One Strategy to Improve Board Performance

April 19th, 2019

performance-4-19-19.pngDoes greater diversity improve the performance of corporate boards, or is it just an exercise in political correctness?

Cognitive diversity—also called diversity of thought—has particular relevance to bank boards of directors, which are overwhelmingly made up of older white men with general business backgrounds.

This is not an indictment against older white men per se, but rather a recognition that a group of people with similar backgrounds and experiences are more likely to think alike than not. The same could be said about other homogenous social groups. For example, a team of older Latinas or younger black men might also be subject to groupthink.

“We’re only going to get the right outcomes if we have the right people around the table,” says Jayne Juvan, a partner at Tucker Ellis who is vice chair of the American Bar Association’s corporate governance committee and frequently advises corporate boards on governance matters.

It would be a mistake to dismiss board diversity as a political issue pushed by feminists, LGBT advocates and progressive Democrats. Even some of the world’s largest institutional investors think it’s a good idea.

In his annual letter to chief executive officers in 2018, BlackRock CEO Larry Fink said the investment company would “continue to emphasize the importance of a diverse board” at companies BlackRock invests in. These companies are “less likely to succumb to groupthink or miss threats to a company’s business model,” he wrote. “And they are better able to identify opportunities that provide long-term growth.”

State Street Global Advisors, another big institutional investor, announced in September of last year that it will update its voting guidelines in 2020 for firms that have no women on their boards and have failed to engage in “successful dialogue on State Street Global Advisor’s board diversity program for three consecutive years.”

As part of the new guidelines, State Street will vote against the entire slate of board members on the nominating committee of any public U.S. company that does not have at least one woman on its board.

There is, in fact, a strong business case for cognitive diversity. Studies show that diverse groups or teams make better decisions than homogenous ones.

Companies in the top quartile for gender diversity of their executive teams were 21 percent more likely to experience above-average profitability than companies in the bottom quartile, according to a 2017 study by McKinsey & Co. The study also found that companies in the top quartile for ethnic and cultural diversity were 33 percent more likely to outperform companies in the bottom quartile. Both findings were statistically significant.

“On the complex tasks we now carry out in laboratories, boardrooms, courtrooms, and classrooms, we need people who think in different ways,” wrote University of Michigan professor Scott Page in his book “The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy.”

“And not in arbitrarily diverse ways,” he continued. “Effective diverse teams are built with forethought.”

Page differentiates cognitive diversity from “identity” diversity, which is defined by demographic characteristics like race, gender, ethnicity, sexual orientation and national origin. But striving for identity diversity, through characteristics such as race and gender, and the different life experiences and perspectives that result, can help boards and organizations cultivate cognitive diversity.

Yet, Juvan says boards also need to gain insight into how potential directors think and process information, which they can do by appointing them to advisory boards or working with them in other capacities. Banks that have separate boards for their depository subsidiaries, for instance, could use those as a farm system to evaluate candidates for the holding company board.

“I think it’s about creating a pipeline of candidates well in advance of the time that you actually need them, and really getting to know those candidates in a deeper way … as opposed to thinking a year out that we’re going to have an opening and … [working] with a recruiting firm,” she says. “I don’t think it’s something that, even if you work with a recruiting firm, you should fully outsource to somebody else.”

jmilligan

Jack Milligan is editor-in-chief of Bank Director, an information resource for directors and officers of financial companies. You can connect with Jack on LinkedIn or follow @BankDirectorEd on Twitter.