THE WORKING CLASS ON BOARDS – NOW THAT WOULD BE DIVERSITY

Theresa May, in her first campaign speech, which about an hour later unexpectedly became her last campaign speech, promised a shake-up of Company governance in the UK with the words: “I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders. In practice, they are drawn from the same narrow social and professional circles as the executive team.” And then she went on to declare that: “If I am PM, we’re going to have not just consumers represented on company boards, but workers as well.”

Set aside for a minute the fact that the Chairmen (and they are mostly men) will probably have been spluttering into their cornflakes at a Tory PM suggesting a policy that was last advocated by that most unsuccessful Labour Leader, Ed Milliband, would it be a positive move to diversify UK Board members away from the “narrow social and professional” circles from which most of them come? And even to include representatives of the workforce?

On the face of it, Board members are largely a homogenous bunch. Well, at least, they are overwhelmingly male and white, that’s for sure. In the top 297 top jobs in the FTSE 100 (Chair, CEO and CFO) when I counted them up in May, I found more people called Andrew, David and John than women and bme people!

Because of this we are often asked, as part of the work we do designing diversity into organisations, whether greater diversity on Boards would make for better decisions, better examination of risk and more rigour in developing strategy. Our immediate reaction is to respond positively because, with a wider range of perspectives and experiences round the table, surely a company can only reach better decisions? But what does the research say?

The Davies report on Women on Boards quoted a large number of studies, this one being typical: “Companies with more women on their boards were found to outperform their rivals with a 42% higher return in sales, 66% higher return on invested capital and 53% higher return on equity”. (“The Bottom Line: Corporate Performance and Women’s Representation on Boards”, Lois Joy, Nancy M Carter, Harvey M.Wagener, Sriram Narayanan, Catalyst, 2007). And the Report continued with the assertion that “This is not just a gender numbers game. It is about the richness of the board as a whole, the combined contribution of a group of people with different skills and perspectives to offer, different experiences, backgrounds and life styles and who together are more able to consider issues in a rounded, holistic way and offer an attention to detail not seen on all male boards”.

Trevor Phillips, former Chair of the Equality and Human Rights Commission and now President of John Lewis’s Partnership Council, commenting on research into the Executive level of business from which so many Board members are drawn, made the point that “the narrowness of the outlook of too many of the UK’s business elite threatened Britain’s global competitiveness”

“As China grows to be the largest consumer market in the world, and as the US becomes a majority-minority society, the fact that two-thirds of our biggest companies have all-white executive teams – and apparently not one person of Chinese descent – should set off a big red flashing light that we aren’t equipping ourselves to compete in these markets,” he said.

https://next.ft.com/content/16f6d228-900f-11e3-aee9-00144feab7de

The research by and large concurs that the more diversity, the better the performance – always with the caveat that the diversity is well managed and you don’t fall into the trap of confirming the dangerous assumption that there’s a trade-off between diversity and the appropriately high level of skill. But no-one ever suggests that it is a causal relationship. It is a correlation between diversity and company performance.

And our view is that the correlation has its roots in having an effective talent strategy. If yours is a company that is bothering to identify and develop talent in individuals that come from groups of people who traditionally experience blocks to their talent, then you are the kind of company or organisation that will grow and deploy its people to their fullest potential and that is what will achieve the better results.

The trouble has been that, despite all this being rather obvious to anyone who has ever taken a football analogy off the shelf (and they remain pretty untouched and dusty on mine) and compared Manchester United – a team full of expensive, overpaid superstars – and Leicester City – a team full of cheap, hardly known, rather wonderful team players – British business had to be dragged kicking and screaming to the cause of tackling the absence on Boards of women and other people who represented difference from the norm of white, middle aged men. The incumbents thought they were doing a rather good job. And it was difficult to argue before the Crash that that wasn’t true. There wasn’t a counter-factual. But the Crash changed that.

Up to that point British business governance was regularly lauded as being pretty damn sound. Old Boy. But then came Lehman Brothers, RBS, Barclays and Libor, the explosion of ridiculous remuneration paid to, even failing, CEOs, the ever widening gap in pay between them and their workforce al of which inspired a much more rigorous scrutiny of the composition and behaviour of Boards.

So, if diversity does make a good Board, how do you achieve it – in composition, conversation, challenge and communication.

Peter Drucker, often described as “the founder of modern management”, famously quoted the example of Alfred P Sloan, longtime President, CEO and Chairman of General Motors, at a Board meeting: “Gentlemen, I take it we are all in complete agreement on the decision here,” After everyone around the table nodded affirmatively, Sloan is said to have continued: “Then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”

https://books.google.co.uk/books?id=Y_Q6Pe_dWq0C&pg=PA472&lpg=PA472&dq=Alfred+P+Sloan+%22Gentlemen,+I+take+it+we+are+all+in+complete+agreement+on+the+decision+here,%22&source=bl&ots=N3S4XGXl8g&sig=SynCUgX69GnqKCqmXIWMmPq0dDw&hl=en&sa=X&ved=0ahUKEwjY9_OnjYLOAhVqDMAKHapEA7IQ6AEILzAE#v=onepage&q=Alfred%20P%20Sloan%20%22Gentlemen%2C%20I%20take%20it%20we%20are%20all%20in%20complete%20agreement%20on%20the%20decision%20here%2C%22&f=false

Sloan, Drucker wrote in 1967’s The Effective Executive, “was anything but an ‘intuitive’ decision-maker. He always emphasized the need to test opinions against facts and the need to make absolutely sure that one did not start out with the conclusion and then look for the facts that would support it. But he knew that the right decision demands adequate disagreement.”

“Adequate disagreement” is at the heart of a well functioning Board. Strategies and risks need to be turned round and round and held up to the light from many different perspectives before they’re agreed. And shared understandings, backgrounds and assumptions do not help that process. Difference does.

So how to achieve that level of rigour and performance by your Board? As Chair you need to ensure that the Board:
• Draws up a matrix which will identify who you don’t have on the Board – not just their professional skills but their diversity in terms of both “style of contribution to the Board” and “provenance and identity”;
• Redraws this Matrix every time you recruit to the Board and each time seek someone who explicitly can bring difference to the discussions – because every time you recruit your Board dynamic and the needs of your strategy could have changed.
• Then looks in different places for your new members – don’t replicate the Exec, think of how you can find the relevant new perspectives to interrogate your risks, markets, products and innovation. Whose perspective will stretch your thinking about your markets, your place in them and what you’re offering your customers
• Recognises in its soul that high performing Boards are such because they have a combination of difference on them. It’s not individuals on their own but how you combine them. So be conscious of deliberately finding different people and work on melding that difference into a common purpose.

This requires you to recruit differently to your Board, explicitly looking for complimentary identities and approaches. And that affects the Matrix, the criteria, the process and where you search.

So will Mrs May see the changes in the way that she wants in Company governance? We believe she’ll only achieve them by actively advocating diversity and giving powers to the Regulator to ask intelligent questions about company diversity. Ban the tick box and instead ask the FCA (or hefce, if you’re a University or NCVO if you’re in the third sector) to investigate whether organisations have the combinations of people that will indicate they are taking diversity seriously. in all its glory

And accompany that with further encouragement to the institutional shareholders and their agents – L&G Investment Management and Hermes EOS for instance and the others – to pursue the question of diversity of Boards with Chairs. Because they are the ones that are currently making the running on binding pay recommendations.

http://www.lgim.com/fr/en/capabilities/corporate-governance/team/

https://www.hermes-investment.com/ukw/stewardship/hermes-eos-services/?gclid=CJLHrtmNgs4CFY9uGwodjF8IKA

Diversity does not happen on its own, It only happens by design. Mrs May can’t just wish for it, she needs to act.