Why board diversity can no longer be a company tick-box
Despite being linked to improved performance and innovation, changing the face of directors has been sluggish in SA
The business case for diversity has now been made conclusively in a number of studies. Diverse teams make better decisions, and with that better investment decisions.
Perhaps even more compelling, as reported by the Boston Consulting Group Henderson Institute, companies with above-average diversity scores report an average of 45% of revenue coming from innovation, as opposed to 26% at companies with below-average diversity scores.
The link between diversity and revenue derived from innovation is particularly compelling in the current business environment — Covid-19 has clearly established a link between innovation and the ability to survive (and even prosper) during periods of extreme disruption.
The King IV corporate governance report and JSE regulations refer to the creation of diversity policies and targets, but though there has been progress it has been slow. For example, a Business Engage report published in October 2020 shows that while the number of companies that have set gender targets has grown to 104 from 81, twice as many companies did not set targets at all. And of the 104 that did set targets, only 62 actually achieved them.
PWC’s latest nonexecutive directors report shows clearly that boards in particular still do not fully represent the country as a whole or the organisation’s shifting stakeholder profile. Some salutary statistics indicate that nonexecutives remain largely white (48%) and male (71%). Representation of Asians and coloureds seems to be aligned with their representation within the general population ̶ it’s the African category that remains underrepresented.
Given that we are now more than a generation into democracy, and given the solid business case for diversity, why has there not been more progress? Or, to put it more positively, what actions can organisations take to accelerate the achievement of greater diversity on their boards?
Move beyond box-ticking. The enduring problem with regulations of any kind, no matter how important or beneficial, is that they are typically seen as onerous and constricting. For some companies, simply taking the path of least resistance and ticking the boxes seems the default setting. At the same time, targets are often confused with quotas, with the latter again supporting a counterproductive compliance-based mindset.
A particular challenge is that race and gender are too often seen as proxies for genuine diversity ̶ King IV and the JSE regulations clearly include other criteria, such as field of knowledge, skills and experience, and culture. That said though, race and gender are obvious and necessary starting points.
The bottom line? Make the business case for transformation carefully and make certain it is embedded in the strategy and key performance indicators. It is vital that everybody understands why it is more than a compliance issue, and the board must be seen to be “walking the talk”.
Set targets. Boards should set themselves and the rest of the company some hard targets relating to diversity, including stretch targets. Pious intentions usually remain just that.
Nominations committees should expand their horizons. Those in charge of new appointments should make a concerted and conscious effort to look beyond their usual circles to tap into a growing pool of diverse directorial talent.
Manage a pipeline of future directors. More broadly speaking, the board chair should lead an effort to ensure the organisation builds a profile with up-and-coming talent. The ideal, in Malcolm Forbes’s words, is: “Diversity is the art of thinking independently together.” Epigrammatic, but devilishly difficult to put into practice, relying on the chair to play a critical role in turning a diverse board with the right skills into an effective team.
Shareholders must play their part. In the age of the activist investor, powerful institutional investors in particular should be holding boards to account in two critical areas: new diverse appointments to the board, and progress towards achieving diversity targets.
Board diversity is not an end in itself, and organisations that want to maximise board performance must understand the inner dynamics of diversity and what it seeks to achieve. Clearly, if a board is composed of the same type of people, with no diversity of thought, then chances are it will find itself constantly on the back foot — unable to think its way into the minds of its various stakeholders, its staff and, importantly, its competitors.
Diversity is something SA companies desperately need to succeed in the 21st century. Applied in the right spirit, and with the outcome of improved performance in mind, it has the potential to unlock the diversity dividend latent in a fractured society like ours. Boards must lead the way.
• Natesan and Du Plessis are respectively CEO and facilitator of the Institute of Directors of SA.
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