Reaping the “diversity dividend”
Wednesday, 02 August 2017
By Parmi Natesan and Dr Prieur du Plessis
Board diversity is not an end in itself, and organisations that want to maximise board performance must understand the inner dynamics of diversity and what it seeks to achieve.
Any sports aficionado knows that what sets great coaches apart is their ability to pick the right team for the prevailing conditions, and being cognisant of the weaknesses and strengths of the opposition. The same principle holds when it comes to boards of directors. If they are truly to make the decisions that will lead the organisation to sustained success, despite changing operating conditions and fierce competition, they simply have to have the right skills around the boardroom table.
This has always been true, but it is especially pertinent in a multicultural and global world. Organisations now exist in a complex context with a wide range of stakeholders, and face competition from new quarters. Clearly, if a board is composed of the same type of people, with no diversity of thought, then chances are it will find itself constantly on the back foot – unable to think its way into the minds of its various stakeholders, its staff and, importantly, its competitors.
One of the reasons advanced for the failures of both African Bank and Lehman Brothers was that its non-executive directors lacked the necessary industry knowledge to constructively challenge management.
So far, so logical, you may be thinking. But what “productive diversity” means will differ from board to board and from industry to industry. The first order of business must be for the board to understand what skills it needs now and what skills will be required for the future, bearing in mind that skills can become outdated.
The 2017 edition of PwC’s annual Non-executive directors: Practices and remuneration trends report, offers a fascinating insight into how directorship qualities and skills are changing. This year’s report makes the point that the need to ensure the digital competency of the company, including how it approaches cybersecurity and artificial intelligence, and the ongoing focus on the environment, will require a new set of skills on the board.
Indeed, the report predicts that “the non-executive of the future will be an advisory technocrat ̶ a specialist in a particular field who will have the ability to discuss many aspects of the business”. How many members of your board could be described in these terms now?
Prof Richard Leblanc of York University, international corporate governance guru, also emphasises the importance of assessing what skills are needed for the future, and the importance of regular, rigorous board assessments.
But putting together the right set of complementary skills is not enough. The board has to work as a whole. The ideal, in Malcolm Forbes’s words, is: “Diversity is the art of thinking independently together.” Epigrammatic, but devilishly difficult to put into practice, relying on the chair to play a critical role in turning a diverse board with the right skills into an effective team.
Difficult, but also well worth getting right. The Institute of Directors in Southern Africa’s board appraisal benchmark study concludes that “board composition probably has the greatest single impact on the future success of an organisation”. There is large body of research to bear this out. A McKinsey study by Vivian Hunt, Dennis Layton and Sara Prince on Why diversity matters, shows that companies (in the US, Canada, Latin America and the UK) in the top quartile for racial diversity are 35% more likely to achieve financial returns above industry medians. Also, top-quartile gender-diverse companies are 15% more likely to outperform financially.
A similar study by the Catalyst Information Center found a strong correlation between the number of female directors and return on sales and on invested capital.
Viewed in this light, the JSE’s recent move to require listed companies to have a policy to promote racial diversity at board level should be welcomed. This new requirement complements the existing one relating to gender diversity. Applied in the right spirit, and with the outcome of improved performance in mind, it has the potential to unlock the diversity dividend latent in a fractured society like ours.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
Better Directors. Better Boards. Better Business.