Corporate Culture

Diversity: The business case for boards

Diversity is falling on ASX 200 boards. According to October data from the Australian Institute of Company Directors (AICD), currently, these boards are 29.5 per cent female, down from 26.7 per cent in July. Further, 31.7% of board appointees in 2019 are women, down from 45% in 2018.

Of course, it’s important to note that ‘diversity’ doesn’t only refer to gender: age, ethnicity, social class, education level, work skills and life experience, among many other attributes, can also contribute to a more diverse board.

Why diversity matters

Diversity is good for business. “Collectively, diverse boards possess a broader understanding of their organisation and society at large, assisting in effective decision making and navigating an unpredictable world,” notes the Engaging Young Leaders on Aged Care and Community Boards Program. It’s not merely a logical argument – it’s backed up by some compelling numbers.

McKinsey has found over a number of studies that diversity leads to better performance, starting with 2015’s Why diversity matters, (“New research makes it increasingly clear that companies with more diverse workforces perform better financially”), which found that US public companies in the top quartile for management ethnic and racial diversity were 35% more likely to outperform their industry financially, while those in the top quartile for gender diversity were 15% more likely to have above-average returns.

Delivering through diversity, a 2018 follow-up, found the trend continuing and “suggests how organisations can draft better inclusion strategies for a competitive edge”.

There’s also an impact on risk-taking and risk management, with greater diversity typically associated with better outcomes for both. For example, FINSIA notes that “A lack of diverse and dissenting views in boardrooms was a key driver of the GFC, and this situation could be avoided if more women directors are appointed”.

Less diversity = more risk?

Decisions about risk are among the most important any board will make. We have seen the GFC wipe out trillions in value from the global economy and in a local context, failures of governance causing scandals in Australian industries including banking, institutional religion, insurance and aged care.

The total cost of these failures has not been tallied, but significant fines have been issued (AUD $700 million to the Commonwealth Bank, for example) and leaders dismissed or being forced to step down early.

It’s also a matter with long-term implications. As more companies compete for talent, the ability and willingness to identify more diverse board members will make more good candidates available for appointment, bringing all the advantages of diversity with them.

Diversity: how to do it

How, then, can boards ensure they’re taking advantage of the benefits that diversity offers? We suggest that board will be far more welcoming of diversity if they’re thinking more deeply about the notion of merit, the nature of diversity and business benefits at stake.

  • Merit: Many organisations have a strict policy of appointment based on merit – but what does that mean? If every member of the board has the same ethnic, religious, class, educational and professional background, then its notion of ‘merit’ will be bound by these commonalities.
    Tip: Encourage your board to expand its definition to include new skills, new experiences and new outlooks.
  • Diversity: As noted, ‘diversity’ does not refer only to gender – nor to ethnicity, religion, class, education or profession. Rather, it refers to a diversity of perspective, experience and
    Tip: Encourage your board to seek new members who will contribute to its diversity of ideas.
  • Benefits: If they’re unfamiliar with diversity’s social, governance, decision-making and financial benefits, present your board members with the facts they need to understand the benefits.
    Tip: Look to the more diverse organisations in your sector and benchmark current and projected performance.

Governance is critical

In many respects, diversity is a governance issue, which means that governance tools can help your organisation perform better. Diligent continues to advocate Modern Governance – The practice of empowering leaders with the technology, insights, and processes required to fuel good governance.

In practical terms, this means adopting a single, unified technology platform to handle all aspects of corporate governance, provide the board of directors with the information and insights they need to make good decisions, and ensure policies – such as diversity policies – are being implemented and are delivering their benefits.

That such platforms provide the tools for good governance securely and across virtually all technology platforms, from smartphones to tablets to dedicated workstations, ensures that best practice governance is available to all the board, all the time.

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