CORPORATE GOVERNANCE Diversity – Does it make a better board?

New Zealand directors are pretty homogenous lot – there’s sprink-ling of women, splash of ethnic variation, dusting of difference in terms of skills and experience – but these are little more than light dressing on the same basic middle-aged professional male dish.
So does it matter?
That could depend on the nature of the company and the complexity of the environment in which it operates. Researchers at Massey University have been delving into the topic to explore the links between board configuration, strategic context and corporate decision quality.
In paper entitled “Board Configuration: are diverse boards better boards”, the researchers talk about the growing pressure from investors, shareholder activists and interest groups to appoint directors who can bring greater range of demographic and experiential diversity to the boardroom table.
“The underlying assumption is that greater diversity should lead to less insular decision-making processes and greater recognition of change.”
Decisions from board with greater diversity of director background, experience, ethnic orientation etc are, therefore, more likely to be in tune with diverse customer base and better able to respond creatively to complex, fast-moving markets.
It also helps push up the independence quotient, something investors are keener on post-Enron, if directors are not drawn from the same cosy little camaraderie.
But what if the company is steady-state style operation in fairly stable environment?
In that case, various studies suggest the converse might apply and diversity may introduce an unproductive influence. The greater mix in board composition can make it harder to find common ground which contributes to decision-making difficulties and higher turnover of directors.
Then there’s the issue of context – having directors with strategically useful ties in particular market/industry brings on board bunch of networking knowledge. There are opportunities to pick up on trends, directions, business process changes, find out what worked for other companies, and generally get exposed to vicarious learning that helps bolster board know-how.
Other studies have tried to determine how various levels of strategic complexity – both internal and external – relate to the diversity of board composition. These suggest it’s probably good idea to keep reviewing the sorts of capabilities an organisation could benefit from as the complexity of its inner workings or external environment changes.
It also emphasises that unnecessary complexity in relatively simple business environment can be just as unproductive as unresponsive simplicity in complex business environment.
Building on all this, the Massey study set out to see if it could find any relationship between board composition, strategic complexity and Kiwi company performance.
The 59 locally listed companies that fitted the study criteria were examined on range of performance measures. To try and isolate the impact of board diversity, various factors like business size and age, its leverage, capital intensity, and industry sector, were also taken into account.
Diversity measures like gender, board size, director independence and number of directorships per director were relatively easy to measure. Ethnicity was tad less certain and industry background and relative experience were ruled out because they couldn’t be ascertained with any degree of accuracy.
Amongst measures of strategic complexity were things such as restructuring, business sales, downsizing, divestment, organisation change, mergers or acquisitions, foreign expansion, board or senior management changes.
The results produced some evidence to support the hypothesis that companies functioning in complex environment do better if they have more diverse group of directors, but they were mixed and the findings were not statistically significant.
In terms of profit, relatively high level of board diversity was found to be positively related to profit but negatively related to growth. Findings on strategic complexity proved suitably complex.
It appeared that combination of low board diversity and high strategic complexity may inhibit firm performance in terms of profitability (as per the hypothesis) but, contrary to the hypothesis, companies with relatively high level of board diversity appeared to perform better in fairly stable environment.
Plus, as the researchers point out, the results should be treated with caution as “none of the coefficients for high strategic complexity and high board diversity are significant”. Also the sample group of companies had some limitations in terms of board diversity.
New Zealand boards “are relatively homogenous in terms of gender, age, ethnicity and functional diversity”, the Massey paper notes.
For instance, over the five-year period of the study (1997-2001), the proportion of directorships held by women in the 59 companies was less than six percent and the women who do make it tend to hold multiple directorships. Only five of the companies had two women directors with only one of them retaining this ratio throughout the entire sample period.
That said, research literature apparently suggests that functional diversity has more beneficial impact than constituency representation when it comes to strategic decision making. And information about this aspect of the sample companies was incomplete, though our boards aren’t known for their functional diversity either.
As the study points out, New Zealand directors are pulled from relatively narrow pool of candidates and many serve on multiple boards.
“Thus while the data was stratified on the basis of ‘diversity’, the real level of diversity among the sample companies is comparatively low.”
Amongst those boasting the highest level of diversity was Lion Nathan whose offshore ownership is reflected in its proportion of Asian directors and whose board boasts extensive international business and academic experience. Michael Hill Investments and TelstraClear also scored highly on diversity.
The most homogenous boards included Infratil, Wellington Drive Technology and the Strathmore Group which all had small, stable, all-male boards.
Companies in the sample could also be said to have experienced only relatively low levels of strategic complexity over the five-year period. In few cases they were affected by one-off shocks that resulted in significant write-downs, so impacting on the performance variable.
Researchers also raise the possible influence of time lag such as how long it takes reconfigured board to have an impact on company performance?
The researchers concluded that while intuition may suggest that diversity enhances board performance when the company is dealing with complex situations, this argument is not necessarily supported in the case of listed companies.
Despite this, they say it will be interesting to explore the contribution diverse board can make in different situations – in the public or not-for-profit sectors, for instance, where performance is judged by criteria other than profit.
Another key issue relates to the extent to which boards can actually influence outcomes.
“While findings highlight the fact that diversity does not necessarily enhance the performance of the board when measured in terms of specific outcomes, they may also indicate the fact that the board may not be able to influence the actual performance of the organisation.”
A key implication of the findings, say the researchers, is “the need to clearly define the reasons or purpose for arguing for diversity. While representation and equity may be rational grounds for arguing for greater diversity, board performance in the context of the strategic complexity facing listed companies is not.”

• The Massey University research was carried out by N van der Walt, C Ingley, G Shergill and Townsend.

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