How Smart Diversity Can Lead To Competitive Advantage

*The following is an excerpt from our recent white paper called Smart Diversity: Board Composition as a Competitive Advantage*

“There are two points on why board composition and diversity is critical. One is external,” remarked Tracy Houston, a specialist in board consulting and an executive coach. “It is these external factors that are amplifying the pressure within the boardroom to deliver change. I think the central drivers of turbulence can be attributed to rampant diffusion of technology, increased interdependence across markets, increased shareholder activism, and even frequency of economic shocks,” she continued, “they are driving the demand to retool boards.” 

It is important to stress that technological and social change is not new, but the degree and pace have been gaining exponential momentum in the era of the internet and mobile communications. The iPhone was launched in 2007 and the iPad shipped just three short years ago in 2010 , and today, there are countless tablets, large phones, and smart devices all around us. And with that, the level of executive acumen necessary in order to capitalize on these new opportunities changed forever. Yet, many companies still use paper or antiquated digital means to distribute materials for board meetings. If your board is not taking advantage of these technologies, how can you keep up with your customers?

The PwC’s Annual Survey focuses squarely on growing recognition that board composition must be reevaluated, “At its core, board composition is under pressure to evolve. In order to be well-posited to oversee long-term value creation, directors know their board needs the right expertise and experience – including directors with diverse backgrounds. Directors also recognize they need to be more focused on CEO and director succession in order to make sustained growth a reality.”  Among the experiences boards find very important in 2016 are the traditional hallmarks, financial, industry, and operational Expertise. Yet their importance to directors is down modestly since 2012. Growing in salience in the survey data are directors saying gender and racial diversity are very important, standing at 39% and 30% respectfully.  

It is precisely the reevaluation of board composition’s significance that has moved so many board members to become more openly skeptical of their peer’s performance. Since 2012, director’s motivation to remove a fellow member has continued to grow sharply. The reasons they cite are: 

• Aging has led to diminished performance (up 26%), 

• A board member is unprepared for meetings (up 36%), 

• A board member does not have the expertise required (up 8%).  

Indeed, as directors have become more restless, the number of vacancies on boards are on the rise. Vacancies at public companies have nearly doubled since the financial crisis. Taken together, the survey data tells a story of growing director dissatisfaction of their member’s skills in the wake of major technological disruption. Organizations need directors who are not intimidated by change, technology, and new modes of thinking. Directors with a fresh perspective, not beholden to the way business has been traditionally executed. 

The Delphi corporation is a prime example of a firm that faced every foreseeable disruption and managed to emerge stronger than ever. Between 2005 and 2009 Delphi’s CEO led a turnaround effort that replaced the entire board of directors and led the firm to emerge from bankruptcy.  The board was populated by a substantial number of outside directors, former CEOs who too led companies during down periods. Following restructuring of outside ownership and the firm’s internal workings, the board turned their focus to staying ahead of rapid technological advancement. They created a new CIO position and followed through in establishing an innovation and technology committee. The result was by 2012 annual revenue rose from $9 to $16 billion.  The research into board composition and effectiveness bares out Delphi’s plan. 

In a study in the Academy of Business and Economic Journal, the authors argue “Many scholars, financial analysts, and investors consider outside directors to be better… than inside directors and studies have found their relationship to be stronger with overall corporate performance and larger shareholder returns.” Moreover, a board composition that includes a broad range of experiences and backgrounds has consistently proven advantageous. They go on to argue “A high level of board diversity (both women and minorities) has been found to be positively related to profit levels, greater returns on equity (ROE), larger total returns to shareholders and greater returns on assets.” That is, a board that is representative of your customer base is better equipped to sustain long term growth. 

Research by NACD’s annual board composition assessment bares out this assessment. Their report looked at a variety of factors influencing how boards are navigating this new terrain:

“boards must strive for diverse composition as a means of strengthening their own ability to make wise and informed decisions. In particular, this requires gender, racial, age, and experience diversity to broaden the viewpoints, skills, and backgrounds of the individual board members.” One director said, “We are looking outside the traditional definition of ‘CEO experience…Another participant encouraged fellow directors to “press our search firms to go a level past the usual specs in order to set us up for future success. Where will the interesting next generation of board leaders be coming from?”  

Together the evidence suggests that organizations are taking the need for louder outside voices more seriously. They are substantively committing to smarter and more substantive diversity, to become better equipped to face the challenges of this era. The board of directors needs to reach decisions on an extensive array of subjects. It stands to reason that the headwinds faced by today’s businesses are best met by a group with specialized skills and knowledge. Those with a unique understanding of issues such as Big Data, IT, new age security threats, and the growing power of digital marketing channels such as social media. The challenge organizations face when confronted by this reality is how to move forward. The next step is evaluating your board, understanding its strengths, opportunities, and weakness.