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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.

Thirty-Five Canadian Boards with No Female Directors

In the remaining days of summer before the Labour Day weekend, given that July and August are somewhat slow months, I had an idea – a fun idea.

I thought about how many Canadian boards still have zero women on them. I did a search, assisted by some publicly available Catalyst data. As it turns out, there are many. I did not do an exhaustive search but here is what I came up with (there are more). I tried to cover industry and geographical spread, as well as high-lighting some recognizable Canadian companies such as Air Canada and others. Here is a list of 35 of the top 500 Canadian companies that are, shall we say, lacking given the movement to diversifications of corporate boards in several countries.

Look at all the men, and in most cases white men! Where are the women and minority directors? Do we not have qualified diverse directors to sit on corporate boards in Canada? (And note a number of the boards below contain men who are governance experts and who promote boardroom diversity!)

407 International Board

Air Canada

Algoma Central Corporation

Baytex Energy Corp.

Bruce Power

Canaccord Financial Inc.

Canfor Corporation

Catalyst Paper

CCL Industries Inc.

Central Fund of Canada Ltd.

Dollarama

Fairfax Financial Holdings Limited

FirstService Corp.

Genworth MI Canada

GMP Capital Inc.

Great Canadian Gaming Corporation

Hatch Ltd.

IAMGOLD Corp.

Inmet Mining Corporation

McCain Foods

Mitel Networks Corporation

North American Construction Group

Pacific Rubiales Energy Corp.

Patheon Inc.

Petrobank

Precision Drilling Corporation

Reitmans (Canada) Limited

Rocky Mountain Dealerships Inc.

Savanna Energy Services Corp.

SEMAFO

Tembec Inc.

The Jim Pattison Group

Toromont Industries Ltd.

Woodbine Entertainment Group

Yamana Gold Inc.

Yellow Media Inc.

Caveat: The above search was internet-based and may not be current. I also attempted to glean male-vs-female through first names and Google image searches when necessary. If I have made a mistake, I am happy to correct it and apologize!

Here is my offer to the chair of the board or chair of the nominating committee of any company below. If you are serious about addressing boardroom diversity, I will put you in contact – either myself or via another expert third party – with women who have business and C-suite experience in your industry. I may revisit this list in the future and hopefully you will not be on it!

 

Richard Leblanc

 

 

 

Diversification of Corporate Boards – Suggestions for Action

Last week, I presented “eight traps” limiting the diversification of corporate boards. Here I present some proposed solutions.

Leadership by Shareholders

Major institutional shareholders should commit resources to develop an electronic registry of prospective directors based on skills, experience and attributes. The technology exists and doing so will begin the dialogue of shareholders proposing prospective directors. In Canada, the Canadian Coalition for Good Governance (“CCGG”) and Ontario Teachers Pension Plan Board should develop registries. See how CalSTRS and CalPERS have done it.

Investor groups should propose model diversity policies, with best practice language, for investee boards to adopt, similar to what was done for majority voting and say on pay. Women and minority groups should be explicitly mentioned in the policy.

Leadership by Companies

Companies should disclose how prospective directors are assessed for board membership. This disclosure should include the use of a competency matrix, assessment of skills and experiences, candidate origination, advertising of board vacancies, short-listing, interviews, recommendation to shareholders, and mentoring and on-boarding practices. This disclosure should be public and on the company’s website.

Companies should adopt self-objectives for diversifying their board and senior management team, and disclose to shareholders progress in this regard annually.

Leadership by Regulators

Regulators should consider imposing a tenure limit of 9 years on company boards, as is done in other countries, including the UK, Singapore and Hong Kong. Regulators should provide guidance to companies on defining diversity and its benefits, including on debate and decision-making within the boardroom.

Regulators should provide guidance to companies on the transparency and disclosure of director nomination practices (see above), and give greater consideration to the role of investors can and should play in selecting and removing directors.

Leadership by Search Firms

Search firms should develop and adopt a rigorous and readily disclosed firm- or industry-wide code of principles and practice. The code should address methods firms use for validating candidate competencies; initial selection, short-listing and recommendation practices; conflicts of interest; confidentiality; remuneration policy; client loyalty; quality of service; assurance controls; and enforcement.

Leadership by Industry Associations

The National Association of Corporate Directors (“NACD”), Institute of Corporate Directors (“ICD”) Institute of Directors, and large shareholder associations (including pension plans and unions) should disclose CEO/President succession plans (referencing the skills and experience of the next CEO); the total compensation of the incumbent CEO; and the internal pay equity ratios of other officers within the organization. This disclosure is regarded as best practice for listed companies, and director and shareholder groups should follow suit. Such disclosure would provide member information and interest prospective CEOs (internal or external). The CCGG, NACD and ICD nominating committees should give consideration to appointing a next female or minority CEO with a value creation background (e.g., investor or entrepreneurial) as opposed to a compliance one (e.g., accounting or legal).

Industry associations should develop robust competency matrixes for company boards to use in selecting directors.

Some of the above suggestions may be controversial, but different models and techniques are needed if progress is to be made.

Eight Traps of Boardroom Diversity

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

In this first of two blog posts, I consider the “traps” and embedded myths. In the second blog post to follow, in about a week’s time, I will propose solutions.

Here are the eight “traps” as I call them.

 

1.         The “Defining diversity downward” trap

“Diversity” itself as a word is used to shape the debate. Australia has a succinct definition: “‘Diversity’ includes gender, age, ethnicity and cultural background.” If diversity is undefined by a regulator (such as in the US), or there is inadequate guidance provided to companies, then companies can define diversity to suit their own agendas, such as diversity of “perspective” or “training” or “educational background.” This leads to the unintended consequence of a board of almost all white males claiming itself to be diverse when it is not. To drive this point home, I usually post a cartoon of white males sitting around a board table stating that they believe they are diverse because they attended different private schools.

“Moving the Needle,” which is the subtitle for the diversity debate favored by a few groups, is another example suggesting minimalist change.

“Competencies” and “attributes” (or qualifications for directors) also need to be defined and disclosed more fully, on a director-by-director basis, because these criteria for director selection have implications for the diversity movement. “CEO,” for example, is not a competency. (See the “We want a CEO” Trap below.)

2.         The “Business case” trap

“Show me the business case,” opponents to diversity argue, and proponents attempt to advance. The fact is that peer-reviewed empirical evidence is mixed in the effect that adding women to boards has upon corporate financial performance, as is the effect of boards themselves upon financial performance. Engaging in this debate is a distracting non-winning proposition. Perhaps the business case for men sitting on boards should also be established. The case for diversifying boards should be based on the effect on 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), not on downstream financial outputs.

3.         The “Be careful” trap

When women directors are advanced, a response received is “Be careful, as we need qualified directors” (or words carefully spoken or written to this effect). This assertion lacks any empirical support whatsoever. It was offered in Quebec when the Premiere mandated that women must receive parity on Quebec boards and the cultural make up must match that of communities in which the company operates. 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.

When visible minorities as directors are advanced, such as African, Hispanic/Latinos and Asian Americans (whose proportion on boards are in the 1-3% range depending on the survey), the other “be careful” argument I receive is, to use the words of an Assistant Secretary of a large US company “corporate boards should not be designed to be all things to all people. It’s not necessarily in the best interest of a company to try to make the board look like the General Assembly of the United Nations, the U.S. Congress, or U.S. Supreme Court.”

My response to arguments like the above has been: “Listen, the numbers have flat-lined for women and minorities at 15-16% and 1-3% respectively for some time, so if and when boards look like the UN or we have too many women (which will likely never occur in my lifetime), then we can talk about hypothetical arguments. Until then, let’s confine ourselves to the evidence and the here-and-now. And, having multi-culturally diverse boards looking more like communities and emerging markets is especially important if a multinational company does business around the world.

4.         The “Entrenchment” trap

Stanford researchers content 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 UK, Hong Kong, Singapore and Malaysia. North American regulators should consider the effect that prolonged tenure has on director independence. Director tenure should be based on performance and it should be easier for shareholders to nominate and remove directors. Any board policy restricting entrenchment should not contain “grandfathering” (exempting existing directors) and should be decided by disinterested directors (and preferably shareholders) unaffected by the policy and free from undue influence of other directors or management.

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 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. Research also supports tenuous advantage of CEO-directors. Also, only 46% of directors believe former CEOs are above average.

“We want a CEO” may be “code” for women or minorities need not apply.

6.         The “It’s whom you know” trap

According to course materials I am using in my Harvard corporate governance course this summer, unlike executive recruitment, where interviews occur of a short list of candidates occur prior to making a choice, in director recruitment, candidates are instead ranked (1, 2, 3 and so on), and NOT interviewed. But rather, the first candidate is approached for a board position. The second and third candidates are approached only if the preceding candidate said “no.” There is no clear rationale for this anomalous recruitment practice and it has the unfortunate effect of excluding unknown but highly qualified candidate directors. It forces women into hyper-network mode because no interactive validation of competencies exist or opportunities to meet the nominating committee. This unfortunate practice perpetuates the “it’s whom you know,” mentality towards board directorship, rather than one’s competency and skills. 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 am aware confirming that first-time directors are less effective than long-serving directors, or the that the latter are more effective. The focus should be on underlying competencies and attributes and track record of accomplishment. See “Traditional benchmarks keep many women off boards…” Governance is a learned sport, just like anything else. And it is not rocket-science. The fact of the matter is that search firms and nominating committees should focus their efforts on validating and assuring competencies and intrinsics necessary to be a good director, such as integrity, leadership, mindset, industry track record, value creation process, shareholder representation and culture of equity ownership, communication, commitment and specific functional skills needed by the board – and not on an arbitrary metric of prior experience that may or may not relate to the above. The sooner this occurs, the better.

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

Women have not made it to senior enough levels and the director talent pool is too shallow, is the final myth. Show me the evidence that this is the case. Perhaps boards are not looking hard enough. In my experience, which includes resume and profile assessment of some of the most senior C-suite women 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 a mindset recruiting issue more than anything. 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!”

Join my blog next week where I will propose solutions to address the eight traps above, and action that should be taken by shareholders, search firms, nominating committees, industry associations and regulators to propel boardroom diversity into action.

Augusta Golf Club Needs to Get Real and Admit Women Members

CNN’s Piers Morgan, Masters winner, Bubba Watson, Donald Trump and National Association of Corporate Directors’ (NACD) CEO, Ken Daly, all weighed in this week on Augusta National Golf Club’s policy of excluding women members. See, if you are interested, the list of Augusta’s all-male membership roster, curated by USA TODAY, here.

Ken Daly, in an NACD webinar on ethics and capitalism, called Augusta’s policy of excluding women “DS,” which, he said, stands for “damn silly, in 2012, when women comprise 51% of the population.” Augusta’s policy was a trending issue in social media, including LinkedIn and the twitterverse, with governance leaders Sandra Rupp, Jayne Juvan, Frank Feather and Ray Williams weighing in. Even a petition has started to admit IBM’s first female CEO, Virginia Rometty, who watched on the sidelines with a pink jacket instead of a member’s green one. IBM is a major Masters sponsor and Augusta “has a history of inviting the company’s top executive to join its club.”

Why is the exclusion of women members by a private golf club a corporate governance issue?

It is an issue because all over the world now, in dozens of countries, there is a movement to the diversification of corporate boards and senior management teams in order to make better decisions. Director and executive recruitment and networking is done on golf courses. Excluding women has business consequences for them. This is also about corporate leadership and values of IBM and Augusta National.

Private clubs or associations are not islands. They pay taxes, often enjoying nonprofit tax advantages on behalf of taxpayers, and have corporate sponsors, advertisers, governing bodies (such as the PGA), customers, suppliers and local communities. Still, less than 1% of America’s golf clubs exclude women. This is a signaling issue in that it is okay to discriminate. By extension, stakeholders interacting with clubs that discriminate endorse and enable the practice.

This is also a membership issue for clubs themselves. I was asked by a new female board member last month to lunch to advise her on bringing governance reforms to a very prestigious club. As I sat in the dining room, it was almost empty. I remarked that female, minority and younger members were the future of the club, given changing demographics. And the club needed to “get real” about diversity, as well as its governance, and have transparent, inclusive policies. There is little if any substantive disclosure of how Augusta is governed on its website and how decisions are made. This is always a red flag for me and tells me an organization may not be person-proofed or have up-to-date policies.

Just in the last month, Julie Dickson, head of the Office of Superintendent of Financial Institutions (OSFI), the Canadian regulator for financial institutions, addressed in a speech the importance of boardroom diversity to avoid groupthink. (OSFI’s 2003 guidelines are expected to be updated by the summer.) The Conservative government announced in its budget an advisory council to promote women on boards, under the leadership of Minister Rona Ambrose. EU Justice Minister, Vivian Reding, also a woman, has indicated that she is prepared to use quotas if companies do not raise the number of women in senior management and on boards.

Golf is part of business. As Melisa Denis, Women’s Advisory Board member at KPMG, stated in the LinkedIn Group, Boards and Advisors, “I just came back from Augusta this weekend. If anyone doesn’t think this is business they are naïve. Business is done on the golf course – whether you are playing or not. To deny membership because the CEO is a female puts this country back 20 years (at least).”

Augusta National needs to “get real” about women members. Interestingly, the NACD is also offering events to discuss how corporate boards can “get real” about diversity too. Well done, NACD.


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