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22 June 2016 | By Paul Twine Community

The elephant in the boardroom

A new age of diversity is upon us, and active boards matter to business success

One of the advantages of working in executive search is the number of conversations we have with FTSE 100 and 250 boards. We listen to the concerns of the nation’s top firms. And right now I can report there’s a consistent topic coming up again and again: diversity. But there’s a new definition emerging, and it is the elephant in the boardroom.

Five years ago diversity meant gender. More women! And quite right too. Since Lord Davies’ review last year, women now comprise 26.1 per cent of FTSE Boards, 13.6 per cent up on 2011 – and Davies advocates a third of boardroom positions to be female by the end of the decade.

Yet the public scrutiny and initiatives to hire more women have helped boards hide from the real truth. They don’t care enough about what happens when they move on.

Board limitations

A board is a perpetually changing combination of members, who despite this are susceptible to human influence (groupthink) and, when together, are constrained by time and dominated by process and patterns of behaviour, which in turn creates familiarity and comfort.

Charles Duhigg (author of The Power of Habit) describes this state as the “habit loop”. Neuroscientists see that as soon as behaviour becomes automatic, the decision making area of the brain goes into a sleep mode.

In that vein, the boards that advise the management teams that run companies, and that are accountable to shareholders and investors, are actively inhibiting challenge and creative thinking. They are depending on their experience of the past to advise on the future, they stifle new members and operate in sleep mode. To make matters worse, they are also often members of more than one board.

So can you imagine what would happen if you insisted a board hire someone that thirsts for knowledge and scrutinises on topics before making independent decisions, who is told they may only be there to make up the numbers but insists on conveying a considered perspective?

An EY survey of 20,000 client teams showed that diverse teams exhibited higher profitability, governance, and greater satisfaction than non-diverse teams. The lobby group Catalyst published research showing a correlation between women on boards and senior management and return on investment and equity. And we see report after report revealing under-performance in big companies linked to a homogeneous management mindset.

Women challenge thinking because it is natural and instinctive to them, but boards should have resisted the temptation to be complacent before gender became the catalyst.

Boards for the future

A board is responsible not only for the business today, but for making certain that it stays relevant and successful once the current board members have gone.

When Facebook moved into Sun Microsystems headquarters, Mark Zuckerberg did not replace the sign. Instead he famously flipped it over to remind employees of what can happen when you are on top but fail to innovate.

And now boards are thinking about the next wave of diversity. They are beginning to demand diversity in all its forms – of technical expertise, of countries and regions, of personal characteristics and industry sectors, as well as gender. But it is not happening fast enough – and business strategy is suffering for it.

Adapting to digital is a good example. According to a study by MIT Sloan School of Management, only 38 per cent of CEOs have put it at the top of the boardroom agenda – despite 78 per cent of executives support a faster transition to digital working methods.

A diverse board, with experience to share, should be on hand to challenge the CEO. But Professor Andrew Kakabadse of Cranfield University produced research showing management top teams frequently shied away from raising issues because they are too sensitive to be discussed. In the UK 47 per cent of organisations suffered from this malady.

Boards are vital to good governance. The very best executives see this. McKinsey research says the most effective directors are spending twice as much time on board activities as other directors. Active boards are the model of the future.

These boards need a variety of views to function. Adding new faces from outside the sector is a great way to do this: at Vodafone three quarters of the board come from outside telecoms; at GSK and Sky half are industry outsiders.

Adding women undoubtedly injects new thinking into a board. The merit of adding more women is so clear no serious person questions it.

The next phase for boards is to include talent from an even wider pool; to seek out top minds from rival industries; to include non-conformist personalities who can really ask troubling questions; and for board members to have fewer directorships. Research supports this. Logic demands it.

If the attitude of Britain’s top boards is any indication, a new age of diversity is upon us. Perhaps the elephant can enjoy a happy retirement.