Board composition is the beating heart of good governance and high performance
There is no doubt that Chairs and Boards of listed companies are becoming better at succession planning and thinking more strategically about board composition. It is now more mainstream to use proper skills analysis covering several dimensions of characteristics from professional skills to emotional intelligence. As a result diversity, in all its forms, is seen as critical to improving the composition and quality of Boards.
Charlotte Valeur, Founder & Chair, Board Apprentice Global says: “On the boards I am involved with we map existing board members on a multi-dimensional matrix. We then use a board composition and succession planning model. Those tools together help identify any gaps, which then drives future board hiring.”
The need for diversity in board composition
Some years ago, in an update to the UK Corporate Governance Code, the Financial Reporting Council (FRC) highlighted the importance of the Board’s role in establishing the ‘tone from the top’ of the company in terms of its culture and values. In addition the FRC emphasised that dialogue which is both constructive and challenging is essential to the effective functioning of any board. One of the ways in which this can be promoted is by having greater diversity on the Board; hence Board composition is critical for good governance and great performance.
Dowshan Humzah, Director & Chair of UK Advisory Board, Board Apprentice Global says: “The Financial Reporting Council recognises that diverse board composition in respect of protected characteristics (such as gender and race) is not on its own a guarantee. Diversity, inclusion and impact is just as much about difference of, what I have termed, POETS (Perspective, Outlook, Experience, Thought, Sector & Social background) which of course correlates closely to those with different protected and social characteristics. As a result, we need boards to be more uncomfortable being comfortable – and comfortable with the uncomfortable.”
Gone are the days when a new Non-Executive Director’s main ‘skill’ was being in the right circles and would simply ‘fit’ with the existing Board and culture. The new world we live in brought about by digital technology, more open markets and increased competition has accelerated the need for change and also what many call the ‘war for talent’. As a result, to find new solutions to old problems we must work with people who are different or who we don’t really understand. The privilege, preference and even mediocrity of yesterday must be replaced by the equality, opportunity and meritocracy of today – so that we find the best-of-the-best from the widest talent pools to solve these new challenges and realise opportunities. The people who can help solve these challenges and drive innovation may not look like the gatekeepers of past.
The heart of any board lies in its composition. A Board with a balance of differing backgrounds, skills and experience will have deeper and richer discussions and bring appropriate expertise to as many of the challenges that it faces. Being able to see with different eyes also makes it easier for a board to see all opportunities and risks facing the organisation and reduces the risks associated with ‘group-think’.
Lord Paul Myners, former Financial Services Secretary to The Treasury (referred to as City Minister) and one of Board Apprentice’s Ambassadors, states: “A good board meeting is a conversation, not a series of presentations.” Having differing and challenging perspectives make that conversation richer and impactful to all stakeholders in the long-run. However, to have that richly diverse talented board composition is a challenge as Lord Myners has further stated: “Too often in the UK we appoint to fit as opposed to appoint to challenge.”
The risks of ‘undiversified’ boards
Boards are increasingly visible and with that comes consideration of how their composition affects all its stakeholders, the company and individual board members. There are a number of risks associated with ‘undiversified, homogenous’ boards such as: missing opportunities and risks; being voted against by shareholders and investors; in breach of prescribed governance codes; at risk of breaching equality laws and reputation risk to individual directors, the company and the country. Net, quality, innovation,output and performance are compromised.
The individual personal traits of the Board Directors impact decision processes. It is important to have different personality types on the Board and still be able to manage discussions, conflicts and general interactions in an efficient way. Directors are expected to show confidence (born of courage and experience), integrity (personal character) and judgement (born of knowledge and experience). In addition, they should be able to challenge both executive management and each other in a constructive way crossing being comfortable and uncomfortable. They should, as a Board, collectively ensure that all voices are heard.
Professor Randall Peterson, Professor of Organisational Behaviour and Academic Director of the Leadership Institute, London Business School has some practical tips and says: “Recruiting a diverse Board is a challenge for many reasons, but recruiting a diverse group of members is just the start of the journey for effective and inclusive Boards. Once individuals from underrepresented groups are appointed, they need to be made to feel they belong and their contribution valued. However, once they feel comfortable contributing, there is a high likelihood of miscommunication and coordination failure, as what they say does not always fit with the ‘prevailing wisdom’ of the Board. That is their potential value as they see things that others do not see, but it is also where communication breakdowns get in the way of effective Board decision-making. Being an inclusive Board is a multi-stage process from appointment, to active inclusion, careful listening, and working through the very real challenges and disruption that diversity creates in the Boardroom. If you can persevere through this process, research suggests that the rewards are substantial.”
Indeed, getting the composition right is vital for the health of a Board and therefore for an organisation. The connection between the Board and the Executive Management team is partly dependent on the ability of the Board members to be sensitive to all the issues the executives face in the everyday running of the company. They also need to be sensitive to all the stakeholders including employees, suppliers, customers, shareholders, government and consumers/citizens. These stakeholders will generally consist of a wide range of people coming from different backgrounds and cultures exhibiting different POETS. The Board composition should reflect that – especially given today’s ever-more competitive markets, richer talent pools and calls for greater governance.
Charlotte Valeur is Chair of LSE listed Blackstone/GSO loan Financing Ltd, Chair of LSE listed DWCG Ltd, NED of LSE listed JPMorgan Global Convertibles Income Trust Plc and NED of Renewable Energy companies REG Ltd and NTR Plc. She previously served as the Chair of Kennedy Wilson Europe Real Estate Plc listed on the FTSE 250; she was one of only fifteen female chairs in the combined FTSE 100 and FTSE 250. Currently, she is also Chair of The Institute of Directors.
Charlotte has in excess of 30 years’ experience in the financial services industry as an investment banker in Denmark and UK and is a leading authority on board governance. Charlotte is the Founder and Chair of Board Apprentice.
Dowshan Humzah is a business transformation and digital specialist with over 20 years commercial experience and a former senior director of 2 blue-chip companies. He is known for delivering profitable growth, innovation and industry firsts having worked for RSA Insurance, Virgin Media, Orange, P&G and 4 start-ups.
Dowshan’s background informs his passion for ‘access to opportunity’ for those under-estimated and his development of diversity of POETS (Perspective, Outlook, Experience, Thought, Sector and Social Background) as a business imperatives. He holds a number of directorships and is also Chair of Board Apprentice’s UK Advisory Board.