or explain” using the Australian model is the best Canadian way to address diversity in my view.

See the Australian definition of diversity and broader diversity website:

“Diversity at ASX refers to all the characteristics that make individuals different from each other. It includes characteristics or factors such as religion, race, ethnicity, language, gender, sexual orientation, disability, age or any other area of potential difference. Diversity at ASX is about the commitment to equality and the treating of all individuals with respect.”

Ontario should define diversity explicitly and then have companies disclose their objectives and progress against that definition, both for boards and for senior management. It is important that diversity be interpreted as more than gender and Wynne’s background may have had a part to play in favoring the Australian model.

Business icon Warren Buffett has said women are the key to America’s prosperity. Richard Branson has weighed in on why we need more women in the boardroom.

After observing dozens of board meetings over the last fifteen years and interviewing hundreds of directors, the dialogue and behavior changes with women in boardrooms. More and different questions get asked, groupthink is avoided, and people come prepared. I have yet to see a single woman unprepared for a board meeting. I have seen dozens of men.

Directors should be selected on the basis of merit, not personal relationships.

What is needed is political leadership. We have this in the new Ontario Premier.

Diversifying Corporate Boards ~ How to Do It

There is a movement to diversify boards of directors in almost all industrial democracies as a result of the financial crisis. It has been termed “the number one issue in corporate governance.”

Diversity extends beyond women to include ethnicity, age and other areas. Depending on the survey and country, women on corporate boards have hovered anywhere from 10-15 % for several years. The statistics for non-Caucasians are worst, at about 3%.

Boards surprisingly are a self-selected and homogenous group. There is little ability for shareholders who own companies to propose or remove directors. The qualifications to be a director are minimal. There are no requirements for ongoing education and no license to practice, unlike other professionals such as lawyers, accountants or doctors. Past CEOs are preferred on boards, but the evidence does not support CEOs making better directors. And this practice discriminates against women and perpetuates reciprocity and favoritism.

Boards are a fixed size averaging about 7-10 directors depending on the company. Directors nominate people they know and feel comfortable with. To bring someone “different” on is, well, different, and someone else would need to go off the board. The pressure for the status quo is fraught with inertia and self-interest.

Governments have stepped in. On the one hand is the US approach, which is to require companies to disclose a “diversity plan.” On the other hand are full-fledged quotas, like the one proposed in Europe to have 40% of boards composed of women. In between both approaches is to have companies define diversity and objectives for diversifying their board, and report annually on progress. This seems to be the best approach.

The argument for diversity on boards is a “business case,” although there is no clear evidence that diverse boards create greater shareholder value. There is however evidence that diverse groups make better decisions and mitigate group-think, which is the tendency for similar groups to decide on the basis of agreement and social cohesiveness rather than the best decision, which could create dissent at least initially. There is also evidence that women make better monitors of management, and that performance of men increases when women join boards.

The other business case for diversity is a simple talent issue. By restricting boards to one type or class of director, boards are not making full use of available talent to match their stakeholder base. Women in many industries make the majority of purchase decisions. North American boards sorely need international directors from China, India and other huge markets. The last argument is perhaps the strongest – morality. Discriminating on the basis of prohibited grounds such as gender, race, military status, and sexual orientation or otherwise is not only unfair but also illegal.

So how do boards diversify themselves? What are leading practices the best boards are doing? Three steps:

Step 1: Recruit directors solely on the basis of competency, not whom you know

A board is a team. Team members have different abilities. “Competency” can include experience, skills, knowledge and behaviors. A good board draws up a matrix of competencies it needs on one axis and individual directors along the other. It defines the competencies and the scale, and then individual directors assess themselves relative to each other. If done right, it is apparent which directors may not be needed, and what competencies are needed in future directors.

Step 2: Recruit directors whom you do not know personally and who are first-time directors

 

Once you have the desired director competencies, the next step is to recruit directors who fill this gap. Cast your net wide and go beyond personal and professional networks. Have a diligent way of short-listing resumes and ask candidates to address the specific competencies you need. Conduct background checks, reference checks and individual interviews for open spots, as you would any other management position. Don’t be afraid to short-list diverse candidates whom you likely will not know, including first-time directors who have stellar qualifications your board needs. Most directors now serve on one and at most two boards; so admitting first-time directors is very common.

Step 3: Link director time on the board to performance

 

Have onboarding, coaching and development for new directors. Then, assess each director on his or her contribution at regular intervals. This is difficult to do if done in a superficial way or through a self-analysis given unconscious biases. Have a rigorous director performance assessment with assistance from an expert third party, and link the results to re-nomination. Each director competes for his or her own position every year. No guaranteed tenure or indefinite service.

Then, you should disclose the basis upon which directors are recruited, developed and assessed so shareholders can vote meaningfully on each director at the time of renewal or removal. This sets the tone that the board holds itself responsible and accountable to shareholders in the same way it expects management to be accountable to itself. Your board and organization will be the better for it.

Lastly, expect that a current director who objects to any of the above best practices is doing so out of self-interest. When he objects (and it most often will be a “he”), it could include phrases such as “No one knows this person” or “This person is not qualified like we are,” which is code for entrenchment, ask this director to phrase all objections with the following language: “I believe it is in the best interests of the organization that…” This should address the objection.


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