How to diversify corporate boards

Diversifying boards requires leadership from numerous stakeholders. Here’s what they can do.

 

Last week, I presented “eight traps” limiting the diversification of corporate boards. Here I present some proposed solutions.

Leadership by Shareholders

Major institutional shareholders should develop an electronic registry of prospective directors based on skills, experience and attributes. Doing so will promote dialogue between shareholders about prospective directors. In Canada, the Canadian Coalition for Good Governance and Ontario Teachers’ Pension Plan board should develop registries, if they haven’t already. See how CalSTRS and CalPERS have done it.

Investor groups should propose model diversity policies, with best practice language, for investee boards to adopt, similar to what’s done for majority voting and say on pay. Women and minority groups should be explicitly mentioned in the policy.

Leadership by Companies

Companies should disclose how prospective directors are assessed for board membership. This disclosure should include the use of a competency matrix, the assessment of skills and experience, and which person or firm recommended the candidate. Disclosure should also include whether the position was advertised or promoted in any way, how short-listing occurred, the interview and selection process, and mentoring and on-boarding practices.

Companies should adopt objectives for diversifying their board and senior management team, and their progress should be disclosed to shareholders annually.

Leadership by Regulators

Regulators should consider imposing a tenure limit of nine years on company boards, as is done in other countries, including the United Kingdom, Singapore and Hong Kong. Regulators should provide guidance to companies on defining diversity and its benefits. They should also give information on boardroom practices, such as debate and decision-making, and the role investors can and should play in selecting and removing directors. Lastly, regulators should provide guidance on how to disclose director nomination practices in a transparent manner.

Leadership by Search Firms

Search firms should develop and adopt a rigorous and readily disclosed firm- or industry-wide code of principles and practice. The code should address methods used for validating candidate competencies; initial selection, short-listing and recommendation practices; conflicts of interest; confidentiality; remuneration policy; client loyalty; quality of service; assurance controls; and enforcement.

Leadership by Industry Associations

Large shareholder associations (including pension plans and unions) should disclose the following: CEO/president succession plans, which includes the expected qualifications for the next CEO; the total compensation of the incumbent CEO; and the internal pay equity ratios of other officers within the organization. This disclosure is regarded as best practice for listed companies, and director and shareholder groups should follow suit. It might also entice prospective CEOs (internal or external). Nominating committees should give consideration to appointing a female or minority CEO with a value creation background (e.g. investor or entrepreneurial) as opposed to a compliance one (e.g. accounting or legal).

Industry associations should develop robust competency matrixes for company boards to use in selecting directors.

Some of these suggestions may be controversial, but different models and techniques are needed if progress is to be made.

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