The board and its committees should have the appropriate balance of skills, experience, independence, and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
Many leaders would agree that the success of future Corporations lies with the board of directors. They have a unique responsibility of providing leadership and hence directly to the company. They create momentum and offer guidelines for improvement. When boards fail to make purposeful decisions based on predictable future trends, the corporations are doomed to suffer increased risks. The directors are expected to apply intelligence and think critically about improvements that are likely to create additional values to operations within a corporation (Goodstein 246). Boards must therefore be driven by characteristics that facilitate the growth of respective organizations. These include entrepreneurial minds and the will to drive the business forward while at the same time maintaining prudent control, they should have sufficient and relevant knowledge about the company’s operations without necessarily interfering with its day to day operations, and exercise sensitivity to the short term issues affecting the corporation without drifting attention from long term trends and implications. Additionally, the board members should focus on the corporation’s financial aspects although not at the expense of employees, business partners, and society. These are only achievable if the boards bear appropriate personality distributions to facilitate each aspect.
Many scholars hold the opinion that sufficient diversity is a prerequisite for success of a board. However, diversity in itself is not enough; members should be able to debate and constructively engage each other in decision making processes. Ability to entertain other people’s thought without necessarily agree with them is considered reflective of an educated mind and as Fitzgerald puts it, “it is the test of a first class mind is to be able to hold two opposing views simultaneously and still be able to operate (Goodstein 246).
In a study including 16 top board executives in the UK, they stress the strategic value of diversity within the boardrooms. There emerges a new version of today’s diversity leadership whereby the whole business perspective is focused on putting diversity as an organizational undertaking rather than a simple badge towards corporate ethical image. This approach is expected to play a critical role amongst board members in helping to shape, own and resource diversity initiatives that directly serve the strategic mission. Research links the model of strong executive leadership based on diversity with ability triggers measurable short-term rewards that contribute to organization’s strategic goals including growth stimulation, competition outbidding, tailoring of products relevant to the prevailing market conditions as well as emerging market trends (Carter and Simpson 11).The study directly represents ‘executive diversity leaders’ who have intentionally embraced this approach as bearing a sharp strategic focus beneficial to the organization.
Smart organizations will naturally want to reframe their current arrangements for handling diversity against this new model leadership approach, to enhance the return on their diversity investment. Various researches further stresses that boards that are independent have a lot of transparency and decision are rationally making them the referred choice for investors (Erhardt 107). Perhaps this explains while most of the listed companies in the United Kingdom have embraced the concept of independent boards.
Independence and diversity even on small executive boards is fundamental in all areas including financial and legal decision making. Modern day mergers are also based critical cot-benefit analysis rather than just appeal. Such decision can only be well analyzed and coordinated to boards of they have the appropriate knowledge and ability to understand them it is not mandatory that all bear such knowledge but at the few with such knowledge can guide them through the process of decision making. The justification for diversity therefore lies in ability to incorporate specialists and divergent perspectives into decision making within the entities (Goodstein 249). This practices drifts away from boards which are populated by major shareholders some of whom lack the specials skills and ability necessary in making crucial decisions, independent persons within boards purely bring in ideas and expertise as they have no attached interests to the company (Erhardt 107). This is unlike boards with little independence where shareholders make decision that purely benefit them and at times ignore or are unaware of the future impacts that their decision are likely to have.
According to the 2010 UK Corporate Governance Code, it is mandatory that, with the exclusion of the chairman, no less than have the board members should comprise independent non-executive directors. However, for smaller companies, an exception is made with only 2 independent non-executive director required. This is a move aimed at protecting all the stakeholders involved with a given corporation rather than pure focus on shareholders interest. This measure if viewed as a leeway for corporations to embrace diversity within bards. Other than shareholder’s, specialists can now be brought into the boardrooms irrespective of whether they hold shares or not. The legislation demands that appropriate balance of skills, experience, interdependence and knowledge be exercised in creation of the boards (Erhardt 107). This is expected to enable effective discharge of assigned duties and responsibilities. It is stressed that rigorous, official and transparencies processes be adopted in appointment of directors to serve in the boards. The directors should also have adequate time to discharge the duties assigned to them and also regularly refresh their skills and knowledge with regard to the respective corporation.
Various researches have indicated that increased transparency and share of responsibility improves performance (Carter and Simpson 16; Tyson 15; Watson 594). When the Boards view tangible corporation’s gains on basis of diverse knowledge across its membership, there is increased likelihood of sustaining corporation’s commitment to the needs of all its stakeholders. Scholars warn of significant progress barriers to progress towards greater organizational achievements, unless more Board leaders can learn to proactively exploit diversity benefits to directly serve their mission (Westphal and Ithai 170). Various studies find that without this visible direction, Board attention generally wanders and the long-haul vision for greater diversity becomes fragile or even collapses over time.
Theoretically, corporate board analysis abstract from the process consensus building. Researches stress that the multifunctional role f boards calls for a formal model of boards, taking into account the dual role of boards as monitors and advisors of management (Erhardt 109). It is widely accepted that Powerful executives are likely to influence operations of corporation’s in favor of their own selfish and ambitious agenda. Consequently, some view board composition as the outcome of choices made by executives in their attempt to reduce the effectiveness of monitoring by boards.
Benefits and Costs of Diversity
Practically, any firm intending to choose its board compositions with the aim of optimizing value creation should have adequate knowledge of the tradeoffs of demographic diversity (Erhardt 110). Diversity of boards presents a number of benefits to the organization. Some are discussed hereafter;
Creativity and Different Perspectives
Different experiences, background and knowledge bases motivate diverse thinking amongst individuals. Research indicates that more diverse groups bear enhanced capability for creativity and production of large view perspectives and approach to problems. Diverse groups have reduced likelihood of suffering from “groupthink.” Additionally, such fosters acquisition of broad information from different sources.
Access to Resources and Connections
Resources are fundamental to every organization. Selection of directors from different backgrounds enhances the firm’s chances of accessing additional resources. For instance, directors with financial industry experience may assist in securing investors for the firm if need be while those from political ad legal backgrounds may be influential in assisting firm’s win government contracts and drafting of relevant and appropriate proposals.
Career Incentives through Signaling and Mentoring
Diversity also signals to low level employees, the organization’s commitment to promotion of minority workers or at least that their minority status is not a hindrance to their careers in the company. Additionally, it provides an opportunity for mentorship as a key to career advancement. Minority top executives find an opportunity to advance their career (Westphal and Edward 92). Additionally, it may be termed as a policy aimed at fostering non-discrimination within the top organs of institutions.
Public Relations, Investor Relations, and Legitimacy
Some firms may benefit more from conforming to societal expectations than others. For example, consumer goods firms may want to cultivate an image of social responsibility. Firms in which institutional investors comprise a larger fraction of their shareholder bases may surrender to investors’ demands for board diversity (Carter and Simpson 19). Those types of firms are more likely to pay attention to director demographics, especially gender and ethnicity. For those firms, having a more diverse board can be a means of acquiring legitimacy in the view of the public, the media, and the government.
However, it cannot be assumed that incorporating diversity into corporation’s board is purely beneficial. Just like any other aspect of life, it also comes with some disadvantages. Some potential dis-benefits of incorporating diversity into boards include the following;
Conflict, Lack of Cooperation, and Insufficient Communication
Social psychology literatures have often shown that there is a relation between demographic similarities and attraction. In management this may be interpreted on basis of group faultlines as a hypothetical dividing line capable of splitting groups into respective similar interests. Salient demographic characteristics are capable of splitting implicit subgroups. Such dissimilarity may limit communication, interpersonal relation and cohesiveness of the group which eventually results into conflicting approach to issues (Wiersema and Karen 109). In corporate scenario, a key problem is the possibility of communication breakdowns between top executives and minority outside directors. While outsiders may have to rely on internal directors for information, the latter may form a subgroup aimed at protecting some internal information and hence result into interest conflict. It must be remembered that internal directors would most probably favor decision which maximize their returns (Westphal and Ithai 170). Internal executives may perceive demographically dissimilar directors as sharing different values and espousing dissimilar views. Such reluctance to avail all necessary information may limit the ability of the board to effectively function.
Choosing Directors with Little Experience, Inadequate Qualifications, or who are overused
Basing choice of directors on basis of demographics may overlook the characteristics necessary to hold the position effectively. For instance gender based diversity Take for example the case of may lead to a board that is disproportionately young and little experienced (Wiersema and Karen 108). Furthermore, because qualified minority candidates may be in short supply, minority directors are likely to accumulate more board seats than the average director. Busy directors are possibly less effective than non-busy ones.
Conflicts of Interests and Agenda Pushing
Some directors may be more interested in pushing their own personal agenda even at the expense of the company’s profits. Perhaps more problematic is the case in which directors also represent the interests of outsiders (for example, directors with financial industry connections). A more diverse board may be in greater risk of being influenced by directors with distinct personal and professional agendas. The cause of this risk is not diversity per se, but an insufficient alignment with shareholders’ interests. An excessive focus on some characteristics (e.g., functional background) as a criterion for selecting directors may have the unintended consequence of appointing directors whose loyalties lie elsewhere (Wiersema and Karen 104).
In conclusion, evidence from various researches is compatible with the view that board diversity has costs and benefits. Evidence further shows that balance between benefits and costs are relative across firms. Scholars further stress that evaluating the impact of board composition on corporation performance, has increased likelihood of generating new insights on likely costs and benefits of heterogeneity in director characteristics (Wiersema and Karen 111). Consistent with diversity having costs and benefits, they find that the impact of board diversity on performance varies with firm characteristics. In particular, it is reported that board diversity has a beneficial effect in more complex firms, but a detrimental one in less complex firms.
Carter, David and Simpson, Gary. Corporate Governance, Board Diversity, and Firm Performance. Oklahoma State University Working Paper. 2002. Web.
Erhardt, Werbel. Board of Director Diversity and Firm Financial Performance. Corporate Governance: An International Review, 11, 2003: 102–111.
Goodstein, Boeker. The effects of board size and diversity on strategic change. Strategic Management Journal, 15, 1994: 241–250.
Tyson, Laura. The Tyson Report on the Recruitment and Development of Nonexecutive Directors. 2003. Web.
Watson, Warren. “Cultural Diversity’s Impact on Interaction Process and Performance: Comparing Homogeneous and Diverse Task Groups.” Academy of Management Journal 36.3, 1993: 590-602.
Westphal, James and Edward, Zajac. “Who Shall Govern? CEO/Board Power, Demographic Similarity, and New Director Selection.” Administrative Science Quarterly 40:1, 1995: 60-83.
Westphal, James and Ithai Stern. “The Other Pathway to the Boardroom: Interpersonal Influence Behavior as a Substitute for Elite Credentials and Majority Status in Obtaining Board Appointments.” Administrative Science Quarterly 51.1, 2006:169-204.
Wiersema, Margarethe and Karen Bantel. “Top Management Demography and Corporate Strategic Change.” Academy of Management Journal, 2006: 35:1, 91-121.