How Board diversity drives company performance

AvS – International Trusted Advisors: Diversity is an intensely discussed topic in the business world. Could you tell us something about the commercial advantages for companies committed to building top teams with a high degree of diversity?

Michael Hathorn: The business case has been building for some time and is quite compelling, with a large number of studies that strongly correlate more gender diverse boards with higher performance on the typical financial metrics. The Credit Suisse Research Institute, for example, showed that companies with higher proportions of women in decision-making generate higher returns on equity and maintain a more conservative balance sheet. Other studies confirm that where women are the majority of top management, the business has higher sales growth, higher cash flow returns on investments and lower leverage. When you have only one woman on the Board, there is the risk of tokenism and the inevitable discounting of that person’s views. You only overcome that effect when you get a critical mass. Firms with three or more women on their Boards produce the highest impact on corporate financial performance.

What is behind this correlation between female executives and business performance improvement?

Decision-making and internal team processes appear to be more robust when there is substantial female participation. Studies conclude that women spur a deeper debate on key issues and that gender-diverse teams come up with more innovative solutions, which is critical for company survival and strategic impact in today’s very turbulent world. Furthermore, women have higher attendance rates on Boards than males do and set a new norm for their Board. As a result, male attendance rates go up as well. There are also fewer strikes and layoffs in crisis times under female leadership, measures that can be very costly for companies in the long term. Another, maybe more subtle impact of having females on Board is the improvement of corporate reputation. Many companies find themselves under a lot of pressure from their stakeholders to diversify their Boards. Consequently, a company becomes more attractive as a recruiter for female executives who appreciate a diverse approach. By doing this they gain preferential access to a much larger pool of talent. Again, these effects are not present with only one female on the Board.

If the advantages of diversity are so compelling, why do so many companies still have Boards that are monochrome?

There are a number of systemic issues that are extraordinarily difficult to overcome. First, change is difficult, and culture is persistent. There is a tendency to maintain Board recruitment processes and behaviours over time, which tend to produce very similar Board compositions. Additionally, we can observe the talent selection phenomena of “cloning”. People tend to feel more comfortable with those who are similar to them, which consequently reinforces the selection of male Board members. Another important systemic issue is that talent pipelines in organisations becomes increasingly male as the hierarchical levels increase. This results in senior talent pools that are predominantly male. However, there are enough qualified women who could rise to the top. For instance, balancing family and work is still a big barrier for women moving up the career ladder and becoming “Board ready”, but female executives usually experience a significant “work-family” challenge only over a relatively short period of their working life, perhaps 10-20% of a 40-year career. If you have identified the right talent to drive your company forward, it is worth bridging that period with creative solutions that keep female talent engaged.

Do the specific values and long-term orientation of family companies constitute an advantage in building diverse teams, compared to publicly traded companies that might operate under a lot more pressure?

The values part of this hypothesis is not consistent with my experience. I have worked with a few family companies where a commitment to patriarchal values has resulted in the less talented family member assuming a leadership position due to their gender. However, I do accept that family companies are often able to leverage a longer-term orientation toward the business as they are free from the short-term market pressures of listed companies. It is in general difficult for companies to change culture and adjust themselves to the challenges that exist in today’s world, regardless of their type. That said, I believe culture can be an important driver of strategic advantage. Google, for instance, is a listed company that adapted to the needs of its employees by offering child care, flexible working hours, leisure activities and many other benefits. Performance standards are nevertheless very high, and meritocracy seems to be a key value. Many companies equate presence with performance and do not realise that employees appreciate and become even more engaged in a flexible working environment where the quality of their work is the key metric. Companies should make use of today’s technology to increase flexibility and adjust their working environments, while continuing to focus on performance.

The “Nordic model” is often held up as the best example of a region with a gender-diverse Board landscape. What did the Scandinavian countries get right?

From the beginning, the Nordic countries aspired to develop their governance guidelines in line with global best practice. They incorporated a multi-stakeholder approach that goes far beyond just profitability. By including and holding different interest groups accountable, the issue was raised to a social level and discussed in a much more holistic way. In the case of Norway, the argument has been made that gender-diverse Boards are important for the country and for businesses alike. Using only half of the available talent pool put the country at a competitive disadvantage globally. If a Norwegian company wants to have access to its stock market, it has to make use of the entire talent pool, and this must be reflected at Board level.

Mandatory quotas are one measure used by Nordic countries to increase gender diversity. What are the arguments for and against setting gender diversity quotas for Boards, and whether those quotas should be mandatory?

I think voluntary quotas or targets are preferable as a first step to drive change, reverting to mandatory quotas if progress is insufficient. Norway actually did not strictly enforce their law regarding Board composition from the beginning but encouraged companies to comply voluntarily. Two years later, as there was little progress, the law was implemented. In a very short period of time, the Norwegian Boards of listed companies raised their Board diversity levels up to 40%. The main downside we could observe was the phenomena of “Over-Boarding”. Due to the rapid change, women were serving on many Boards in parallel and sometimes took on a little too much. However, a number of studies concluded that the consequences people feared, e.g. that companies will underperform or that female executives are not experienced enough, proved to be unwarranted.

What career advice would you share with female executives who aspire to Board positions?

Female executives first of all need to build executive experience, internationally, if possible. There is no substitute for having P&L roles and building an expertise base. Secondly, they need to question and understand their own motives for seeking Board work, and they need to be able to articulate them. It is very important for female executives to develop a broader network and actively promote their capabilities in the wider marketplace. This involves joining groups and events that may be predominantly male, and engaging in discussions with men in which they need to be able to clearly point out their accomplishments and ambitions – a rather atypical behaviour for women, which they nevertheless need to adapt in order to make significant impact in predominantly male businesses.

So far, we have talked mainly about gender diversity. Is this focus on gender warranted or should Boards be thinking in a broader, more holistic way?

In my opinion, we need to place the focus on gender balance. Females are a fundamental aspect of diversity, and they are underrepresented. By focusing on bringing more women to the Board, other types of diversity come with it: diversity of thought, mindset, experience, style, etc. However, Board recruitment always has to be driven by the needs of the Board. It is essential that companies do not approach Board diversification as a compliance exercise, but as an attempt to hire the best person for the job – which happens to be female. At the same time, we need to be aware of the need for ethnicity and nationalities on our Boards – again, not because of political correctness, but because the Board should reflect the business. If you have global operations, you need to have certain expertise with respect to your key geographies. This will increase the company’s opportunity for impact in that part of the business.

We are living in times described as Volatile, Uncertain, Complex and Ambiguous (VUCA). The speed of change and the pressure for success is ever increasing. How can Boards keep up, adapt and stay relevant?

In a highly volatile environment, leadership is best exercised through vision and values, instead of elaborate strategic plans. We need to continuously question the assumptions we make and be willing to change our plans if warranted. Uncertainty and complexity require executives and Board members to connect very deeply to multiple levels in the organisation in order to take cross-functional decisions that are in service to the entire business. Finally, ambiguity is an invitation to drive innovation and break new ground. Boards need to recruit members who bring this deep expertise and are capable of operating across the business. They need team players who are fully engaged in the business, ready to lead a deep and meaningful debate. So far, I do not feel like companies are doing enough to address the challenges of a VUCA environment. Many Boards are too far removed from their business, where members are focused on their own “silos” of responsibility and expertise. When a serious challenge hits, these fault lines are very much exposed.

How do you ensure the right mix and chemistry, bringing together the best blend of backgrounds, expertise, perspectives and personalities?

First, you need to be very clear about the specific skills and knowledge that every Board member needs to bring in. That includes eliminating the extraneous criteria that may not have a significant impact, like being a former CEO – this is almost a non-criteria for me, since so many other executives demonstrate that they have gained a holistic view of the business during their career. You also need to define the role the future member will have on the Board. It might make sense for a female Board member to take on the role on the Nominations Committee, if you are trying to expand your scope of recruitment. Then you need to consider demographic data, diversity elements like age, gender, race, nationality etc., to be able to represent all parts of your business. Look at the automobile industry: It took some companies a long time to understand that women are a very important part of the decision-making process when it comes to buying a car. If they had engaged with female Board members with marketing acumen and an understanding of buyer behaviour, they never would have overlooked the role and influence of women in automobile purchasing. Prioritising your diversity needs alongside your business requirements will help to create focus and drive results. In the end, it is a talent question, not a gender question.

What are the necessary ground rules for a diverse Board to work together in a dynamic and highly effective way?

Research concludes that a great level of trust is essential for engaging in open debates and speaking one’s mind. If a Board member does not participate in the decision-making, he or she will naturally have reservations and will not be committed to the decision. That again reduces accountability and ultimately has a negative impact on the results. In order to create an environment in which conflict of ideas is encouraged, it is essential to develop a team Charter or common understanding that captures the mission, guideline and expectations for the team culture and team member contributions. The most important influence however is the behaviour and interaction of the Chairperson, who needs to continuously question their own mission and performance in order to build a team that is striving to improve, reflect and incorporate everyone’s ideas. A Board needs to have clear criteria for its own performance and the performance of its members and needs to regularly assess itself against these expectations.

How should that Board assessment best be done?

There is no “one size fits all” way to monitor and assess Board performance. It is important that Boards develop their own self-monitoring mechanisms for group and individual performance. That can be done with or without the help of an external advisor. For individual performance, I would always recommend a self-evaluation based on conversations with the Chair and the other Board members. The Chair then has to confirm and augment this self-evaluation and point out potential blind spots. It is amazing how many Boards have not installed a structured evaluation process because it may be perceived as somewhat negative, heavy and almost compliance-driven. But the purpose is rather to seed a culture of continuous improvement in order to become a more effective Board member and a more effective Board.

Do you have a last piece of advice on the diversity topic for Chairpersons and CEOs reading this interview?

Approach gender diversity as an opportunity to improve Board performance and to create significant additional business value – and not as an exercise in political correctness. No one else can have as significant an impact as the Chairperson and the CEO in evolving the attitude and mindset in the company to one that embraces and understands top team diversity. This is key. I have spoken with a number of Board members and Chairs who initially were very sceptical about gender diversity on their Boards. After experiencing the opportunities and impacts that a diverse Board provides, they embrace it. If all CEOs realise the benefits of a diverse team, we will not need quotas.

Michael, thank you for these insights!

Dr. Michael Hathorn is an Affiliate Professor at Arizona State University and the Thunderbird School of Global Management. In addition, he is a Partner in the area of Board Development at the International Center for Corporate Governance and teaches Leadership-Governance in the DAS program on Sustainable Business – a joint program of the University of St. Gallen and Business School Lausanne.