26 The Last Call
Many companies embrace a monoculture that threatens their ability to innovate
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.”