Board Composition and Diversity – Where to start?

Companies have begun to realise the importance of a diverse and well-composed board of directors; shareholders and regulators have also insisted on this, as there is a documented correlation between director diversity and board performance. The ASX Corporate Governance Council makes this plain: “An effective board is one that facilitates the effective discharge of the duties imposed by law on the directors and adds value in a way that is appropriate to the particular company’s circumstances. The board should be structured in such a way that it has a proper understanding of, and competence to deal with, the current and emerging issues of the business; exercises independent judgement; encourages enhanced performance of the company, and can effectively review and challenge the performance of management.” For a board to have the understanding and competence needed to perform well, diversity is needed not only in terms of gender, but also in ethnic origin and background, in age and in skillsets. This explains why the New Zealand investment fund manager Simplicity has put the largest 49 New Zealand companies (which Simplicity invests in) on formal notice to fully diversify. “Last year we said that New Zealand companies have five years to fully diversify, which allows for normal board rotation. The clock is ticking,” warns Fund Manager Sam Stubbs. So where to start? Board evaluations are the first step, followed by a board matrix of sufficient analytic complexity. Then a broad and granular search for new board members will find the right people to make the board perform better.

Boards should start with the right technology

The process of effectively diversifying a board today is critically enabled by technology. Board evaluations work best when managed through Modern Governance tools that manage questionnaires and analysis of results. The board matrix should be expanded through research, but also through discussions held in the boardroom with board members, with the nominating governance committee, and with the CEO. Board management software helps arrange and to provide a secure environment for these discussions. Then research technology should enable the search for new board candidates to be really granular, going well beyond the usual parameters which boards use in recruiting new members. “In general, we tend to surround ourselves with people that look like us, think like us, and who value the same things we do when seeking new board members,” comments Carl Dorvil, director of Group Excellence Holdings. Instead, a more scientific approach should extend the search to different candidates with the background and skills the board needs, he adds.

Evaluating the board

The most basic issue with board evaluations is that all the directors, even the independent ones, are too closely linked to provide a fair judgement on their peers. ‘Cronyism’ is the word used by several experts: Recent research in Australia shows that, with a small group of ‘insiders’ present on a large number of boards at major companies, board evaluations wind up being too ‘soft,’ deprived of any real effort to boost performance. Modern Governance tools can assure that the right questions, the tough questions are asked. Then secure communication apps like virtual meeting rooms allow board members to discuss results without fear of leaks or intrusions. Board members should evaluate each other in terms of contributions to strategic thinking, leadership and commitment of the director, participation in board and committee meetings, communication and interpersonal skills of the director, ethical issues and dilemmas faced by the director and relationship of the director with the senior management.

Expanding the board matrix

The board evaluation should show where the board is performing well and where it isn’t. Refreshing the board should start with addressing the gaps in performance and determining how fresh blood and brains will help to fill them. Then the board matrix should be expanded in terms of filling these gaps. Where it is clear that the board lacks know-how in technology, or finance or in expanding markets, then a profile should emerge from the matrix for new board members who can bring in the needed experience. But boards should also consider gaps in terms of diversity: How many women are on the board? How many minority representatives – for example, there is an unfortunate lack of Maori board members in New Zealand. The average age of the board should be below sixty, if the company is to have an effective strategy that reaches Millennials and Gen Z.

Finding candidates to refresh the board

The search for new board members should be based on data and professionally managed. Using online search tools, a large number of candidates can be screened quickly, and those who can fill the gaps can be identified. After that, using board management software to manage the process, the board can securely review and discuss candidates, and eventually interview them.

Diligent Governance Cloud enables effective board refreshment

Diligent, the pioneer in Modern Governance, has created a set of tools to ensure that directors professionalise the board refreshment process. Diligent’s Board Evaluation Tool positions boards to get their evaluations done early and build on past data and successes. Boards can easily set up various question types and monitor submission of the evaluations completely online. The tool makes it ultra-easy to review the results because it produces visual graphics and Excel reports for further analysis. Automatic averages reporting is available to simplify the analysis process. For more information contact [email protected].