DIVERSITY AT THE HEAD TABLE
Bringing Complementary Skills and Experiences to the Board
Events leading to the recent economic crisis and recession show that numerous companies either were not aware of the risks they were carrying, or were betting the company. Also, compensation arrangements for key executives were not aligned with the long-term performance of these companies. Clearly these institutions faced serious governance failures, with many boards falling short in their two key areas of responsibility: guidance and oversight.
To remedy this situation, many governments are considering new regulations—just as the Sarbanes-Oxley regulations came in the wake of the Enron incident. Even though good intentions may be behind this new regulatory impetus, we should not forget that regulation alone cannot bring good governance. In fact, excessive regulation brings the threat of overwhelming bureaucracy, which stifles innovation and risk taking. A better remedy would be to increase the diversity of the boards.
A key function of boards of directors is to ensure that the risks taken by management on behalf of the shareholders are consistent and balanced, and that they have high likelihood of value creation. To be sustainable, an organization must strike a fine balance between:
•risk and reward,
•short term and long term,
•interests of various stakeholders,
•ethical considerations and market practices, and
•providing effective oversight versus motivating management to assume calculated risks for value creation.
But, as the world has changed, so has the definition of a well-functioning board. Just as no single individual—regardless of capabilities—is likely to be sufficient in striking the right balance in all the areas listed above, neither can a group of individuals who differ little from each other.
I MPORTARTARTANT AREAS OF DIVERSITY Generally, we tend to think of diversity in the context of gender or ethnicity. However, to build a strong team, boards should also consider diversity of skills and experience, age distribution, and tenure on the board. Diversity for its own sake is not an improvement in governance; what matters is the combination of complementary skills and experiences that members bring to the table to better address the challenges the company is likely to face.
Diversity of Skills and Experience Let’s look more closely at diversity of skills and experience, breaking it down into industry experience, geographic experience and nationalities, functional experience, stakeholder experience, and experience with different business scales and stages of business life cycles.
• Industry Experience
• Geographic Experience and Nationalities
• Functional Experience
• Stakeholder Experience
• Experience with Different Business
Scales and Stages of Business Life Cycles
Diversity of Age Distribution To be sustainable, corporations need board members of different ages. With today’s rapid changes in technology and social trends comes the need to have younger board members who are able to identify potential risks and remedies associated with these changes. For example, understanding technical trading, hedge funds, or option agreements that pose significant risks requires a grasp of mathematical modeling that few older-generation executives have. Also, understanding of the potential of Internet marketing is much deeper in the new generation. Hence, companies that recruit younger board members with sufficiently broad and holistic experience are benefiting from their decisions.
Age diversity also allows for an easier transition when people retire from the board, since having a range of ages makes it less likely that a large proportion of the members will be retiring at once. A mix of ages helps ensure that there will be a sufficient number of experienced board members.
Diversity of Tenure on the Board Another area that requires careful balance is diversity of tenure. One of the key responsibilities of boards is to prevent potential conflicts of interest between the management and the shareholders. Clear separation of management rights (taking initiative and implementation) and governance rights (guidance, approval, and oversight) is critical in minimizing potential “agency” risks of the management, such as:
• cronyism (building a personal fiefdom with company resources)
• lethargy (focusing on excuses as op- posed to results)
• being too risk-averse (potentially leading to overinvestment) and
• being too risk-prone (betting the company).........