Bringing diversity on board

In just a couple of decades, everything has changed for business. The corporate world continues to be rocked by tidal waves of technology and person-centred change whilst trying to stand firm on shifting sands of economic unpredictability and geopolitical instability¹.

The role of the non-executive board remains deeply rooted in corporate legislation and governance. They oversee, constructively challenge, and hold to account the management in their implementation of strategy within the constraints of the organisation’s system of governance and the board’s risk appetite. Has the time come for Boards to embrace wider skillsets to mitigate against this onslaught of change that shows no sign of slowing, let alone stopping?

Research into the board composition of FTSE500 companies shows that just 2.3% of board members have held positions and expertise outside of CEO, CFO or Company Secretary². That is just 81 people out of more than 4,800 executives–a staggeringly low proportion and certainly not something that can be referred to as a diverse board profile.

Why the traditional non-exec profile needs to evolve

“Diversity is not about opposites, it’s a set of complementary capabilities, and creates a source of ideas, curiosity, learning and true dialogue,” says Jouko Karvinen, chairman of the Investment company Solidium, former chairman of Finnair. However, boards traditionally want ex- or current CEOs, CFOs, and then add a long list of required experiences and capabilities such as digital. But not all experience is relevant to the future of the business even if it is relevant today.

Board composition and diversity must be viewed in multiple dimensions in order to be successful and not just through the traditional lens of corporate experience and protected characteristics. A more comprehensive approach to diversity metrics, encompassing for example financial experience, education, gender, generation, international reach, board experience, active duty, and overboarding should be applied and introduced, acknowledging that the specifics vary for each board and evolve over time.

“Companies would benefit from a higher focus on succession planning and future skills requirements in the board room,” says Frida Norrbom Sams, CEO for Hydroscand Group, and professional non-executive board director. “The board has to critically evaluate itself and its competency needs, find a balance between specialists and generalists,” she continues.

The chair’s key role in diversity

Even with a beautifully diverse board on paper, diversity needs a voice to be effective. With boards mandated to make unanimous and proactive decisions on critical strategy, ensuring that each member expresses themselves on each point of the agenda and not just their own area of expertise takes effort. Silence is not a substitute for agreement.

Every board member should be contributing proactively to forming unanimous decisions within the board, their role is not as expert only. With increased diversity comes the increased requirement for boards to learn the same language, respect different views and work towards joint conclusions.

The nomination committee selects members with the support of the chair, but they don’t create the functioning board. The chair is mission critical in creating a diverse, curious, and learning board.  However, the chair is just one person, and they have their own outlook and opinions and level of seniority, that may make achieving true diversity really challenging. Paradoxically, the more senior and widely experienced in listed company roles the chair is, the more important it becomes to proactively recruit more diversity into the boardroom in order to dispel groupthink.

Mr. Karvinen puts it: “The range of skills within the board should relate directly to the current and future needs of the company and be up to date in terms of experience and education.” The board is meant to agree and make decisions, and inherently decisions are of higher quality if they have been looked at from different angles. “A board who never disagrees and does not have to work through their differences to reach an honest joint conclusion is not on board, or even a board.” he continues.

As a senior adviser to the Non-Executive Directors Association, and often quoted professional chairman, writer, and chairman of The NED City Debates, which formally explores the challenges of board best practice, Barry Gamble is clear on the issue. “We still see far too many examples of governance blow-ups which point to a lack of meaningful debate and the thorough examination of alternative courses of action. Boards should work well as a team but avoid becoming too familiar or clubby. True bench strength requires thinking beyond the norm and considering what is not on the formal board agenda, but which might just warrant urgent attention.”

Executive Search’s role in supporting the chair

Board composition is by nature a product of years of selection. The natural capabilities to perform audit, valuation, financing, communication, all require financial knowledge and experience.

Executive search can play a really crucial role when tasked with seeking out new board members by getting to know the chair, including their strengths and weaknesses, and challenging them on what diversity truly means. A consultant with a breadth of diversity knowledge can often be best placed to point out the merits and risks inherent in the ratio of relevant skills versus experience. They can also demonstrate how board work practices can be upskilled when absent by pushing for significant onboarding, coaching and impactful training commitments.

A good executive search consultant will support the chair and nomination committee by evaluating the existing Board skillset, identifying gaps in expertise, and facilitating the discussion about how to achieve the breadth and depth they need going forward.

This process can be surprisingly fast and straight forward when the partnering search team is highly experienced in board dynamics. “You need to resist the temptation to hire people who mirror the existing directors,” says Patricia Rodrigues Jenner, nominated by financial times as a finalist in the “NED to watch”; a non-executive director for multiple boards, including the board of Legal & General Assurance Society, a leading UK authorised insurance company.

Accessing digital diversity

Amongst others, Forbes wrote about digital expertise on boards in 2018³, but the board compositions have yet to change despite almost five years of disruption, digitisation, and sweeping radical transformation affecting every business. In fact, right now AI (Artificial Intelligence) is hitting an inflection point that will change the way organisations operate on so many levels.

“Boards should aim to raise their individual and collective ”digital quotient”. Board members should understand the strategic consequences of evolving digital technologies such as Generative AI,” says Marco Ryan, Cyber Leader in Residence at the Lancaster University, former CDO for BP and Wärtsilä. “Much of the future risk to the business will be caused or informed by technology being used for competitive advantage and Boards need to be able to be challenged around emerging digital technologies without feeling embarrassed,” he continues.

Eliminating the inferior propositions and processes using AI will bring enormous benefit for organisations, whilst at the same time emphasising the requirement for top talent. Having a more thorough understanding of the technology behind AI allows the board to realise, that it’s not about making things average, it’s about shifting the standard distribution of performance into the positive and towards excellence.

When boards seek out digital talent the shortlist of potential non-execs with the traditional seniority and financial knowledge may have had experience of IT in the ERP arena for example and therefore tick the digital box, but not of AI that maybe future critical for the company. A younger person who has bleeding-edge tech experience might be a more suitable candidate, but they will be discounted because they don’t yet have CEO experience. What company boards must realise is that the world has already changed–majority of buyer journeys start with digital.⁴

Organisations that are willing to invest more intensively in selected non-exec’s onboarding and to upskill them around the necessary financial and governance training as part of the process will reap the rewards of relevance and futureproofing that come with diversity.

Organisations run on their people

Globalisation coupled with skills shortages and profound changes in how and where people work since the pandemic, make hiring and retaining talent a more complex and individualised issue; a lack of succession planning is threatening to wreak havoc within organisational hierarchies. Furthermore, a deficit of true insight into the workforce means that many organisations may be failing to fully recognise the value-creation potential of their people.

There are also increasing expectations around Equality, Diversity and Inclusion, mental wellbeing and non-financial reporting on social aspects of the ESG agenda and corporate failings around sexual harassment, discrimination, bullying, and poor working practices, present key risks that can lead to serious reputational damage if not recognised by the board. Despite this, according to research by the CIPD, just 2 percent of boards in the UK for example, have an HR director as an executive board member⁵.

“Having a sound pipeline of internal leaders is crucial to protect the company from surprises,” says Frida Norrbom Sams. “Having visibility into the internal talent pipeline is a big risk mitigation factor for the board.” But will the boards of today be able to demand this from their executive committees? What is the ambition level for business-driven HR functions if they are not set from the board and how can that ambition level be set without the proper HR expertise within the board? The solution is again to reset the balance between board-relevant skills and HR expertise using board skills training to fill in the gaps.

The moral and business imperative of sustainability

Climate change, weather events, unstable supply chains and limited or inaccessible natural resources can stop business in a moment. Consumer demands for environmental responsibility and accountability can make or break a brand. “Making far-reaching decisions around the supply chain, production, leadership, and even customer segmentation needs consideration of the sustainability and CSR strategy,” says Tom Berry, former EVP Sustainability at Farfetched, former head of sustainability at Kimberly-Clark. “ESG is not just a compliance topic, proper understanding and expertise allows companies to utilise the changing consumer sentiment and legislative changes as opportunities rather than compliance requirements,” he continues.

Nevertheless, no board is happy with a “one trick pony”, and even the specialists should have sufficient seniority to be able to contribute in a more holistic manner. This sentiment is shared by all interviewees questioned in this research. Boards are the stewards of long-term value and have an obligation to be bold in setting the strategy and embedding a culture that embraces sustainability and ESG and encourages innovation. But a key challenge for boards is ensuring a common understanding of, and alignment on, sustainability and ESG priorities throughout the organisation and that might best be achieved with a sustainability expert on the board with true understanding of the wider implications.

Managing world turmoil from the boardroom

Globalisation is driving our business environment. Local markets are often limited in their size and international growth is seen as an attractive opportunity for companies. As last years have proven, the geopolitical environment has shifted to a more volatile position which is anticipated to be long, and the board decision making may struggle with the balance of risk and reward in entering new markets, especially if they have little experience or even exposure to said market. Having a good view of international politics allows the board to at least evaluate the risk types and their threat levels when dealing with different countries and markets. A dedicated “foreign affairs director” is not necessarily required, but time spent by the board to discuss these topics makes all members realise the importance.

Scenario work alone is a widely adopted practice in boards, but the detail and depth is often just a superficial scratch. “Everybody knew that a global pandemic was inevitable, and claimed to have contingencies and plans in place for it. But when COVID struck, almost all organisations were caught unprepared and oblivious to the impacts it would have,” says Hetti Barkworth-Nanton, CBE, Non-executive director for various companies and the CEO of Ploughshare, British government owned innovation business. “Risk registers should be more than a compliance thing for boards, they should be part of the annual clock and a systematic deep dive should be done every now and then. At the same time, they need to move from a static tick boxing exercise to a more agile, innovative heartbeat for the business,” she continues.

In conclusion

The non-executive directors of the moment, have to do more than ensure compliance and drive the bottom line. They are tasked with creating a culture of innovation and creativity; one that is inspirational and attractive to talented people. Their remit is to explore and take advantage of technology and get ahead of the curve in customer experience. The board members of the moment have to be agents of constant innovation in order to make the constant flux of the operating environment work for the business, and not against it. The board members need to be well aware of the wide spectrum of risk and be part of creating scenarios on how to mitigate and how to act if those risks actualise. A modern board member is beginning to look more like a modern-day renaissance genius than a one-dimensional business professional.

Based on this article, I claim that nominating committees should begin by not seeking overly specific capabilities or even overvaluing generic experience but instead look for T-shaped profiles. Generalists that have a strong platform of experience and skills which are based on education and knowledge and up to date experience to create maximum value. Understanding the financial information and the business model, markets etc. is, of course, still a prerequisite to function as a board member. But with more emphasis on on-boarding, actual training by the company and coaching by board colleagues, diverse and valuable specialisms can be brought into the boardroom and will bring greater rewards.

“I feel for the senior leaders. They have grown through a traditional path to their leadership roles, and now they are expected to think in a sustainable and diverse manner to drive results. For them, it is easier and more comfortable to stick to familiar methods that worked previously,” says Chandre Torpet, Founder & CEO of Inclusive Matters, who empowers leaders to increase diversity and lead inclusively, and connect those opportunities to their business strategy & results.

Accepting and driving real diversity should be a top goal when selecting chairpersons. This one person can either seek people into the board with similar or different capabilities. Choosing the former may make a happy board who has an easy time in making decisions. Choosing the latter will make curious, learning and very hard-working boards who may sometimes struggle but can also bring something highly valuable to the table.

References

1. https://www.pwc.com/gx/en/government-public-services/assets/five-megatrends-implications.pdf
2. https://wbdirectors.co.uk/wp-content/uploads/2023/06/HiddenTalent-2023-final2.pdf
3. https://www.forbes.com/sites/adamgordon/2018/04/15/cio-cto-board-ready-gartner/?sh=25bd36292d27
4. https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/the-consumer-decision-journey
5. https://www.cipd.org/uk/knowledge/reports/people-expertise/

This article is originally published on the web site of Alumni.