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Companies need to act on diversity
Jo Iwasaki, Institute of Chartered Accountants in England and Wales (ICAEW), talks about mixing it up in the workplace
May 6, 2014 5:28 by kippreport
Following on from the financial crisis that began in 2007, there have been many calls for companies to have more diverse boards. The feeling in many countries has been that governance shortcomings could be partly traced back to their directors thinking and acting too much alike. Typically male, middle aged and from similar social backgrounds, there are fears that boards that are too similar could lead to ‘groupthink’, where a lack of diversity leads to people all coming to, and even sticking by, the same conclusions, even when wrong.
Board diversity is now a mainstream corporate governance issue. Commentators and interest groups regularly review board membership across the world and challenge their effectiveness where they seem too homogenous. A potential problem is that, while the lack of diversity is a real issue, solutions companies come up with are often simplistic and cosmetic. For example, hitting a target that can easily be measured might only be focusing on one element of diversity, such as gender, while the risk of the purpose of diversity being ignored – board members being diverse in substance – remains. This can be different if companies are to be able to pre-empt these challenges, instead, and take actions before their hands are forced.
Businesses need to understand that diversity can contribute to board effectiveness. It can make companies more socially acceptable and make the decision-making process more rigorous. Having an overly similar board can make people doubt that the company supports social norms of fairness and equal opportunities. This can do real reputational harm among customers, shareholders and societies within which they operate.
Diverse boards can be better at doing business. No one would argue against the idea that companies need to be in tune with their customers, suppliers and other stakeholders. It is highly likely that these groups will be diverse in terms of age, gender and background. Although it is unrealistic to accommodate all different components of the society, boards need to work hard to see things through their eyes and diversity is one tool for achieving this. Furthermore, markets are increasingly globalised and it makes sense for boards to have the experience and expertise to understand them.
Simply achieving a diverse board composition is by no means the end of the road. To realise their full potential, boards need to have mutual respect and rigour to enable different views to be expressed, heard and considered. It will take effort and commitment from the chairman and board members to recognise that an open exchange of diverse viewpoints can help the board reach better, shared conclusions.
Ultimately the question of ‘how diverse a board should be’ will depend on the company, its business purpose, its position in society and its stage of development – there is no single ‘right answer’. But companies that act ahead of the curve to develop relevant initiatives will achieve diversity in substance that genuinely contributes to business success.