The composition of the board has become a matter of public policy. Policymakers are calling for boards of public companies to include a range of diverse perspectives.
CEOs view the need for internationally experienced staff … yet almost half (45%) reported that they had very little, if any, international diversity on their own boards.
Policymakers in more than one jurisdiction have called into question the composition of boards, with a view to enhancing their diversity. A range of diverse perspectives and thinking helps to strengthen the quality of board deliberations and deliver real value for companies and shareholders, particularly for companies that operate globally.
Diversity, chemistry and avoiding ‘group think’
Research supports the fact that diversity of thought drives better solutions for organizations and contributes significantly to innovation and growth.1
In fact, a survey of CEOs of major global companies indicated that they view the need for internationally experienced staff as the cultural factor of the highest importance when conducting international business, yet almost half (45%) reported that they had very little, if any, international diversity on their own boards.2
The chemistry of the board and the personal competencies of its members are also important. A board’s performance will depend on the directors’ ability to work collectively, to challenge decisions in a credible manner, and to avoid ‘group think’.
Independence and expertise
Policymakers also are taking a fresh look at the balance of independence and expertise on boards of directors.
Independent non-executive board members bring an important perspective to board deliberations and are meant to enhance shareholder representation. Certain board responsibilities should be handled by independent members to provide enhanced integrity to board processes. This traditionally has been the case with audit and compensation committees, but policy-makers are now considering extending independence requirements to other board responsibilities.
While board independence is important, so is expertise. As business models evolve and risks become more complex, policymakers are emphasizing the need for directors to possess relevant expertise and to devote sufficient time to their activities.
In some cases, policymakers have questioned whether the demand for independence has overshadowed the importance of expertise on the board of certain financial institutions. This question could appropriately be asked about other types of companies as well.
Evaluating effectiveness
To identify any weaknesses and make recommendations for improvement, boards should periodically evaluate their effectiveness and act on the results.
Policymakers are looking at measures or indicators of effectiveness as part of their focus on board performance.
Effectiveness evaluations can help a board assess how it and its committees carry out their responsibilities, interact with management and external stakeholders, and manage the composition and cohesion of their members.
In the aftermath of the financial crisis, such an evaluation could be particularly useful in order to reflect on how effectively the board prepared for and met the tests of the crisis.
Boards can use internal assessments or external consultants to help them measure their effectiveness, and alternating between the two can help provide a level of objectivity. Some countries are beginning to require boards of public companies to undergo periodic effectiveness reviews.
Where not yet required, boards should consider the benefits of doing this on a voluntary basis.
1 A summary of the leading research is published in Ernst & Young’s report,
Groundbreakers: Using the strength of women to rebuild the world economy, which can be found
here.
2 Redrawing the map: globalization and the changing world of business, which can be found
here.
