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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.

Getting on Boards ~ Practical Pointers That Work

Do you think the average board can afford to pay a search firm $80,000 to recruit a director? Of course not.

One major shift is the impact of technology and diversification of boards on creating recruitment opportunities for new and often first-time directors.

Here are the opportunities and advice for becoming a member of a board of directors, based on recommendations I have given to directors, executives and boards.

1.      Network, network, network – and now “connect”

LinkedIn, online databases and other social media tools (e.g., groups) are now at least as —if not more— important as paper resumes, rolodexes, email, business cards and reference letters once were. Most prospective directors are 2-3 degrees of separation between themselves and the ideal board or decision-maker. Social media has enabled the playing field to become much more equal and accessible in linking supply (boards) and demand (directors), particularly for younger and diverse directors. Boards and directors would both be well served to use this new medium. It is efficient, effective and inexpensive.

Second, if you are aspiring to be a director, you should become known to advisory firms (law, accounting, consulting) as often they are asked to serve but can’t because they’re conflicted or it’s a liability issue: they can recommend you and look good. Advisors however are beholden to their clients, not the director. The person who best represents a director is the director.

Third, you should also be known by shareholders, who in the future may be nominating directors directly. See this new database for example.

But ultimately it is you who best represents your interests. The networking rests with you, not an intermediary.

Also, become a member of the ICD, NACD or IoD or one in your country (AICD, IoDSA, NZIOD, etc.). It is a wise investment, for education, webinars and networking.

2.      Target and tailor your search

Volunteer, advisory, charitable, hospital, university, college and government (“crowns” as they are called in Canada) corporations all have boards. There are 100s if not 1000s of boards, including in your local community, and they all need directors on an ongoing basis. Many have (or should have) online application platforms. See Ontario for example, or federal government boards. Registration is (or should be) free. Director associations also have online registries for members. See here and here. These are excellent as well.

Target your contacts – the top 25-50 best list say, who really know you and can vouch for you, to people they can recommend (often it’s the 2nd or 3rd degree of separation that counts).

Read papers and online as more and more board positions will be advertised, but again it is who you know and your networks that really matter.

Target boards with term limits, high turnover and diversity. Approach them directly, including being introduced to directors or the chair of the nominating committee on LinkedIn or otherwise, via your connections. You don’t need an intermediary to make contact with the right board or director.

Be patient, tactful but deliberate too, in promoting yourself, that you are available, have the time, and would be a good director.

Also, don’t listen to people who tell you that you need to wait to be “asked” to serve. This is a veiled attempt to suppress you. Position yourself to be in the right place at the right time (luck is preparation meeting opportunity).

2.      Manage your resume and profile

Your resume (or even LinkedIn profile) will get you the interview. Your interview will get you the position.

Most cv’s I review for directors can be improved. They are for hierarchical and command-and-control organizations and managerial positions, not a board of directors, which is a group of peers.

Good boards now have competency matrixes (I recommended this and we are one of the few countries with this requirement explicitly). The NACD has also endorsed the idea of a skills matrix. Boards want to see core competencies you bring to the table, and how your background and experience support these competencies. Prospective directors need to connect their portfolios seriatim to the competencies and other attributes looked to, for and by directors. The four most important are leadership, financial literacy, industry knowledge and softer skills such as impact, influence, teamwork, integrity, communication style, and a bias to learn. And leadership is by no means synonymous with “CEO,” but includes NFP, SME, professional, project and issue leadership as well. Bring your top competencies up front, and have no more than six to eight.

Also, leverage your contacts, languages and international experience, particularly in emerging markets or where the company and management team wants to be (in particular China and India). Don’t rule out serving on boards outside of Canada who seek trade or do business with Canada.

Attend conferences, speak, sit on panels and manage your profile so you become known in the industry or sector you are targeting.

3.      Get educated on governance and serve for the right reasons

If you have been out of school for 20 years, get some governance education. The world has changed, and this field is turning over constantly since 2002. The Institute for Corporate Directors, Directors College, and the National Association for Corporate Directors offer excellent programs. There are excellent programs at Stanford, Harvard, Kellogg and The Directors’ Consortium. Spend the time and money to become current, and be seen to be. Also, join a LinkedIn group, such as Boards & Advisors. (It’s free!)

Don’t worry about money when serving on boards. Most directors serve to contribute, network, make a difference, have fun, stay young, and learn. The experience you gain can be leveraged into larger paying boards later.

 

4.      Prepare for the interview

Your interview and references will get you the board position.

Take the interview very seriously. Every word coming out of your mouth matters and will be scrutinized. You will probably be interviewed by two or more directors or the nominating committee. Prepare a binder with highlights and stickies. Bring it to the lunch or meeting. Know the business; know the company and management team; know the accounting and measurement issues for the policies and estimates; know the competitors; and know the top strategic issues. Show you will hit the ground running and add value. If the board is important to you, take at least a full week to prepare. It will make a difference and will be noticed.

And have references and sponsors that can absolutely go to bat for you (who have known you for 20 years, who may not necessarily have profile).

5.      Negotiate effectively at all stages

 

Being asked onto a board is a bit of a dance. Create a demand and don’t look desperate: position yourself as a valuable commodity who can contribute. There are certain questions you should ask however to determine the right fit. See my article here.

6.      If you have been on the board over 9 years, it’s probably time to go

 

Now it’s time to address current directors. It is very hard for shareholders to “fire” directors at present, but this too will likely change in the next few years.

At present, what is holding board turnover and renewal back are directors who place personal interests ahead of those of the organization. This is an integrity issue. No director is irreplaceable. If a director has been on the board over nine years, regulatory best practice is that that director is no longer regarded as independent. Such directors need to do the right thing and step down to make way for succession and renewal.

This means chairs have to have tough “let’s have a chat or take a walk” discussions with these directors, and lead by example. If the chair is the problem him or herself (more than five years, let’s say), then a group of directors or the chair of the nominating committee should “have a chat” with the chair. Lifetime appointments and directors serving 10-25 years are blocking renewal of new directors. Succession planning and term limits should be explicit to avoid directors who stay on way past their best before date and create uncomfort for colleagues and prospective directors. This is not a discriminatory issue but is a matter of renewal and good succession – the same as the board requires for management. Boards must lead by example. Management knows when a board is dated and is less useful to them.

7.      Choose your first board and industry wisely and invest the time

Your work on your first board will determine your second, third board and so on – like your degree after college gets your first job, and your performance then on after is what matters.

The first few boards are the hardest, take the most time, but mean the most.

Count on spending 200-300 hours all in, per board, especially if you are not from the sector. This figure may be across all boards, from public companies to not-for-profits. The risks, obligations and liability may be no different.

Don’t over extend or over promise; the directors on your first board will be your referees for your second: so choose wisely.

On your first board, have mature confidence, leadership, judgment and contribute and communicate. Be polished and a team player; but be independent, competent and rigorous.

8.      Be mentored and leverage onto other boards

Lastly, find a mentor and get candid data on your performance, right down to tone, words, preparation, style and contribution.

Go from not for profits, to health, education and government boards, to private boards, to SME traded, to traded large over 4-8-10+ years: have a governance trajectory.

Above all, be positive and patient: the whole field is changing.

 

The Boardroom of the Future: Changes that will reshape corporate governance

A global “mega-cap” company recently asked me to submit a briefing on how a boardroom of the future will look. This is an abridged summary of my report.

Democratization of governance

Your shareholders will nominate and elect your directors by electronic voting directly on your website. They will base their vote on the accomplishments of each director and track record of acting in the best interests of shareholders and the company overall.

Electronic registries and meetings will be the primary basis upon which shareholders select directors to your board. Director competencies will be fully disclosed.

Diversification of boardrooms

Your board will be 40% to 50% women and have far fewer CEOs on it in the next five to seven years. Your directors will be independent experts within their relevant strategic domains, will be quick studies, and will have access to the best learning of the company. They will request an Office of the Board be established. Board tenure will not exceed 9 years.

Corporate reporting

Reporting to shareholders will be fully integrated and online. Non-financial risks and internal controls will be independently assured. All reporting will be accessible, complete, accurate and independently validated.

Technology

Your board will be paperless and directors will have access to any piece of information they need to oversee and advise management. Technology will be used to attract and communicate with international directors. Risk appetite frameworks, established by the board, will translate into clear incentives and constraints using integrated firm-wide information systems.

Executive compensation

Executive compensation will be established by shareholder-directors. Professional standards will be imposed on any consultants retained by these directors. All compensation will be fully risk-adjusted and linked to performance. Current models and methods will change significantly.

Office of the Board

An Office of the Board will be established. It will house independent staff and resources available and accountable to the board and paid by the company.

 

Regulation of corporate governance

The unprecedented intrusion into the governance of companies will continue until most or all of the above reforms are implemented.

Conclusion

The above changes are significant and will fundamentally change the way directors are selected and how boards control management.

Canada’s Absence from the Global Movement Towards Diverse Boards of Directors

On Monday August 21st, I am delivering the opening keynote address to the annual Canadian Society of Corporate Secretaries conference in Quebec City. (See my PDF slide deck with embedded links here). It is beneficial that the conference is being held in Quebec City this year. In Quebec, Premier Charest mandated into law in 2007 that by December 2011, boards of directors of all Quebec enterprises need to be comprised of an equal number of men and women, and that the cultural make-up of boards reflect more the ethnic diversity of Quebec.

Quebec City academic Marie-Soleil Tremblay was also a part of a working group of eight Canadians who addressed board diversity in a submission that was recently made to the European Commission, which is contemplating introducing initiatives to make boards of directors within European Union countries more diverse. (See the group’s report here and the European Union “Green Paper” on proposed corporate governance reforms here (PDF). The questions on board and gender diversity are 5 and 6.) I plan to draw on our group’s submission in my address. The diversification of Canadian boards will be my opening topic. I also plan to show this video provided to me by Catalyst in the US.

With the exception of the Province of Quebec, Canada has been noticeably absent from the global boardroom diversity movement. Major initiatives by market regulators – ranging from disclosure of diversity plans, to self-imposed objectives, to full-fledged board quotas – in the US, UK, Australia and a number of European countries are well underway. At a the 2011 Institute of Corporate Directors Fellowship Awards Gala, Spencer Lanthier, who was one of four Canadian directors honored, called boardroom diversity “the number one issue in corporate governance right now” and that boards should just “get on with it.”

It is difficult without some form of government leadership (e.g., disclosure of diversity plans in a “comply or explain” manner), similar to that of other countries, to expect corporate boards to “get on with it,” given that boards are of a limited size and bringing on a woman by necessity might require removing a man. Both women and men tell me in confidential interviews that the system is presently “stuck.” The figures in Canada for women on boards have hovered around 8-14%, depending on the survey, and have been stagnant for many years, with only small upticks. Australia recently reported, after the Australian Stock Exchange required companies to state diversity objectives and progress towards meeting them, a whopping 600% increase in women being appointed to corporate boards in just two years. Now women comprise 30% of all new director appointments. The figure used to be 7.5%.

There is no reason women should not comprise a similar percentage of all board appointments in Canada. In the aftermath of the financial crisis, which include scathing reports (here and here (PDF)) documenting governance and regulatory breakdowns, governments want to make sure that boards can be as strong as they possibly can be. There is academic evidence that women make better monitors within boardrooms and that men even enhance their performance when women come on to boards. (See my article in English, here, and in French, here.) There is also a case to be made that group-think (which means groups agreeing too much by virtue of similar background and social pressure to conform) is counteracted with greater diversity, in all forms (women, visible minorities, Aboriginal Peoples and people with disabilities). Beyond the academic case however, the business case is that having diverse boards ensures access to a broader talent pool of Canadian directors, as Canada increasingly sees China, India and Brazil as trader partners and our companies need to compete in the global marketplace.

The case against gender diverse boards is that many or most women are not former CEOs and do not have broad-based, business experience, with direct responsibility for profit and loss, which is helpful experience for boards. Yet there is scant academic evidence that CEOs make better directors. Moreover, enterprise leadership includes not-for-profit, professional firms, and divisional leadership within companies, as well as “up-and-comers” in the executive suites, such as CFOs and COOs. Competency matrixes (required for boards under National Policy 58-201 Corporate Governance Guidelines, section 3.12) now include skills such as social media/technology, sustainability, human resources, and public policy, where women are particularly strong. Expatriates with international experience (in India and Asia) who know the players and the markets are of enormous assistance to management teams when they sit on boards.

It is also not the case that diverse directors cannot be found, or the pool is too small, which is another argument against diverse boards. My LinkedIn® Group, Board Advisors, for example, includes 460 members. My profile alone has over 800 connections that include practicing directors and prospective directors at the top of their game. I am interviewing over 100 directors for my research and half of them I expect will be female and many will be visible minorities. There is a rich network of very well qualified directors out there for board positions. Search firms and nominating committees of boards would be well advised to look harder, and more creatively. The world has changed and prospective directors cannot simply be found at private clubs like they used to. Canada has incredibly talented directors, and we need to use all the available talent we can.

The benefits for board diversity are enormous. Boards need to get on with it, yes, but so do our government and regulatory leaders in providing that extra “nudge.” Having companies disclosure diversity plans, for the board, senior management and the company as a whole, is a needed first step.

 


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