In recent years, scholars, researchers and business practitioners have increased their focus on the effectiveness of more diversified company boards. Senior Manager for Board Services, Veena Pydiah explores the benefits many companies experience when they employ a diverse board.
The boardroom is where strategic decisions are made, governance is applied and risks are overseen. It is therefore crucial that boards are constituted of high calibre individuals possessing the right mix of skills, experience, qualifications and backgrounds. In a talent-driven and increasingly diverse society, the business case for boardroom diversity is clear.
The financial crisis in 2007-08 prompted a sincere reflection on board composition. Governments, regulators and the public held the view that corporate failures might have been caused by a lack of diversity in the boardroom. Indeed, boards having members with similar backgrounds, experience, education and gender raises doubts about their ability to avoid “group thinking”, which is characterised by a tendency to reach consensual decisions in order to minimise antagonism and frictions within a group. This behaviour impairs the ability of boards to “think outside-of-the-box” and benefit from new ideas, different perspectives and robust challenges, meaning that issues are not always tackled in an objective and holistic way.
Benefits of a diverse boardroom
Board diversity is not just about age, race, gender, qualifications, backgrounds, skills and experience, but also less tangible factors such as personal convictions and attitudes. Academic studies and research projects show that there is a strong correlation between board diversity, financial performance and value creation. Diversity in the boardroom offers several benefits to the board. These include:
- Improved decision-making
- Access to a wider pool of talent
- Better customer insight
- Enhancement of investor relations
- Stronger corporate reputation
- Improved corporate governance
Board diversity improves the quality and objectivity of the decision-making process by bringing new voices to the table, to the debate and to the decisions. It fosters innovation, creativity and a better understanding of customer insights through a greater variety of problem-solving approaches, perspectives and ideas.
Inclusive and diverse boards are more likely to be effective boards. Board diversity is a source of competitive edge in this globalised economy and a key enabler of growth and value creation. However, according to PwC's 2018 Annual Corporate Director Survey, directors see value in diversity but question the motivation to implement diversity. In addition, more than half of them are of the view that board diversity efforts are driven by political correctness.
Challenges to board diversity come both from within and outside the boardroom. Board members should adopt an open attitude to board diversity and welcome a more diversified and heterogeneous board. A key ingredient of good corporate governance, board diversity is also a leadership challenge to be reckoned with.
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