The number one issue in corporate governance is the diversification of boards. Despite their claims otherwise, corporations are not doing a good job with diversifying boards. Boards are a self-selected and homogenous group. Nomination committees prefer people who are known to them or are drawn from within existing contacts. Furthermore, lack of turnover on boards slows any diversity initiatives. Furthermore, as a Spencer Stuart survey discovered, two thirds of corporate directors stated that they are challenged with "balancing all the interests at hand with those they believe are most important when looking to fill a board seat and responded that there is a lack of qualified candidates."
The results confirm this as the Canadian Board Diversity Council found. Only 150 out of 1000 Canadian companies had any diversity on boards.
What is the business case for diversity on boards? 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. 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.
So how do boards diversify themselves? What are leading practices the best boards are doing? Four steps:
Step 1: Recruit directors solely on the basis of competency, not on whom you know.
A board is a team. Team members have different abilities. "Competency" can include experience, skills, knowledge and behaviours. 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.
Step 4: Be prepared to be accountable.
Consistency and follow-through are the only means by which diversity can be achieved. We can expect that some current directors may object to these best practices. Change is difficult and upsetting the status quo is threatening. Objections may take the form of phrases such as "No one knows this person" or "This person is not qualified like we are." This type of thinking entrenches the board and perpetuates the problems that we have discussed. The board must hold fast to its vision to act in the best interests of the corporation. The evidence has shown that diversity serves corporate interests.
Finally, 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.