26 The Last Call

Many com­pa­nies em­brace a mono­cul­ture that threat­ens their abil­ity to in­no­vate

The Australian - The Deal - - News - John Con­nolly

John Con­nolly ex­plains why a lack of board­room di­ver­sity could be fa­tal.

Now, I have noth­ing against ac­coun­tants, lawyers and engi­neers. Some of my best friends are men and women who are ac­coun­tants, lawyers and engi­neers, some are a com­bi­na­tion and some are great di­rec­tors, but it’s a bit rich to pre­tend we have board di­ver­sity when these three pro­fes­sions make up 76 per cent of the di­rec­tors of our Top 50 com­pa­nies. Of course, 93 per cent of Top 50 di­rec­tors are white per­sons of Euro­pean ori­gin and 76 per cent are male.

The lack of di­ver­sity by pro­fes­sion gets worse when we get to chief ex­ec­u­tives. More than 90 per cent come from a fi­nan­cial or en­gi­neer­ing back­ground. Not that bean coun­ters or ginger beers don’t make good bosses, but a bit of a mix would be a good thing.

Putting women on boards has be­come a smoke­screen for di­ver­sity. Women as board mem­bers is not about di­ver­sity but equal­ity. The facts are, we have glass, bam­boo, con­ser­va­tive and WAP (West Asian peo­ple) ceil­ings.

The prob­lem is this: most Aus­tralian busi­nesses are in a zero sum game. There is small or no growth in tra­di­tional mar­kets; there is in­tense com­pe­ti­tion, but a smaller num­ber of cus­tomers in many in­dus­tries; tech­nol­ogy is threat­en­ing the busi­ness model, costs are go­ing up and mar­gins are be­ing squeezed.

Writ­ing in the McKin­sey Quar­terly for­mer IBM boss Lou Ger­st­ner said “the will­ing­ness to tackle out­moded or­tho­dox­ies de­ci­sively is cru­cial to sus­tained value cre­ation. In any­thing other than a pro­tected in­dus­try, longevity is the ca­pac­ity to change, not to stay with what you have. Com­pa­nies that last 100 years are never truly the same com­pany. They’ve changed 25 times or five times or four times over that 100 years.”

Lou should have a look at Aus­tralia. Of the Top 50 com­pa­nies in 1980 only nine sur­vived to 2014. There goes the blue-chip the­ory. So there’s no one now who doesn’t preach the need for in­no­va­tion for Aus­tralian busi­ness and Aus­tralia to sur­vive. But in­ter­na­tional con­sult­ing firm BMGI found that not many com­pa­nies are look­ing to cre­ate more in­no­va­tive cul­tures. “At least not the big com­pa­nies (Global 1000) any­way. It seems big com­pa­nies are strug­gling with in­no­va­tion … but the idea of a more in­no­va­tive cul­ture ap­pears too fright­en­ing to many.”

This means a lot of our big­gest com­pa­nies are on that very scary cor­po­rate fair ride, the loop of doom. New York’s Cen­tre for Tal­ent In­no­va­tion found that “com­pa­nies with 2-D di­ver­sity (in­her­ent and ac­quired) out-in­no­vate and out-per­form oth­ers”. “Em­ploy­ees at these com­pa­nies are 45 per cent like­lier to re­port that their firm’s mar­ket share grew over the pre­vi­ous year and 70 per cent like­lier to re­port that the firm cap­tured a new mar­ket.”

Only 14 per cent of 692 di­rec­tors and C-suite ex­ec­u­tives sur­veyed by McKin­sey in Septem­ber 2014 picked “a rep­u­ta­tion for in­de­pen­dent think­ing” as one of the main cri­te­ria that public com­pany boards con­sider when ap­point­ing new di­rec­tors.

So why are boards so con­ser­va­tive? The birth of the share­holder value move­ment in 1976 saw many boards be­come fo­cused solely on num­bers and ap­peas­ing an­a­lysts. A 2013 sur­vey of 774 di­rec­tors by McKin­sey found 65 per cent agreed they did not fully com­pre­hend their com­pa­nies’ strate­gies. One year later McKin­sey and the Canada Pen­sion Plan In­vest­ment Board asked 604 top ex­ec­u­tives what source of pres­sure was most re­spon­si­ble for their or­gan­i­sa­tion's over-em­pha­sis on short­term fi­nan­cial re­sults and un­der-em­pha­sis on long-term value cre­ation. Forty seven per cent said the board was the source of such pres­sure.

On top of that, ap­peas­ing an­a­lysts is prob­a­bly not that smart in the long term. As a re­viewer of No­bel Prize win­ner Daniel Kah­ne­man’s ex­tra­or­di­nary book Think­ing Fast and Slow pointed out, when Kah­ne­man looked at the per­for­mance of Wall Street an­a­lysts over the long term, “it’s clear that you would do just as well if you en­trusted your de­ci­sions to a mon­key throw­ing darts at a board”.

Num­ber-based pro­fes­sions see the world as lin­ear, where hard sciences pre­vail. They be­lieve that by mea­sur­ing ev­ery­thing they can make de­ci­sions that have pos­i­tive out­comes. Nat­u­rally busi­ness books, par­tic­u­larly by man­age­ment con­sul­tants (at least 20 per cent of our Top 50 di­rec­tors own up to be­ing man­age­ment con­sul­tants), back this view up and cater to our need for an ex­pla­na­tion of busi­ness suc­cess and fail­ure. As Nas­sim Taleb says in The Black Swan: “We at­tribute our suc­cesses to our skills and our fail­ures to ex­ter­nal events out­side our con­trol.” Or as Bert Ein­stein said: “Ev­ery­thing that can be counted does not nec­es­sar­ily count; ev­ery­thing that counts can­not nec­es­sar­ily be counted.”

Out of this need for causal re­la­tion­ships has come the CEO as rock star, man­age­ment fads such Six Sigma, busi­ness process re-en­gi­neer­ing, ma­trix man­age­ment and core com­pe­tence. And ev­ery­one, an­a­lysts, busi­ness com­men­ta­tors and au­thors are ex­perts in ret­ro­spect.

Ol­givy UK vice-chair­man Rory Suther­land ar­gues that all so­lu­tions should sit at the cross­roads be­tween tech­nol­ogy, eco­nom­ics, and psy­chol­ogy, which ar­gues for real di­ver­sity. Or as the Cen­tre for Tal­ent In­no­va­tion says: “Only 10 per cent of the global tal­ent pool is white men; more than ever, global com­pa­nies need to lever­age and de­ploy the other 90 per cent to be com­pet­i­tive in the global mar­ket­place.”

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