Reap­ing the ‘di­ver­sity div­i­dend’

The Star Early Edition - - OPINION & ANALYSIS - Parmi Nate­san and Dr Prieur du Plessis

BOARD di­ver­sity is not an end in it­self, and or­gan­i­sa­tions that want to max­imise board per­for­mance must un­der­stand the in­ner dy­nam­ics of di­ver­sity and what it seeks to achieve. Any sports afi­cionado knows that what sets great coaches apart is their abil­ity to pick the right team for the pre­vail­ing con­di­tions, and being cog­nisant of the weak­nesses and strengths of the op­po­si­tion. The same prin­ci­ple holds when it comes to boards of di­rec­tors. If they are truly to make the de­ci­sions that will lead the or­gan­i­sa­tion to sus­tained suc­cess, de­spite chang­ing op­er­at­ing con­di­tions and fierce com­pe­ti­tion, they sim­ply have to have the right skills around the board­room ta­ble.

This has al­ways been true, but it is es­pe­cially per­ti­nent in a mul­ti­cul­tural and global world. Or­gan­i­sa­tions now ex­ist in a com­plex con­text with a wide range of stake­hold­ers, and face com­pe­ti­tion from new quar­ters. Clearly, if a board is com­posed of the same type of peo­ple, with no di­ver­sity of thought, then chances are it will find it­self con­stantly on the back foot – un­able to think its way into the minds of its var­i­ous stake­hold­ers, its staff and, im­por­tantly, its com­peti­tors.

One of the rea­sons ad­vanced for the fail­ures of both African Bank and Lehman Brothers was that its non-ex­ec­u­tive di­rec­tors lacked the nec­es­sary in­dus­try knowl­edge to con­struc­tively chal­lenge man­age­ment.

So far, so log­i­cal, you may be think­ing. But what “pro­duc­tive di­ver­sity” means will dif­fer from board to board and from in­dus­try to in­dus­try. The first or­der of busi­ness must be for the board to un­der­stand what skills it needs now and what skills will be re­quired for the fu­ture, bear­ing in mind that skills can be­come out­dated.

The 2017 edi­tion of PwC’s an­nual Non-ex­ec­u­tive di­rec­tors: Prac­tices and re­mu­ner­a­tion trends re­port of­fers a fas­ci­nat­ing in­sight into how di­rec­tor­ship qual­i­ties and skills are chang­ing. This year’s re­port makes the point that the need to en­sure the dig­i­tal com­pe­tency of the com­pany, in­clud­ing how it ap­proaches cy­ber­se­cu­rity and ar­ti­fi­cial in­tel­li­gence, and the on­go­ing fo­cus on the en­vi­ron­ment, will re­quire a new set of skills on the board.

It pre­dicts that “the non-ex­ec­u­tive of the fu­ture will be an ad­vi­sory tech­no­crat – a spe­cial­ist in a par­tic­u­lar field with the abil­ity to dis­cuss many as­pects of the busi­ness”. How many mem­bers of your board could be de­scribed in these terms now?

Pro­fes­sor Richard Le­blanc of York Univer­sity, an in­ter­na­tional cor­po­rate gov­er­nance guru, also em­pha­sises the im­por­tance of as­sess­ing what skills are needed for the fu­ture, and the im­por­tance of reg­u­lar, rig­or­ous board as­sess­ments.

But putting to­gether the right set of com­ple­men­tary skills is not enough. The board has to work as a whole. The ideal, in Mal­colm Forbes’s words, is: “Di­ver­sity is the art of think­ing in­de­pen­dently to­gether.” Epi­gram­matic, but dev­il­ishly dif­fi­cult to put into prac­tice, re­ly­ing on the chair to play a crit­i­cal role in turn­ing a di­verse board with the right skills into an ef­fec­tive team.

Dif­fi­cult, but also well worth get­ting right. The In­sti­tute of Di­rec­tors in South­ern Africa’s board ap­praisal bench­mark study con­cludes that “board com­po­si­tion prob­a­bly has the great­est sin­gle im­pact on the fu­ture suc­cess of an or­gan­i­sa­tion”. There is a large body of research to bear this out. A McKin­sey study by Vi­vian Hunt, Den­nis Lay­ton and Sara Prince on Why di­ver­sity mat­ters shows that com­pa­nies

The non-ex­ec­u­tive of the fu­ture will be an ad­vi­sory tech­no­crat – a spe­cial­ist in a par­tic­u­lar field with the abil­ity to dis­cuss many as­pects of the busi­ness

(in the US, Canada, Latin America and the UK) in the top quar­tile for racial di­ver­sity are 35 per­cent more likely to achieve fi­nan­cial re­turns above in­dus­try me­di­ans. Also, top-quar­tile gen­der-di­verse com­pa­nies are 15 per­cent more likely to out­per­form fi­nan­cially.

A sim­i­lar study by the Cat­a­lyst In­for­ma­tion Cen­tre found a strong cor­re­la­tion be­tween the num­ber of fe­male di­rec­tors and re­turn on sales and on in­vested cap­i­tal.

Viewed in this light, the JSE’s re­cent move to re­quire listed com­pa­nies to have a pol­icy to pro­mote racial di­ver­sity at board level should be wel­comed. This new re­quire­ment com­ple­ments the ex­ist­ing one re­lat­ing to gen­der di­ver­sity. Ap­plied in the right spirit, and with the out­come of im­proved per­for­mance in mind, it has the po­ten­tial to un­lock the di­ver­sity div­i­dend la­tent in a frac­tured so­ci­ety like ours. Parmi Nate­san and Dr Prieur du Plessis are ex­ec­u­tive di­rec­tor: Cen­tre for Cor­po­rate Gov­er­nance; and chair­per­son of the In­sti­tute of Di­rec­tors, re­spec­tively. En­quiries: info@iodsa. co.za. Bet­ter Di­rec­tors. Bet­ter Boards. Bet­ter Busi­ness.

Dr Prieur du Plessis

Parmi Nate­san

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