A key topic in the corporate governance community is board composition, in particular regarding board member diversity. Boards have been increasingly focused on improving diversity for several years. This focus includes broadening the board composition regarding gender, ethnic and racial backgrounds of board members as well as with respect to specific knowledge, skills, and abilities that would enhance a board’s ability to oversee the management of the corporation.
In particular, boards have been focusing on increasing gender diversity as well as increasing the percentage of independent directors who bring professional, operational and industry-specific experience that would be beneficial to the board of a company as it undertakes to exercise its fiduciary duties.
Board Composition Builds Strength with Diversity
Diversity is crucial to creating fully functioning boards – diversity of expertise, thought, background, ethnicity, gender, and geography. Board composition is important to highlight when building a governing body; assembling a team of people with different strengths to reach the best solutions is the ideal approach—with respect to strategy, succession planning, risk management, financial, legal, and regulatory oversight, competitive benchmarking and international expansion and during a crisis. A board can increase its diversity profile in a number of ways.
For example, board composition leaders should expand their scope beyond the historical tendency to exclusively focus on former Chief Executive Officers as potential board members and consider others with rich leadership backgrounds, such as former leaders of operating divisions and corporate functions, college, university, and other not-for-profit corporation leaders, political and other government leaders and military officers.
While boards can benefit from a former Chief Executive Officer’s strengths of strategy and oversight perspective, they also require a diversity of expertise to adequately perform their fiduciary duties. Individuals who have been Chief Financial Officers, General Counsels, Chief Marketing Officers, Chief Information Officers, and Chief Human Resource Officers can help a board navigate its way through the myriad of issues that it is charged with addressing. In addition, boards can recruit quality members from well-run private companies of significant scale to help with diverse board composition.
A board can also increase its diversity profile by considering candidates for director openings who represent gender, ethnic, racial, geographic, skill set and industry background dynamics. Increasing a board’s gender, ethnic and racial diversity serves to bring different perspectives to board deliberations. Gender diversity initiatives are grounded in research that shows that corporate boards function better and corporations perform better when board composition includes both men and women, in particular after a board takes action to increase the percentage of directors who are women.
A number of countries have imposed legislative quotas requiring that corporate board composition in those countries include a minimum percentage of women. While it is unlikely that federal quota legislation of that nature will be enacted in the United States, similar legislation has been approved in the State of California, and other states may follow suit.
Thinking Independently Together
Increasing a board’s diversity can be accomplished by increasing the number of independent directors on a board. Independent directors bring a variety of backgrounds and perspectives to board composition, deliberations, and the exercise of its fiduciary duties. In general, independent directors are those who do not have any employment or other significant ties to a company or its controlling shareholders apart from his or her role as a director. An independent director is not a direct or indirect customer or vendor of the corporation, is not involved in other business ventures with the company or its shareholders, and does not have any relationships that would interfere with his or her ability to exercise independent judgment.
There are several benefits of including independent directors when considering board composition. Independent directors bring to a board objective and unbiased advice and different perspectives than those of inside directors. They also bring new skills, resources, and business contacts to the board and can be helpful with respect to corporate transactions. Key skills, experience and attributes of independent directors include strategy, financial, legal, industry, operational, technology, risk management, governmental and regulatory and marketing expertise.
In general, independent directors bring value in a number of ways. Independent directors can feel free to raise sensitive issues without fear of repercussion and they bring different experiences and perspectives to the board. Also, independent directors who are or have been directors of other corporations bring corporate governance expertise and practices to a corporation’s board composition.
The overall objective of increasing a board’s diversity profile is for the board to have the benefit of different opinions and perspectives that result in a higher quality of board discussion and debate to enhance the quality of a board’s decision-making. Diversity on boards results in robust discussion and critiques of alternatives being considered by the board. Diversity on boards promotes high-level debate fueled by a broad range of views espoused by different directors and serves to facilitate constructive challenges to a board’s historic method of decision-making and pressure testing proposed board actions and mitigates board “group-think”.
