Successful boards are diverse, including a group of dissimilar executives handpicked to support the organization’s strategic goals. Also, they have strong governance. They work within well-defined practices and rules that control the organization, which empowers them to pursue the organization’s strategic goals in a way that mitigates risk.
Let’s talk about each of these fundamental qualities in a little more detail.
Diversity Goes Beyond Demographics
When we think about diversity, our minds naturally gravitate toward a melting pot of ethnicities and genders. These demographic differences are proven to help drive growth and profitability. A study by Equilar, a compensation research firm, discovered that the CEOs of gender-diverse boards receive larger paychecks than those dominated by men. Since women are not commonly on compensation committees, these fat checks are likely not courtesy of their generosity but because the companies they guide perform better. To back this up, another study showed that share prices fell by an average of two percent following an unexpected departure of a female director. When a man departed, however, stock prices remained on an even keel.
So demographic variety is good, but real board diversity goes further, including executives who have a broad range of skills, come from a range of backgrounds, and use different thought processes to approach problems. A well-planned assortment of expertise and experiences stimulates creative thinking and ensures directors challenge strategies from all angles. This creates the potential for a board to redefine the course of an organization.
Given the power of diversity, corporations that need to add a board member must determine the skills and backgrounds that they need to help them achieve their strategic objectives. Then they can look for gaps in their board membership and define recruitment goals to fill them.
For example, boards are missing someone with expertise in human resources. It’s clear, however, that these skills are needed to help with executive and board assessments, as well as the ramifications of strategic moves, such as an acquisition. After all, it is important to have a robust plan for integrating talent.
In another instance, the board of a global transportation company had 10 directors. Of those, eight shared the same industry expertise. Also, while there were lawyers, as well as financial and business experts, no one had practical experience in HR. Because of this gap in expertise, the board did not have the ability to plan for board or CEO succession or compensation. Why not? Perhaps they did not even understand how to assess the board and determine the skills they required to be successful.
While there is an increased focus today on gender and ethnic diversity, especially on public boards, not all leaders in charge of recruiting are taking it to the next level. They often fail to look for a diversity of thinking, experiences, and skills sets. To find a diversity of talent, leaders need to think outside the box when it comes to recruitment because it’s likely that a traditional tool, retained executive search, may miss the mark. To address the need for a new solution, many human resources leaders are tapping into their networks, including their service providers. Board members are doing the same.
Changes in the approach to board recruitment, however, need to go further if companies are going to make some headway in diversification. Another option is the executive agent who works on behalf of professionals who seek board positions. Most agents have a stable of pre-vetted candidates to draft from and can determine where each would fit best and provide the greatest value. When CHROs, general counsels, corporate secretaries, and chairs of nominating boards are conducting a search, they simply need to contact these agents. They can quickly find out if the agent is working with an executive who is looking for a seat that meets their needs. Best of all, it costs the company nothing.
The Increased Importance of Good Governance
While governance has always been an important board responsibility, it is more critical than ever. It encompasses the rules and practices that control the company. Also, it delineates each board member’s role responsibilities and accountabilities. Thus, governance empowers directors to collaborate and work together efficiently and effectively. They can make decisions that help an organization achieve its strategic goals and do so in a way that mitigates risk.
Good governance does not make the headlines, so we rarely hear about it. The opposite is true when it is missing. In the new millennium, that headline-grabbing lack of oversight has put governance in the spotlight. It all started in 2001 when Enron imploded, a company that purported to have 63 billion dollars in assets. Clearly, the checks and balances were not in place, allowing deceptive accounting and negligent auditors to put the company on a runaway train to bankruptcy. At the turn of the century, Enron was not alone. As high-profile downfalls mounted up, the Sarbanes-Oxley Act was born, reforming accounting standards.
Unfortunately, reckless governance lived on. In fact, the whole global economy fell victim to it in 2008 when the lack of risk management within the too-big-to-fail banks brought on the Great Recession. To prevent future disasters of this scale, the federal government introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act, which increases accountability and transparency.
Because corporate meltdowns have brought forth increased scrutiny from the US Securities Exchange Commission (SEC), boards are now on the line should they shirk their governance responsibilities. As a result, they must scrutinize the CEO’s decisions to ensure they do not threaten the organization’s health. In this way, they protect shareholder and investor interests and build trust with the general public.
The Fundamentals for Effective Boards
In summary, effective boards are diverse. Each director is hand-picked to serve a particular role in furthering the organization’s strategic objectives. At the same time, they form a cohesive team. By making sure governance of the organization is strong, they mitigate risk to investors and stakeholders.