Until recently, the subject matter of board diversification was merely an exercise in corporate social responsibility (CSR), ethics, morality and regulatory compliance. Although the subject matter is nothing new under the sun, discussions surrounding board diversification have progressed well beyond the moral imperative to a new paradigm. More and more companies are finding that having a diverse board of directors is a critically essential component of a successful business strategy.
The responsibilities of the board of directors have been on the corporate agenda for a number of years. Acting as the agents of shareholders, board of directors are expected collectively to formulate practical and financial strategies for the organisation as well as to monitor the effectiveness of the organisation’s traditional practices. The board of directors form one of the core pillars of a full-bodied corporate governance framework. This, according to ACCA’s report: Diversifying the board – a steps towards better governance, is evidenced by the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance stating that ‘the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders’. As a result, this leads to the central concepts of corporate governance. ‘Recent academic literature suggests that one of the ways to enhance corporate governance, arguably, is to diversify the board,’ states ACCA’s report.
In today’s exceedingly competitive marketplace, there are extreme demands and high expectations from constituents, investors and external stakeholders exerted on businesses’ board of directors in warranting good business management and delivering favourable results. At the moment, there is a growing trend of interest among stakeholders in the idea of bringing diversity to the board. Greater emphasis has been placed on filling the gaps on a board with diverse individuals who can bring both a fresh and unique perspective to boardroom issues. But what is board diversification and how much diversification is enough? There is no uniform definition of board diversity. By tradition, one can think through factors such as age, race, gender, culture, educational background and professional qualifications of the directors to make the board a lot less homogenous. Many interpret board diversity by considering such less tangible factors as life experience and personal attitudes. Principally, board diversity aims to cultivate an all-encompassing spectrum of characteristics and demographic attributes in the boardroom.
The cry for board diversification is loud and clear. While many organisations are making headway in creating a more diverse and inclusive board, a great deal of progress still remains. Diversifying the board is still more of an agenda item than reality in various organisations. Fortunately, there a number of strategies those organisations can employ. Firstly, to diversify a board, constituents must to look beyond traditional skills and knowledge for a competency-based board. Secondly, stakeholders are required to thoughtfully deliberate not only what the board’s current gaps are, but also to what the future needs of the organisation will be. A well-articulated strategic plan with comprehensive stakeholder engagement navigates the main direction for the organisation including the priorities that should be focused on over the next couple of years. This will subsequently advise on of the necessary skill set and industry knowledge to propel the organisation forward.
Diversifying the board has a number of benefits and provides organisations with unique competitive advantages. According to ACCA, these include
- More effective decision-making
- Better utilisation of the talent pool
- Enhancement of corporate reputation and investor relations by establishing the company as a responsible corporate citizen
Diversity has become an inescapable fact of life and it is argued that board diversity reflects the diversity of the society and community served by the organisation.