Diversity on boards: Strong processes, good governance

Far more important than the measure of diversity, though, is the purpose or the cause of that diversity.

Businesses that consciously seek board diversity might be going about it the wrong way, experts say. Board diversity is an outcome, not a driver, of excellent governance.

At a glance

  • Board diversity is important in preventing “group think” and driving processes that result in wider successs.
  • However, the full benefits of diversity can be achieved only when it is driven by a clear purpose and understanding of what is needed to reach a certain goal.
  • Experts agree that diversity should not be looked at as a goal, but as the result of strong processes and good governance.

At Malaysia-based Maybank, diversity and inclusion reporting began in 2013, but work internally to address diversity and inclusion had begun four years earlier, in 2009. That year, the business’s strategy shifted significantly to focus deeply on human capital.

“We were predominantly a Malaysian bank in terms of size, and in the market we were not dominant in terms of performance,” says Narita Naziree FCPA, Maybank Malaysia’s head of group succession and talent development, and human capital director.

“There was a lot of transformation required for us to become the leader of the pack. We wanted to be first and best in every way, not just in terms of size. For us to do that, we had to look at our composition of people.”

To make important decisions around changing human capital structure, Naziree says, a business must look at data points such as demographics, backgrounds, educational experiences and qualifications.

“What we discovered was that, if we wanted to be the number one bank in Malaysia, we needed to attract the very best talent,” she says. “If we wanted to do that, we had to be an employer of choice. At the time, we were number 17 on the employer of choice list.”

A few years later, Maybank was the number one employer of choice in Malaysia. Since then, diversity has worked its way up through the organisation. Looking at gender diversity alone, the number of women in management positions had risen from 17 per cent in 2009 to 35 per cent in 2020. At executive vice-president level, 47 per cent are now women, when in 2009, that number stood at 33 per cent. At board level, women make up about 40 per cent of members.

“You can’t really get into a board role if you haven’t been in top management,” Naziree says. “So, as the diversity figures across the organisation are trending upwards, I am confident the diversity at board level will also continue to rise.”

Of course, Naziree says, diversity is about a lot more than gender – the number of women on Maybank’s management team and board is simply one measure of success among many.

Another important take-away from Maybank’s path towards greater diversity is that it is an outcome of the processes put in place to achieve wider success.

Board diversity across APAC

A recent report on corporate governance from CPA Australia, Banking on Governance, Insuring Sustainability, authored by Associate Professor Yuen Teen Mak and Associate Professor Richard Tan, both from the NUS Business School in Singapore, delves deep into board structure and diversity.

“Board diversity is important to prevent ‘group think’ and encourage constructive debate,” the report says, singling out age and gender diversity as two important aspects for boards to consider.

The study of the 50 largest listed banks and 50 largest listed insurance companies headquartered in the Asia-Pacific (APAC) region found that, in 2018 and 2019, Australian bank boards had the least age diversity, while Thailand and the Philippines both had wide age spreads.

Less than 7 per cent of independent bank directors were younger than 50 years old, the researchers found, potentially leading to a lack of knowledge in particular areas in which younger professionals are known to excel.

“One of the areas we looked at was technology, and today, on bank boards, it’s very important to have strong cybersecurity knowledge,” Tan says. “But we found that generally lacking across the APAC region.”

In fact, the report says cybersecurity experience is “almost non-existent” on the boards researched – a serious concern for banks in the APAC region, as well as their customers, shareholders and other stakeholders.

The picture is different when it comes to gender. Australia’s four largest banks have at least 30 per cent female directorship, while the median percentage of female directors across all 50 banks in the study was just over 15 per cent.

Far more important than the measure of diversity, though, is the purpose or the cause of that diversity, Mak says.

“When you come across a board containing 10 people who all look the same, it tells you that something is fundamentally wrong with the way they go about searching for directors,” he says.

“If you have actually gone through a proper, thoughtful process that is driven by the organisation’s strategy, and you’ve made a comprehensive list of the skills, knowledge, experience and perspectives the board will need to help reach a strategic goal, what is the likelihood that you will end up with 10 people who look the same? If that’s the result, I would immediately suspect their process is very flawed.”

Diversity, Tan and Mak agree, is not something a business goes out to create. It is the result of strong process and good governance, and it creates more of the same.

Diversity, in fact, often comes about as a result of the problems caused by a lack of diversity.

A bank board filled with banking executives is going to develop serious issues, as will a medical company board filled with doctors. Those problems, then, create the need for new actions and plans to achieve a specific strategic goal. When carried out properly, that plan of action naturally leads to diversity.

Directors must direct

Phil Ruthven, founder and director of IBISWorld and founder and CEO of the think tank Ruthven Institute, says that during the board diversity discussion, people often forget that the first and greatest responsibility of the board is to direct.

“I’ve often said, running a company is a bit like a wagon train in the wild west of America,” Ruthven says. “Your wagon master was pretty important, but your scout was even more so.

The scout had to go out and find where the dangers were – was there a flooding river, was there a blind canyon, etc.? They’d come back and tell the wagon master which direction they needed to travel in to get to where they wanted to go. The wagon master is the CEO, and the scout is a director.

“We’ve got to know where we’re going, why we’re going that way and how we’ll get to our destination. That seems to have been totally and utterly lost on some boards in Australia, and that’s where a crisis comes in.”

Does diversity help identify direction and ultimate success? The answer is yes, Ruthven says. However, diversity should be separated into two categories. One is about where you’re going, and the other is about fairness.

“The single most important thing, which is totally irrelevant to gender, age, ethnicity, etc., is, ‘Do I know where I’m going, and can I help this business get there? Can I be a director, not just a passenger?’,” he says.

“First and foremost, a director must know where they’re going. After that, there should be diversity in knowledge and experience, including finance, because without that you could go broke; and marketing, because you have to know how to sell your services; and someone who can help direct in terms of the industry-specific systems and technologies; and HR, because our workers in the Western world are becoming much freer than they’ve ever been.”

Diversity of skills, Ruthven says, is the most important type of diversity on a board. After that, the “fair” distribution of other forms of diversity – gender, age, ethnicity, etc. – becomes important.

“A lot of companies would do well to have at least one director under the age of 30. In other words, somebody who has come through the digital era,” Ruthven says. “But gender is the most important of these types of diversity. It goes beyond fairness and becomes about relevance.

Let’s get real – 50 per cent of the population is female. Fifty per cent of the market is female. When you’ve got all men on the board, and they claim they understand what a female customer or client wants, they’re drawing a pretty long bow.”

Diversity and board appointments

There are five drivers when it comes to the best fit for a board appointment, says David Schwarz, founder and CEO of Board Direction.

Those drivers are:

  • Prior governance experience
  • An executive skillset that is valuable at board level
  • Networks and relationships that can be leveraged by the organisation
  • Cultural fit with the current board
  • Demonstrable passion for what the organisation does

Then, there are three “nice-to-haves”. They are industry experience, governance training and diversity. Like Ruthven, Schwarz believes that, while diversity is absolutely a positive, it should not be a number one priority for board appointment decisions.

“From a board appointment perspective, diversity is important, but it’s not always the most important driver,” Schwarz says. “Having said that, there have been studies that suggested having a female on a board produces a 7 per cent better output.

“However, other studies have indicated that such improvements are in businesses that had something to sell into a diverse space.”

What is important, Schwarz says, is recognising how diversity can add value to a board, rather than making an appointment that is driven, for the most part, by a need for diversity.

“If you are a white male of a certain age – some call it ‘male, pale and stale’ – and are seeking a board appointment, then you need to figure out your pitch,” he says. “Just like everybody else, you need to work out what makes you compelling, what your point of diversity is, and what your unique selling point is. That’s because everybody appointed to a board should bring something that is absolutely valuable and unique.”

Read next: Making diversity work in the workplace

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