The Importance of Diversity of Perspective on Boards
It has been shown that one of the most effective ways to enhance corporate governance is through board diversity. In general terms diversity looks at the board composition of individual directors to allow for a balanced board which is the essence of corporate governance. Boardroom diversity covers age, background, gender and ethnic diversity, and also diversity in terms of skills, thinking, competencies, experiences, and careers.
Depth of perspective leads to a better dynamic and manifests in better compliance and corporate governance. Where the directors have different points of view there is less likelihood of “group think”, which leads to a more agile board and better performance. Diversity of thinking and perspective assists the board in fulfilling its ongoing oversight responsibilities.
A key benefit of board diversity is more effective decision making. A diverse board with different skills, background, and experiences will look at topics with a broader perspective which leads to more critical analysis and a different board dynamic. Having multiple views on any action and its outcome makes for decision making that is more than likely to take into account the risks and implications of possible actions. This leads to a more thoughtful and considered decision making process and allows for more comprehensive oversight.
A well-constructed board is able to draw upon its wide experiences in foreseeing challenges and appraising risks. This diversity of perspective leads to better risk management as the board can draw upon its diverse set of skills and knowledge. This is essential if boards are to successfully tackle complex issues such as the accelerating use of technology and the growth of Artificial Intelligence.
There has been much discourse on the issue of women’s representation on boards and the need for gender diversity at the board table. This has brought about renewed discussions on the broader aspects of diversity such as experience, background, and tenure on the board. What has been shown is that compiling a board with a wide range of perspectives must be a conscious decision and flexibility needs to be considered in selecting board members to make better use of the talent pool. 100 Women in Finance, a global network of professionals in the finance and alternative investment industries, launched in Ireland last year, with a key focus area being female board participation. The 30% Club published in January a study of women in the financial services industry in Ireland where only 37% of participating firms’ talent pools were women. It was also found that firms with gender targets at employee level were more confident in their ability to develop, retain and attract female talent. This lends weight to the initiative of creating and cultivating an active pipeline of female participants and widening the scope in terms of candidate selection.
Diversity and inclusion should be matters at the forefront in board selection. In addition to the critical analysis that boardroom diversity can bring, it can also enhance corporate reputation, positively affecting board performance and making for better use of the skill base. It can also be seen that institutional investors are taking into consideration board diversity as a factor for evaluating investment to ensure that interests are aligned. The Irish Funds Corporate Governance Code requires the board to formally review its membership every three years. Board diversity and maintaining a balanced board lends itself to be discussed at this review with a real assessment to be undertaken. With CP86 we are also seeing the review of the fund board composition and skillset analysed at least annually with meaningful discussion. More boards are attuned to the value diversity can bring which we welcome.
Vanora Madigan, Associate Director, DMS Governance