21st century boards better diversity, better boards, better profitability

Directors are now confronted with not only complex oversight accountability, but are exposed to greater risks and liabilities.

In current times, Boards are charged to inspire, guide and establish the right tone from the top – from corporate management policies and oversight encompassing executive duties such as appointment and discharging of senior executives, setting dividend policies, corporate goals and ensuring adequate and well-managed resources at the company’s disposal.

Tall order, but a fair one, given the performance companies and its people are tasked to deliver.

Changing construct and roles of boards

“It is time for Boards to change their approach regarding strategy formulation toward 'shape and monitor.' Boards must move from a passive role to a more active role. The Board must be fully engaged, at all times, with strategy." Dr. Reatha King, Chair of NACD (former Board member of Exxon Mobil, Wells Fargo, HB Fuller, Lenox Group and General Mills Foundation)

In the past, having reliable and like-minded individuals to build a Board was a logical strategy, but the resultant group think due to this homogeneity, poses an inherent risk of being blinkered.

This risk has no place in today’s increasingly dynamic business environment where boards are expected to generate new ideas and foster creative solutions to combat the complex challenges in businesses.

Less than a decade ago, issues such as climate change risks, food and internet security and environmental issues rarely made it to the boardroom agenda.

Today, they have now become compulsory for corporate governance adherence.

Boards today face mounting pressure from increasing involvement of investors demanding a review of all matters of interest, from remuneration to the Boards’ role in setting company strategies. Boards are not only expected to generate long-term value creation, but also social purpose and impact.

As such, Boards have begun to broaden their perspective and composition or face greater scrutiny from regulators and shareholders, and equally vocal groups comprising consumers, media and the public.

Disruption begets diversity

“[The benefits of board diversity have] become consensus amongst investors.” Ken Bertsch, Executive Director, Council Of Institutional Investors.

The case for boardroom diversity has never been stronger. It should never be about meeting quotas.

A McKinsey report showed a statistically significant relationship between a more diverse leadership team and better financial performance.

The companies in the top quartile of gender diversity were 15 per cent more likely to have financial returns that were above their national industry median. Companies in the top quartile of racial/ethnic diversity were 35 per cent more likely to have financial returns above their national industry median.

In Malaysia, the Securities Commission’s recent Corporate Governance Monitor 2019 highlighted a big imbalance in the gender diversity of the local board composition, with 84.08 per cent or 4,398 directors being men and the remaining 15.92 per cent or 833, being women directors.

This puts forth the question of talent – specifically on whether the environment is facilitative or has sufficient emphasis around cultivating greater diversity in future boards.

Effective directors are the foundation of effective boards. The board of directors must first, effectively represent both management and shareholder interest. To be able to do so, boards should consist of both internal members, where experience within the company adds value, and externally sourced individuals, who bring a wide range of perspectives, rather than token representations.

The need for greater board diversity has also been fueled by the necessity to address inherent risks related to cross border businesses across a polarised society globally.

Simply put, having a rich melting pot of talent and perspectives in the boardroom leads to better, more robust decision making, competitiveness and ultimately, better business success.

Moving beyond gender diversity

“The Board should facilitate a process that ensures a thorough understanding of the diverse characteristics necessary to effectively oversee management’s execution of a long-term business strategy. Board diversity should be thought of [holistically], in terms of skill sets, gender, age, nationality, race, sexual orientation, gender identity, and historically under-represented groups.” CalPERS

While there isn’t a standard definition, board diversity is more than a matter of optics. There needs to be a holistic understanding and approach for an effective board that allows for more robust discussions, helps businesses stay competitive and resonates with customers.

Board composition is crucial – arguably one of the most critical components of a company’s governance. Today’s challenges require new and varied perspectives, skills and expertise in managing disruption, arising from non-traditional sectors.

Instinctively diversity means one that is heterogeneous with a broad spectrum of attributes in terms of gender but also age, expertise, professional qualifications and educational background.

Fintech and e-payment players like Alibaba’s Alipay or Tencent’s WeChat Pay, for instance, have brought unprecedented disruption to the big banks.

Increasingly, banks are not just looking at getting experienced directors from the financial, accounting or law sectors, but are instead looking towards board members with experience outside of these traditional sectors who can bring invaluable insights to issues and risks.

Essentially, they can contribute to the boards’ collective knowledge and competencies, while also challenging traditional approaches, especially where the disruption is coming from outside one’s industry.

Some organisations continue to struggle to make the mindset shift from the traditional or compliance-oriented approach of constructing a Board.

Often companies grapple to identify what diversity means in respect to their business to navigate the current and future challenges.

The first step is for companies to evaluate and assess the effectiveness of board oversight, focusing on the business and what boards need to achieve. The other issue is finding suitable, highly-qualified individuals to address diversity gaps at the board level.

On this front, the Institute of Corporate Directors Malaysia (ICDM) offers a 360° evaluation and solution-based programme designed to ensure boards are the drivers of holistic governance in their businesses. Board evaluations are an effective avenue to asses the Board’s collective performance and address issues of quality and composition. To complement the evaluation exercise, ICDM provides competency-based director placement services through our director registry that hosts a diverse pool of candidates with varied skills, experiences and background.

Age and gender diversities are not the only aspects that require attention; enhancing the overall diversity in the Malaysian corporate boardroom – from experience, industry, background, geography, personality – is exactly what ICDM aims to achieve.

A holistic approach to diversity provides balance to the boardroom and part of that is through building a pipeline of new and young directors. Diversity in this form not only enhances representation, it offers mentoring opportunities, where older board members can mentor younger ones in areas they have less exposure in, such as governance, regulations and risks.

By developing the younger members, Companies inherently build in continuity – a boardroom pipeline – to seamlessly take the helm when more experienced members step down, paving the way for a new generation of growth.