Value of board diversity is rising, but less so among tenured directors
Diversity on corporate boards is an honourable goal, and potentially one with financial rewards: Research indicates that companies with more women or minorities on boards have performed better than their less diverse counterparts.
But a reliance on the status quo is still favoured by board members most likely to benefit from it, even though board consistency can be seen in a positive light. A board that stays current on industry trends can offer deep expertise.
Newer board members at large companies are more likely to think that a fellow board member should be replaced. Those who have served more than ten years are less likely to recommend a director’s replacement, according to a PwC report. Overall, the percentage who consider gender diversity an important board attribute rose from 37% in 2014 to 41% this year – too low a percentage, according to some experts.
“Fifty-nine per cent think the old boys’ club is better,” said Sharon Constançon, CEO of Genius Methods, a UK board coaching, mentoring, and evaluation firm. “The statistics are very clearly in favour of the guys who have been together the last ten years.”
PwC’s 2016 Annual Corporate Directors Survey showed stark differences of opinion about board service according to gender. For example, 97% of male directors believe the optimal percentage of female representation on a public company board should be less than 20%. Boards around the world generally have about four men for every one woman, though the numbers vary by region, according to a global report by Spencer Stuart.
While the percentage of board members who say that gender and racial diversity is important is growing, the opinions often fall along gender lines in the PwC report. Eighty-nine per cent of female board members believe that such diversity enhances company performance, but just 24% of male board members agree.
Female board members are more likely to advocate that board members be subjected to term limits, 68% to 56% of male board members, according to Spencer Stuart.
Pluses and minuses of board tenure
Board tenure can be tricky. On one hand, a board with long-tenured members has consistency and expertise. On the other hand, board members who have extended tenures can be seen as less independent and less likely to challenge management information. “None of that is going to be challenged when the people have stayed on and there’s been no change,” Constançon said.
Boards that don’t change or stay current on trends run the risk of not seeing emerging threats, said Mike Gray, FCMA, CGMA. Gray, the managing director of CFO Centre, a provider of part-time CFO services in Africa and Indian Ocean islands, said companies that fail to respond to social media crises, for instance, risk irreparable harm to their reputation, but he pointed out that few board members in the PwC survey were concerned by reputational risk (24%).
Having a group of board members that has been together for a long time can lead to stagnant decision-making or a lack of fresh ideas. One way to change that dynamic is by changing board makeup. Taylor Simonton, CPA, currently a board member at Advanced Emissions Solutions Inc. and Escalera Resources Co. in Colorado, said that increasing diversity can lessen the probability of boards engaging in groupthink.
Why boards tend to stay the same
Several obstacles exist in improving diversity on corporate boards. First, potential board candidates are often current or former CEOs, most of whom are white males. So companies must look outside the C-suite for potential candidates, and familiar recruiting strategies must be disrupted, experts say.
“A board’s primary goal as to its composition is to have the best combination of skills, experiences, personalities, and backgrounds to succeed with its company’s business strategy,” Simonton said. “New directors with these backgrounds have diverse perspectives, which encourage lively dialogue about strategy and the changing dynamics of a company’s operating environment.”
Another reason board membership has been slow to change: Serving on a board can be lucrative. The median annual compensation for a board member at a large company is more than $260,000, according to research by Willis Towers Watson. Who would want to give up a part-time position that pays that well?
A lack of preparation for meetings is the top reason board members should be replaced, according to 25% of respondents in the PwC survey, up from 11% in 2012. The second-most common reason for recommended replacement is not having the required expertise (17%), followed by aging that’s seen as leading to diminished performance and overstepping the boundaries of the role (12% each).
—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.