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Boards still fall down on diversity

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Company boards need to be upgraded to reflect today’s diverse business community, according to a new report from Grant Thornton – and this is true for companies around the world as well as in South Africa, where diversity has been on the agenda for the last 20 years.

“South Africa is not unique in believing board diversity to be critical,” says Carla Clamp, director: advisory services at Grant Thornton Johannesburg. “While diversity is especially necessary in this country, being essential to address past inequality, it is seen as vital all around the world to ensure good corporate governance.”

According to the Grant Thornton global governance report 2015 entitled “Corporate governance: the tone from the top”, boards will struggle to effectively advise management teams in meeting the challenges of today’s economy if they don’t change. It shows that the challenges facing local boards are not unique to this country; globally companies lack diversity, technology experience and new blood at board level.

The report draws its data from Grant Thornton’s International Business Report (IBR) which provides insight into the views and expectations of more than 10 000 businesses per year across 36 economies. The data for this report draws on 1 865 telephone interviews with business leaders and 82 in-depth interviews with board directors across nine countries conducted between November 2014 and February 2015.

“Mixed boards outperform those composed only of like-minded individuals and the benefits of greater diversity are widely accepted,” Clamp says. “A diversity of perspective invariably leads to better decision-making and governance. By incorporating new perspectives onto boards, businesses can tackle problems from different angles, creating an open, inclusive mind-set which should cascade down the organisation.”

In South Africa, boards are still predominantly composed of white males and only about a quarter (26%) of senior management jobs are held by women – a percentage that has remained relatively constant for several years. This situation, however, is by no means unique. According to the Grant Thornton global governance 2015 report, just 16% of board roles globally are held by women.

“A lack of diversity often leads to ‘groupthink’ when people from similar backgrounds approach challenges in a similar way,” says Clamp.

“This can sometimes lead to poor or dysfunctional business decisions being made.”

The report states that boardrooms have historically been dominated by older men. For example, analysis of annual reports of the largest 150 companies in India found that the average age of an independent director is 65 and the average age of a general director is 60. And while the proportion of women on boards in the UK’s FTSE 100 has doubled over the past four years, it remains below a quarter.

Although South Africa is serious about increasing gender equity at senior levels in business, government has not yet to come up with any practical solutions.

The Women Empowerment and Gender Equity Bill was withdrawn from Parliament in July 2014 for further consultation. One of its key provisions legislated that 50% of all decision-making positions must go to women in “designated public bodies and designated private bodies”.

“South African businesses, however, would have had far too large a gap to fill should government have remained firm on its demand that half of all of decision-making positions are filled by women,” says Clamp.

The majority of board members interviewed for the Grant Thornton global governance report 2015 were against the idea of quotas to mandate diversity on company boards. However, with little progress evident at the local and global level over recent years, business management teams are increasingly warming to the idea of mandating gender diversity. Just under half of business leaders would support the introduction of quotas for female directors in their country (47%) according to the data, up 10 percentage points from two years ago. Of course, diversity does not just relate to gender – boosting diversity of race, socio-economic background, sector, skills, education and the like could all help a board to reduce groupthink and increase performance.

Clamp believes that board composition in South Africa will become much more diverse, but only if business takes concerted action now to get that right.

“Eighty three percent of South African businesses surveyed, and 81% of global businesses, said relevant experience in the industry is a desirable attribute in a board director,” she says. “This helps dictate the skewed make-up of local – and indeed, international – boards.”

According to Clamp, it’s vital that skills transfer begins to happen in earnest in South Africa. Business needs to introduce more diversity at board level, but this cannot be at the expense of skills and experience.

“Older, experienced board members must mentor the new generation – as recommended by the King III Report,” she says.

King III states that part of the chairman’s role is “mentoring to develop skill and enhance directors’ confidence (especially those new to the role) and encouraging them to speak up and make an active contribution at meetings. The mentoring role is encouraged to maximise the potential of the board … The development of the skills of inexperienced directors is vital in alleviating the shortage in the pool of directors available for appointment”.

The global governance report highlighted that 58% of local businesses believe “bringing new ideas to challenge management and the rest of the board” is a desirable attribute in a board director, reflecting South Africa’s entrepreneurial, innovative business culture.

Another key theme to emerge from the report was that boards do not reflect today’s digital economy.

“Companies with digital acumen on the board will be better placed to embrace and exploit new technology to drive productivity and performance,” says Clamp. “It is vital that boards understand the very real cyber-threats that exist today, new legislation such as South Africa’s Protection of Personal Information Act (POPI), which poses huge challenges for certain industries and the competitive edge that technology can bring.

“The Grant Thornton report showed that a lack of digital savvy in the boardroom is a glaring hole,” says Clamp. “Digital has disrupted markets, and the way we do business, but it hasn’t yet changed boards. The digital sector is also among the most entrepreneurial; generating ideas and innovation. Harnessing this at a strategic decision making level is vital to firms that have an interest in exploiting technology to drive growth.”

The report also focused on importance of culture in achieving a company’s objectives and setting the right tone at the top, and found the vast majority (90% globally, 88% in BRIC countries and 83% in South Africa) of business leaders believe culture is important to a robust governance framework. A good governance culture is critical to a company’s longevity. Integrity and transparency are the principles that should underpin every action a business takes, which might be harder when the company is facing tough challenges.