There is a game-changing trend sweeping the world's boardrooms. Regulators and stakeholders alike are putting pressure on directors to change the way boards are put together. Investors in particular are driving the demand for greater transparency when it comes to succession planning. Let's take a closer look at two key issues: director tenure and board diversity.
There are two reasons why investors get worried by directors who sit on the board for long periods. The first is that personal relationships may start to form between the directors, which can result in groupthink. The second is that directors may become complacent and let their oversight of the company's management slip.
The other point of view reasons that a director who has been sitting on the board for a long time will understand the business much better. Supporters of this point of view believe it is bad business to dismiss a good director just because he or she has served a certain number of years.
The ideal situation seems to be a careful balance of tenure periods. In other words, directors who have been sitting on the board for various lengths of time. But this is easier said than done for reasons we will explore below.
Diversity in the boardroom is the big issue in corporate governance today. It is about more than race and gender and age. Qualities like life experience, cultural influence and personality type are all very important.
Compared to directors who are all very similar, a board made up of very different people will have a much wider and deeper understanding of the world. This prevents groupthink, so the board is less likely to miss potential threats. They are also more effective at identifying new opportunities and delivering consistent long-term growth.
Despite this, most companies have been slow to add diversity to their boards. One reason for this is that the push to prioritise diversity must come from the board itself. And this situation creates a conflict of interest.
As strategies and business models change, so do the skills and qualities needed for effective oversight. Directors need to be able to understand complex issues in short amounts of time. They must be able to quickly determine how new political, socio-economic and technological trends will affect their business strategy.
The best board is made up of agile directors with diverse backgrounds. To ensure this kind of composition, many companies will carry out a gap analysis. This means identifying the skills that are important for an effective board and then comparing them to the skills that the board has. This allows any gaps to be identified and filled.
Committing to excellence
Developing a good strategy to create diversity in the boardroom is a major challenge. And self-evaluation by the board is just not a reliable solution. To overcome this hurdle, many companies are turning to the objectivity and expertise of external evaluation specialists like Birn+Partners.
If boosting performance and showing your investors that you are committed to excellence sounds like the way forward, give us a call.