Harnessing Board Diversity:Time for a Double Jump?

After 2015 the focus broadened to the FTSE 250 and the target was increased to 33% by 2020, which again was met (2). The FTSE small cap top 100 aren’t far behind, with 28% female directors in January 2020, and although the AIM-market is still lagging (15% female directors) this isn’t bad progress given they tend to have smaller boards with less public scrutiny. As of May 2020 there were, for the first time, no all-male boards in the FTSE 350.  Something that at the time seemed unchangeable, has become the norm as a result of persuasion, soft regulation, investor pressure and lots of work by pressure groups such as the 30% Club and Women on Boards.

The Business Case for Board Diversity

So does this also mean we have better boards?  Lots of research has been published on the so-called ‘business case’ for board diversity (3). It usually argues that there is a relationship between companies with women directors and a whole bunch of business outcomes, such as higher profits, better reputational returns, shareholder returns or business performance. Diverse boards are said to be even more important in industries or sectors that have majority female consumers or employees, and are often connected to gender equality too, with the assumption that having women on boards leads to more gender balanced companies lower down, or is a measure of how seriously a company takes its commitment to diversity.

Not all of these claims are over-exaggerated – the symbolic value of women in senior positions is significant, and particularly for listed companies whose investors are scrutinising all-male boards. But they can be frustrating. Organisational diversity can both drive and be an indicator of company success, but to claim that simply increasing the number of women in a boardroom will directly lead to higher profits, is a wilful misinterpretation of what the board is there to do.

There are countless ways to assess how effective a board is, but we rarely start with “How successful is the company?”  We start with internal measures – how effective is the board at making the decisions they need to, when they need to?  Do they have the right mix of perspectives to make those decisions? A value-adding board is a complex thing, and we can’t expect to just ‘add a woman and stir’ and see better outcomes down the river. Apart from anything else, it’s a lot of pressure to put on a new female NED!

That is not to say a diverse board isn’t an asset. It can reduce ‘groupthink’ and help to change the balance of a conversation, especially when the people being appointed come from genuinely different backgrounds. Other kinds of diversity are also coming to the fore, in particular the need for boards to have ethnic diversity (something else that did not change much with the focus on gender). The pressure to increase diversity is also leading boards to refresh more often than they were before, especially given the emphasis on independence, another significant change in the last 20 years. We know, both through experience and data that teams with people from different perspectives who think differently are likely to make better decisions – assuming, of course, their perspectives are relevant to the decision being made and that the decision making process is done well and chaired well. Diversity is not without its challenges, but the rewards are undeniable.