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 towards a melting pot of ethnicities and genders. These demographic differences are proven to help drive growth and profitability. A recent study by 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. Thus, it has the potential 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 ten 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 human resources. 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 look for diversity of talent, they 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 new option that many may not have tried is the Executive Agent, who works on behalf of professionals who seek board positions. At Summit Executive Resources, we have a stable of pre-vetted candidates on hand who have worked with us to determine where they 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 and might meet 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 response this we have realized the Sarbanes-Oxley Act.
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 as we saw in 2008,, 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 have on the line to no longer shirk their governance responsibilities. Fast forward to now, with COVID-19, there is an entirely new set of governance issues at hand. As a result, they must scrutinize the CEO’s decisions to ensure they do not threaten the organization’s health – figuratively or physically. 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.