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Traditional industries are being disrupted by agile, innovative startups faster than ever before. In that context, new and diverse ways of thinking are required for larger and more established organizations to respond to new market dynamics, evolving customer needs and increasingly complex technologies.
Bringing targeted diversity to the boardroom is one way to quickly augment existing talent with the creative talents of the disrupters. While boardroom diversity refers to myriad attributes such as gender, ethnicity, age or experience, the ultimate goal of a diverse assembly is to achieve cognitive diversity that brings different points of view that lead to more effective and creative decision-making.
For too long, adding women to boards has often been seen as a “nice to have,” something to check diversity boxes, rather than as a strategic imperative that elevates the board’s cognitive functioning.
However, the fact that the percentage of women on boards has increased for seven straight years suggests that organizations are taking action because it’s good for business. Whether it results in improved responsiveness to stakeholder groups or improved quality of group decision-making, it is becoming more and more apparent that greater gender diversity at the board level leads to several strategic advantages.
In Tune with Global Markets and Stakeholder Expectations
One benefit of a gender diverse board is greater alignment to global market expectations, from investors to consumers. When considering consumer spending, women’s purchasing power translated as an emerging market is estimated to represent about $18 trillion in global income, larger than China and India combined.
And yet organizations have been slow to reflect the demographics of their consumer base at the highest decision-making level – including in the boardroom. CEOs and boards have a duty to enable their organizations to achieve their untapped potential.
That raises the question: To reach women, do you need women on your team?
“You don’t need to be a woman to understand a woman’s point of view,’’ says Karin Lutz, Partner and Global Leader – EY Beacon Institute and Women. Fast forward. “But why would you wait to get to the right answer when you could much more easily bring women into the conversation from the get-go? Time is not on our side when it comes to consumers, who are much more purpose driven. Purpose and parity reinforce one another. Businesses that fall behind on either count will get left behind.”
Increasing diversity in any form at the highest levels of the organization also sends a powerful signal on the value placed on diverse thinking, which helps attract and retain talent.
Given the pace of market change today, organizations should:
- Examine whether previously appointed board directors have the experience and skill set that are still relevant today
- Address identified experience and skill gaps
- Consider expanding the board size to add the diverse perspective needed
If a boardroom looks and thinks like its market, it can think intuitively and creatively, innovate faster and enhance its brand value by mitigating potential reputational risks.
Stronger Decision Making
Research from Kellogg School of Management, Northwestern University, proves that a more diverse group will come to a better decision than a more experienced or better educated – but more homogenous –one. Even bringing a single diverse perspective into an otherwise homogenous group can shift how decisions are made, avoiding “groupthink,” a dynamic that introduces risks whereby decisions end up stale, negatively affecting performance.
Sometimes it is merely the presence of a newcomer with a new perspective that allows the existing group to voice opinions they might otherwise hold back on. Says Tony Johnson, Chief Executive Officer of EY Oceania:
“There is a tendency to think that a board that works well together is one that can easily find consensus. What a good board should seek to cultivate is a culture of trust, honesty and open dissent. If you fall back on consensus, you’re just recruiting yourself.”
However, Johnson warns against thinking that just one woman on a board will make enough of a difference to realize the benefits of a truly diverse board.
“If a board dips their toe into the water by recruiting one woman to an all-male board, or one man to an all-female board, and then bases their future recruitment decisions on that one person,” he says, “neither gender has the opportunity to shine. In order to achieve the utility of introducing minority groups, you need at least 30% of the board to be made up of any minority members.”
In 2015, women held just 15% of board seats in global organizations. Of those organizations, just 20% of them had a board makeup of at least 30% female board members. The figure of at least 30% women on boards was subsequently established as the benchmark for maximizing the potential of board diversity, as organizations that met or exceeded that benchmark added 6 percentage points to their net margins.
Blockers to greater diversity
Ten countries, including France, Spain and the Netherlands, have set gender diversity quotas for boards and the EU is proposing to follow suit. An alternative method: that of “comply or explain,” pushes boards to reach a minimum target or have to explain themselves to government. However, in both instances, a question often arises around the number of qualified women for the available roles, or the experience level of those hired to perform at the board level.
Kelly Guterl, Principal, People Advisory Services at EY, sees this as a misunderstanding of what boards should be looking for when recruiting.
“As with other leadership roles, director positions need to be considered in light of what is missing in terms of experience and knowledge within the current set of directors and what will help the organization move forward. Traditional job descriptions and expectations that require a director to be a sitting CEO automatically limit the pool of resources and perspectives that will help drive innovation and agility.
Broadening the pool to include Chief HR/Talent and Marketing Officers and General Counsels not only will accelerate the diversification of the pool, but also the diversity that boards need. These roles will also bring invaluable insight to drive board strategy. That said, if boards are insistent on using a pool of CEO-only candidates, expanding the search into geographies where CEO pools are more diverse could be an alternative strategy towards diversification.”
Johnson adds that it’s important for boards to look at a candidate’s skills, and how those skills match what the board needs, rather than just how long they’ve held a senior position.
“There’s a very fixed view of skills and tenure when it comes to board recruitment, particularly when it comes to tenure. There can be a culture of saying, ‘we’ll review the skills needed for this role when that person’s tenure is up – in 9 or 10 years.’ We need more flexibility in both skills and tenure.”
There can also be a belief that focusing on demographics such as gender or race takes away from cognitive diversity – after all, it’s not really diversity if a racially homogenous, all-male board hires one woman with the exact same educational and professional background.
However, Lutz suggests that one should not take priority over the other.
“It would be unfortunate if a focus on diversity of skills and perspectives were to undermine or cloud the focus on gender and racial diversity. In fact, typical definitions of board diversity include a demographic component.”
So, the deeper questions may be these:
- How does the board go about defining diversity?
- Does its definition include gender and racial factors?
- Does it also include factors such as skills, experiences and perspectives?
- Will the board’s practices enable it to achieve diversity along these various lines?
Gender diversity at the board level is not merely a nice to have but a key strategic imperative if an organization wants to compete and thrive.
Having more women on the board can help:
- Increase cognitive diversity, contributing to stronger decision-making
- Lead to a greater understanding of the needs and demands of the global market, from investors to consumers
- Sharpen the ability to collectively spot reputational risks that might otherwise be missed
To maximize the benefits of diversity and the ability to innovate, the board must create a culture that is open to dissent and discussion, and commit to advancing change on the board agenda.
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