Accelerated Diversity—A New Paradigm for Addressing Short-Term Obstacles to Board Membership

Bill Poutsiaka is a Financial Services Consultant and Founder of Enterprise Driven Investing, LLC.

Introduction

Goldman Sachs recently announced a new policy stating they will not underwrite the IPO’s of firms having only white male board members. This policy is a natural, but different, follow-on to SSGA’s initiative a few years ago requiring at least one female on the boards of companies in which they invest. Various measures have been taken in recent years to improve board diversity [1], especially by more visible companies such as those included in the S&P 500. Goldman’s action expands this visibility by adding firms at earlier stages in the evolution of their capital strategy. Good governance is no less applicable to companies at these moments, nor well before them.

While select measures, including some related to gender, have shown meaningful gains, overall progress in achieving diversity more widely has been slow. [2] Although helpful, many actions taken do not alter the root causes of small percentage gains. Promising programs, such as customized management training initiatives, do address root causes and have yielded results, but they require extended lead times.

There is a complementary strategy that would address near-term obstacles, accelerate diversity and, therefore, improve governance quality for organizations of all sizes and with various missions. This approach recognizes the value of all groups, and the interests of all entity stakeholders. Implementation has two steps, neither of which reduce standards: (1) Revising specific board membership policies and the selection process to increase their relevance; and (2) Critically assessing how, why, where, and when all groups add value in today’s governance ecosystem.

I have summarized the five components of this call to action below:

1. Gain Confidence from Common Sense, Not Studies That Are Missing Key Data

There is research underway seeking to determine the financial impact of board diversity. The primary reason some completed studies have reached conflicting conclusions is that they rely on various intersections of economic data with the diversity, age, and knowledge characteristics of individuals. These analyses omit consideration of the equally essential governance behavioral data because it is not available for the companies examined.

Social diversity sets the stage for decision quality control. This social diversity must be accompanied by suitable, advanced and also diverse business expertise possessed by the same individuals. In combination, these two dimensions are the raw material for the diversity of perspective and approach that are, without question, the foundation for decisions resulting in better outcomes in business and life.

One of the reasons a governance foundation built on diversity has excellent potential involves engagement. Experience and general observation tell us that diverse groups, assembled for any purpose, are more interesting than non-diverse groups. The critical ingredient of board engagement comes from many sources (personal standards of professionalism, chemistry, quality of agenda, format of the material, decision support technology). But greater diversity in the individuals’ backgrounds and competencies leverage the engagement potential of all these other variables. Plainly stated, the entire experience is just more intriguing, and this contributes to better governance performance.

However, the presence of interesting people who, together, also have the social and business diversity needed to deliver quality control doesn’t guarantee they will do so. Doing so depends on members exercising governance skills, most notably the chairperson’s ability to understand each person’s strengths, form outstanding questions, cultivate debate (e.g., avoid Groupthink), insist on respect, and guide the team to compromise. Unfortunately, a database having this binary indicator for the presence or absence of the effective governance behavior that drives financial outcomes doesn’t exist.

Recommendations: For now, accept the common-sense conclusion that a group comprised of people who each possess a different combination of business expertise and social diversity qualities, and are informed, skilled as critical thinkers and encouraged to enrich the dialogue with excellent questions, will improve decision quality and financial results, dramatically.

Continue the research underway using natural language processing, neural networks and behavioral economics to better reveal the connection between team member selection/group dynamics and financial results.

2. Revise Member Term Limits

Board turnover needs to take place to diversify membership without increasing the size above a threshold (10-12), where productive committee dynamics are the exception, not the rule. Research confirms that average tenures are typically ten years or longer, and this remains a primary limiting factor to increasing diversity. Traditionally, term limit policies balanced the benefits of fresh thinking and updated executive knowledge against the value of organizational continuity surrounding the implementation of longer-term board responsibilities, such as strategy and CEO succession. Now that more rapid growth in diversity is an objective, how can we increase turnover without abandoning the continuity of governance?

First, establish both age and length of service, independently, as the basis for retirement. Inevitably, as we age, specific skills decline. What receives less recognition is that certain business skills, dependent on what neuroscientists refer to as crystallized intelligence, improve often well into our 60’s. For example, the techniques of excellent plan design and execution are timeless, and the more experience in this area, the better. Startups who are fueling the rapidly expanding innovation economy value these skills and the business knowledge accumulated through long careers. They are actively seeking advisors and mentors with such competence, effectively applying a broader definition of “diversity,” for good reasons. Nevertheless, the natural decline in other important decision areas linked to governance do support a mandatory retirement age. The data varies, but age 70 or thereabouts is entirely defensible.

In terms of length of service, boards should request directors who have at least five years of service to submit annual letters of resignation subject to a maximum term of 10 years. Empirical studies in group development theory confirm that even five years provides an extended period of maximum productivity for teams having a wide range of compositions. Authorize the governance committee, or board chairperson in the case of committee members, to accept, or not, such resignations. In all instances, the decisions should be made with the benefit of evaluations of individual and overall board effectiveness, and future “readiness”, now in place as part of best practices.

Second, create a two-year post-retirement director role, such as an appointed advisory committee meeting semi-annually, where recently retired directors convey a thoughtful and objective history to their successors. This step formalizes what many new directors already know, that some of the most helpful onboarding discussions are with recent or soon to retire members.

The combination of these two steps should increase turnover, preserve continuity (but not status quo), and demonstrate professional respect to long-standing contributors.

Recommendations: Create a meaningful transitional role for existing directors and request annual resignation letters after five years of service, subject to a maximum term of 10 years and mandatory retirement around age 70 in any event.

3. Revise Candidate Age and Years of Experience Requirements

One of the reasons given for the slow pace of board diversity is the intense competition for candidates from a relatively small pool of qualified individuals. Often, criteria include minimum ages in the late ’50s or at least 30 years of executive experience, or both. The primary rationale for these requirements is the higher retention risk associated with younger candidates, say in their early 40’s. For the reasons described below, these once valid risk mitigators are both less necessary and strategically more expensive in the current environment.

Governance is now an attractive career, drawing more people to its significant challenges, greater accountability, and unique fulfillment. The NACD’s new certification program effectively recognizes this structural change in employment trends and, clearly, the paramount importance of governance expertise. In addition, a career in governance, especially given the increasingly conservative interpretation of conflicts and member limits on the maximum number of boards, also means fewer hours than most senior executive positions. The younger age range often excluded has been recognized by experts in cognition as peak years for creative thinking. Immensely talented, younger, and very qualified people who want high impact responsibilities, but with greater personal flexibility (under normal circumstances), are now interested in governance as a career. Despite these trends, the average age of corporate directors has been increasing.

Years of required experience also needs to be recalibrated based on the type of experience. The velocity of change in most fields has increased so substantially that domain proficiency acquired through work 20 and 30 years ago has limited value. A shorter executive career in many functional disciplines is not necessarily an expertise deficiency today, as it was previously. Also, many boards require that all candidates have served on a board previously. A better option, especially given the simultaneous need for experience in emerging areas including “E and S” could be concurrent participation in a high-quality “G” education program such as NACD certification.

Finally, avoiding top candidates because of the retention risk solidifies the same path to mediocrity as does targeting minimally qualified candidates for employment because “they aren’t going anywhere.” Even with shorter tenures, the enormous impact of quality governance, attributable to the right board composition, will more than offset the inconvenience of turnover (within reason).

Recommendation:Lower age and experience prerequisites significantly, expanding the pool of eligible, interested, and qualified candidates who have suitable business expertise and are socially diverse.

4. Set Goals, Shorten Timetables, Accelerate Diversity

A more significant turnover of incumbents, combined with lower candidate thresholds for age and years of experience, will enable boards to comfortably set aggressive timetables for minimum parity (approximately 40% social diversity), such as three years, realizing all the benefits of diversity sooner.

Recommendation: In conjunction with greater turnover and lower candidate thresholds for age and experience, establish goals and accelerate board diversity accordingly.

5. Recognize the Emerging Value of Innovation and Social Responsibility Experience

Innovation and social responsibility have quickly evolved from slogans to defining elements of corporate success, if not survival. Kai Fu Lee, a respected authority on the history and future of fundamental business changes, captured the inflection point in 2018 as follows:

“And time is one thing that the AI revolution is not inclined to grant us. The transition to an AI-driven economy will be far faster than any of the other GPT-induced transformations, leaving workers and organizations in a mad scramble to adjust. Whereas the Industrial Revolution took place across generations, the AI revolution will have a major impact within one generation.” [3]

Similarly, major trade organizations and the full spectrum of business constituents, including shareholders, rating agencies, and regulators have already set expectations for corporate social responsibility (CSR). Last year, The U.S. Business Roundtable released a new Statement on the Purpose of a Corporation which recognized the interests of all stakeholders. As we wrestle with new questions on how companies should be more socially responsible, we should logically assume that the foresight of a diverse board along with effective meeting dynamics will guide companies through insights less likely in their absence. Domain expertise has taken on this expanded meaning for all people affiliated with corporations.

The speed and nature of these changes mean candidates with updated backgrounds will be sourced in new ways and from entirely different channels (described later), creating a governance ecosystem in the process. Targeting retired executives with enduring business skills through search firms and networks will remain important. But finding candidates with hands-on expertise in areas of climate change and technology innovation has become the next iteration of search competition. Also, accelerating social diversity in corporate governance addresses, unintentionally but effectively, the pipeline challenge in candidate expertise through the sequence described below.

White men who are highly qualified as corporate directors in traditional ways but, obviously, not from a social diversity perspective, continue to be included in searches. Governance committees facing the need to increase diversity, address retirements in the next few years, but anticipating the long lead times due to the unnecessarily small pool of qualified diversity candidates, understandably recruit qualified white men as a deadline insurance policy and a point of comparison.

Ironically, some of these men have been aggressive advocates for diversity during times when doing so was unpopular. For them, accepting candidacy often means full participation, including time and effort from beginning to end of these lengthening periods of diversity search and candidate evaluation. But the chances of their selection, ultimately, have declined. Governance committees, and the search firms they retain, do handle this ethically by disclosing probabilities to these candidates.

When viewed through the lens of business innovation and social responsibility, lower prospects for selection today can also mean a higher likelihood of selection in the future. During the shorter path to parity, these executives (and others) can pursue roles advising various tech and non-profit startups, as well as mentoring their leaders. The business and executive skills obtained through careers in large companies have significant value subject, as always, to specific requirements. Here, the central requirement is the conversion of this knowledge to organizations at much earlier and urgent points of organizational development. Fortunately, trade groups, traditional venture capital firms, incubators and accelerators have refined how and where this knowledge applies, and where it doesn’t, to entrepreneurs. The need for experienced professionals, who make this transition, has grown significantly.

At the same time, the corporate governance value of the knowledge, network and, often, diversity experience acquired in these roles, together with traditional business expertise, is a compelling combination in today’s candidate. The mix of (1) sooner achievement of social parity on corporate boards, (2) a universal view of aging enlightened by neuroscience, and (3) the acquisition of this critical new expertise in the interim, means a bright and not too distant future for the candidacy of these individuals. Given the experience, they may choose to continue in this new capacity along with a conventional director role, or exclusively.

Recommendation: Executives should explore the rapidly growing innovation economy by pursuing mentoring and advisory opportunities. Governance committees that haven’t done so should add direct experience with innovation and social responsibility to their candidate criteria and skill descriptions.

Conclusions

Board diversity is a complex balancing act with no perfect solution. But we can improve on prevalent policies and approaches.

I believe with the implementation of this strategy, board diversity will accelerate and, over a relatively short period and in different ways, everyone wins individually and collectively. I hope that these ideas help pivot the dialogue more quickly from repeating the challenges to finding the answers, including those that depart from the recommendations I’ve made here.

We’re a long way off from machines replacing directors and executives, but the work is underway. The sooner we fully exploit our advantages (avoiding confirmation bias, addressing circumstances with little history like fully integrated CSR) the longer we’ll own the boardroom. Diversity, broadly speaking, and effective group dynamics leverage these powerful human advantages.

Endnotes

1Unless specified, “diversity” means social diversity (gender, ethnic, racial).(go back)

2Two excellent sources for research, data and discussions on governance are this Forum and https://www.nacdonline.org.(go back)

3AI Super-Powers; China, Silicon Valley and the New World Order; Houghton Mifflin Harcourt; 2018; page 152.(go back)

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