The boards of FTSE 350 companies have seen a step change over the past decade, becoming more diverse than ever before. Most notably we have seen a dramatic, and welcome, rise in the number of women on boards in response to the targets set by the Hampton Alexander Review. We are also starting to see some progress, albeit at a much slower rate, around the ethnic diversity of boards. Socioeconomic diversity has been understudied, but I suspect falls someway behind.
But in my view, diversity is not just about gender, ethnicity, or socioeconomic background – important though they are. Rather it is about how diversity can be leveraged to make boards more effective. It’s about the richness of the board as a whole and the combined contribution of a group of people with different skills and perspectives to offer. People with different experiences, backgrounds and lifestyles who together are more able to consider issues in a rounded, holistic way and offer an attention to detail that might not be present on less diverse boards.
Across several years, KPMG Board Leadership Centre surveys have identified ‘diversity of thinking’ as the thing that would most improve board effectiveness. This is supported by research, Board Diversity and Effectiveness in FT350 Companies, published last month by the FRC in conjunction with London Business School, Leadership Institute and SQW which found that individual differences (Personal/Neuro/Personality) are seen by directors as the most significant and important source of diversity in the boardroom, rather than demographic differences including gender, ethnicity and nationality.
So, if individual differences such as personality are the most salient type of diversity, then the next questions must be around measurement and whether boards have the right mix to maximise their effectiveness.
I think the former is an area where more research needs to be done but, in my experience, very few boards engage in any form of personality testing or cognitive profiling. If they did, I think there may be some surprises as to just how little diversity of thought there is despite the huge strides forward in more observable forms of diversity.
To test the water, KPMG’s Board Leadership Centre asked 165 audit committee members to categorise their own style of thinking. In some respects, the findings showed that board members already exhibit a good mix of thinking styles with respondents showing a roughly equal propensity for being idea initiators vs idea generators; diplomatic vs forthright; and task-orientated vs people-orientated. But in other respects, the findings were startling!
With 81 percent of respondents categorising themselves as ‘risk cautious’ rather than ‘risk adventurous’, our study suggests a worrying imbalance in the boardroom.
Perhaps the greatest risk businesses face today is the risk of taking no risk. Excessive risk aversion leads to a lack of innovation and ultimately stagnation and failure. Board members should be prepared to encourage executives to knowingly take calculated risks in pursuit of corporate objectives – but, of course, not be unwittingly exposed to risk. A robust risk management framework is key if a more risk adventurous, entrepreneurial approach is to flourish.
The second attribute we found most often absent around the boardroom table is ‘detailed thinking’. Not unsurprisingly, most respondents (83 percent) tend to focus on the bigger picture. There is nothing wrong with this. Non-executive directors are expected to take a broad perspective – they need to see the wood not just the trees. One might even argue that to expect anything else is unrealistic. But non-executive directors do need to know when to dig beneath the surface and they must be willing and able to do so. This can require courage, tenacity, and a certain amount of board craft – a tough ask in an environment where non-executive directors have a serious information deficit relative to executive management.
Collaborative thinking is an important boardroom trait – and our study showed that 90% of board members favour that mode of thinking. However, autonomous thinking is also an important trait and one that appears to be in short supply. Autonomous thinking – free from any external control, constraint, or influence – is the bedrock of the independent non-executive director. Board members must have the ability to view issues through a different lens to executive management and be both willing and able to hold management to account even in successful companies.
Head or heart?
The final mode of thinking in short supply around the boardroom table is that of being ‘ruled by one’s heart’ with an overwhelming (89 percent) of board members declaring a propensity to being ‘ruled by their heads’. Of course, both thinking through the head and through the heart are necessary in combination – it is rarely a case of simply one or the other. Head thinking is concerned with logic, facts, analysis, and data – all essential tools for the board member. But creativity, horizon scanning and the inclination to follow a hunch are based on heart-thinking, not head thinking. Being a good non-executive director has a lot to do with having the ‘nose’ to ‘smell out’ the key issues and the courage to back one’s instincts when something just doesn’t feel right.
So, are UK boards missing autonomous, risk adventurous, detail thinkers who are ruled by their hearts? Perhaps, perhaps not. But if diverse boards are the way forward – which I believe they are – then I think more work needs to be done to identify the way board members actually think and operate; and whether there is the right balance on any one board. Such information should play a vital role in succession planning, but awareness alone might well encourage boards to approach issues in ways that might ordinarily be overlooked.
Gender, ethnicity, and other ‘observable’ elements of diversity remain very important, but if we are serious about having truly diverse boards then I believe diversity of thinking must be the number one consideration going forward.