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Blog/October 16, 2019

Gain the Advantage: Diversify Your Corporate Board

Over the years, we have found that bringing in external directors to diversify the boardroom brings with it a plethora of benefits, including:

  • Changing the focus – External directors can challenge myopic views to complicate discussions and generate new solutions.
  • Shifting conversation dynamics – External directors can positively influence the interaction among board members, especially when internal directors are members of the executive team.
  • Broadening thinking – External directors can promote fresh ideas, helping a board capitalize on a greater range of expertise and perspective.
  • Fostering objectivity – With no long-term financial stake in the business, external directors are more likely to recognize impacts of major decisions.
  • Providing missing competencies – External directors can provide specialized knowledge that a team currently lacks.

Further, a survey conducted by KPMG asked respondents whether they thought their boards had the optimal combination of skill sets, backgrounds, experiences and perspectives to probe management’s strategic assumptions. It also examined organizations’ abilities to navigate an increasingly volatile and fast-paced global environment. Of those surveyed, 49% reported they were not satisfied, 15% said they were somewhat satisfied, and only 36% were satisfied. As a result, 64% recognize a need for greater diversity of viewpoints and backgrounds on their boards.1

These results coincided with findings from “The Untapped Potential of Corporate Governance in Engineering and Construction: 2018 FMI/CIRT Corporate Governance Study.”2 One of the study’s four major themes focuses on how diversity of background, experience and expertise are essential to fully tap a board’s potential. This research also highlighted how achieving diversity in the boardroom can elude even the most forward-thinking engineering and construction (E&C) companies.

With that said, this article will explore the importance of diversifying corporate boards while avoiding common pitfalls and enforcing meaningful strategies.

On the Path to Diversity: Three Missteps to Avoid

In its “Delivering through Diversity” study, 3 McKinsey & Company found that companies in the top quartile for gender diversity on executive teams were 21% more likely to have above-average profitability than those in the fourth quartile. For racial/ethnic diversity, top-quartile companies were 33% more likely to outperform on profitability. These results reflected an increase over a similar study conducted three years earlier.4

These hard facts show that having a diverse leadership team is key to improving bottom-line corporate performance. Diversity helps organizations overcome groupthink mentality and avoid getting “used to only one way of framing problems and addressing challenges, which stifles innovative and creative thinking, whereas genuine diverse cultures reduce the likelihood of assimilation to ‘default’ norms and increases collective team intelligence, which leads to higher performance.”5 These benefits can be transferred directly to the boardroom, as long as organizations avoid three critical mistakes.

  1. Settling for “Plain Vanilla” Membership

The “2018 FMI/CIRT Corporate Governance Study” revealed that while many board chairs and CEOs are aware of the lack of boardroom diversity, few have tackled the challenge of diversifying their director roster. But it is worth noting that their current demographics partly reflect the composition of today’s E&C industry as a whole. As one board chair succinctly notes, “What we’re missing is diversity. We have a bunch of old, white guys, and we need some different perspectives.”6

On the other hand, Hugh Rice, senior chairman of FMI Capital Advisors, reports, “When we went through the last round of director recruitment and brought on two new directors, we looked really hard to find a female industry representative. And one just didn’t rise to the top, unfortunately. There just aren’t that many female candidates in the industry; that’s the reality. But I think it would be beneficial to add more women.”7

Herein lies both challenge and opportunity: infusing new, qualified and fresh voices into boards is ultimately difficult. Yet, it isn’t impossible, and organizations that successfully do so can gain key strategic advantages.

While many firms realize that leadership does not reflect the totality of employee diversity within the company, they still struggle to diversify executive and director roles. Peter Deveraux, chair and CEO of HED Design, says, “We have pretty decent diversity within our ranks as a whole. However, we don’t look as diverse at our leadership level. It’s terrible. On our board, we have just two women and nine men, with nine white directors out of the total of 11 people.”8

Compared to other industries, E&C companies severely lag when it comes to the inclusion of women and racial/ethnic minorities. According to respondents, only 3% of E&C firms have some racial/ethnic diversity, and 15% of firms have some gender diversity.

Further, a study conducted by the National Association of Corporate Directors (NACD) reported that, on average, 12% of director seats are held by a racial/ethnic minority, and 20% of director seats are held by women.9 In the E&C industry, 71% of firms do not have a single minority member, and 50% of firms have no gender diversity on their boards, creating a diversity gap that can greatly limit the thought potential of the director team.10

A recent article suggests that the diverse backgrounds and perspectives comprising a boardroom should reflect a company’s evolving needs.11 Ultimately, broad membership enables greater cross-pollination of ideas, increased collaboration and less groupthink. It also encourages innovation and problem-solving and allows an organization to grow. In today’s rapidly advancing world, thinking differently about problems and ideas can mitigate unforeseen risks that organizations face when adapting to an increasingly digital world.

Another advantage of membership diversity is an increased likelihood of attracting the best and brightest leaders to the organization. Mike Burke, chairman and CEO of AECOM, explains, “Global companies benefit in so many ways from diverse boards of directors, workforces and leadership teams. They help generate different ideas and perspectives on behalf of our clients, allow us to recruit the best talent, and enrich an inclusive culture where the brightest professionals in our industry can grow their careers and thrive.’’12

  1. Not Soliciting Outside Perspectives

A positive correlation exists between external directors and overall board effectiveness – meaning that the more external directors who serve on a board, the higher their self-rated overall effectiveness. Yet, these external directors clearly possess more limited knowledge of the organizations that they serve compared with internal directors.

Is it appropriate to assume that greater organizational understanding diminishes director efficacy? Before reaching this conclusion, it is prudent to consider other influencing factors of board performance – perhaps even some with a more profound impact.

Internal directors tend to be cut from the same cloth. Depth of organizational knowledge aside, internal directors typically possess similar competencies and experiences; therefore, less is added to the collective wisdom of the board. Steve Halverson, president and CEO of Haskell, explains, “One of the reasons we are looking to both enlarge our board and expand the diversity of experience and thought is to lay the foundation for effective long-term governance for the enterprise.”13

In other words, expertise from external directors should complement, not duplicate, the skills and knowledge possessed by internal directors and executives serving on the management team. External directors also provide healthy doses of objectivity and candor. Patrick Whelan, general counsel for Weeks Marine, adds, “When outside directors hold you accountable, you can’t just kick the can down the road.”14 In many boardrooms, directors are also corporate executives who spend all day, every day, working together. This tight-knit relationship may distract from setting direction for the organization. For example, company executives who sit on the board and work together every day may tend to push board meetings toward operational focuses rather than forward-looking strategies. External directors’ objectivity and fresh insights can challenge those dynamics.

Halverson talks about the benefits of their transition from an all-internal board to one that includes external directors: “We didn’t have a board with outside directors until 2008, and so it’s actually a relatively recent advantage for us. It was important to me, and we started with the idea that we wanted to use the board strategically. There is no question in my mind that our outside directors have made us a better company and me a better CEO. That’s really what we were looking for.”15

However, companies may be hesitant to add external directors to boards due to the challenging onboarding process. It can take a significant amount of time for a new director to become completely familiar with a company, its people, perspectives, business plan, goals, etc., and some companies may resist that level of commitment.16 However, despite the upfront time investment, organizations have confirmed that it is a more than worthwhile investment.

  1. Creating “Buddy Clubs,” Not Diverse Boards

The selection process is another challenge in filling new board seats. Board members tend to have broad professional networks and access to numerous C-suite executives who could make strong director candidates. Yet, people are often drawn to other like-minded people, which can lead to a highly homogenous board. As highlighted in the “2018 FMI/CIRT Corporate Governance Study,” having a homogenous board limits the innovative and problem-solving potential of its directors.

Directors surveyed in that study explained how many boardrooms are populated with individuals who share more than a professional relationship. While in some ways this dynamic could facilitate difficult conversations, sharing a boardroom with friends can obstruct constructive criticism, dissenting opinions and opposition to poor ideas. Put simply, friends tend to be nice to friends.

One participant adds, “The six of us are actually pretty good friends, at least from a work perspective. So I think there is still a degree of not wanting to upset each other’s apple cart. On one hand, it’s a great strength of this current board in that we’re all fairly new to playing on this level; we’re facing common enemies or common issues. There’s a real tendency to rally to each other’s support and make sure that everyone succeeds, which I think is great. However, if someone has a blind spot or is going about something in a way that the rest of the group doesn’t agree with, we will kind of say, ‘Well, give it a try. See how it goes.’ We’re not going to beat the heck out of you if we’re disagreeing with you in the meeting.

“But when something isn’t working, there’s a tendency to just say, ‘Well, he wants to do it that way. It’s not how I would do it, but it’s kind of his rodeo, so we’ll let that go,’ instead of us telling that person that he or she needs to find a different solution and change tracks. There’s definitely the tendency to just say, ‘Well, I like him generally and he does a good job, so I’m just not going to keep after him on this.”17

Creating a strategic board by leveraging diversity in gender, race/ethnicity, experience, education, industry familiarity and age gives organizations the tools needed to leverage unique perspectives. Boards can improve director diversity by seeking out opportunities to network with other individuals

through the community or professional networking events (or by asking their friends to help them find suitable candidates). Drawing from a wider net provides boards the best opportunity to include qualified, multifaceted perspectives, experiences and worldviews, while bringing an organization closer to its long-term goals.

Getting the Right People at the Table

To develop a high-performing board, get the right people in the room to support your organization’s strategic vision. The NACD recommends using a mix of tenure-limiting mechanisms to increase membership diversity, which helps to improve the board’s function based on a company’s evolving needs.18 Limiting the length of time your directors serve on a board provides a way to replace board members who may not be actively contributing to the board with new members who have fresh or innovative perspectives.

Moreover, term limits allow for a regular assessment of overall director effectiveness and provide a means to aid in member transitions (in and out of their director roles). Unfortunately, this well-recognized tool is only used by 38% of study respondents, with 55% reporting no limits on tenure.

A skills gap analysis represents another best practice for getting the right directors in the boardroom. According to the “2017-2018 NACD Public Company Governance Survey,”19 the experience of boards that analyze their existing skills and competencies versus those needed to fulfill their mission (81%) plus conducting individual director evaluations (73%) represent two highly effective approaches to enhancing performance.

The following represents a recommended process to conduct a skills gap analysis:

Identify Strategic Objectives

Identify your company’s current challenges, business priorities and goals for the next three to five years. Examples could include entering new markets (or market sectors), bolstering the quality and quantity of leaders across the organization, acquiring a competitor, or preparing for the transition of several senior executives. Other illustrative objectives could be to increase the number of external directors, grow board diversity, or add specific governance-related expertise.

Define Needed Competencies

Define the competencies, skills and experience needed to assure successful achievement of the identified strategic objectives. A helpful mental exercise considers the question, “What resources and/or capacities would help the business (and board) accomplish its key objectives sooner, with greater certainty and with less risk?”

Identify Current Resources

List all available resources (people) within your sphere who could be deployed in support of the defined strategic objectives. This includes internal resources (your executive team, other key leaders within the organization), your current board and trusted advisors (those people outside of the organization who are in a position to provide tangible support in solving major business challenges).

Complete the Skills Gap Analysis

Using a simple, two-dimensional matrix, populate the column headings with a listing of the identified strategic objectives and needed competencies. Similarly, populate the row titles with a listing of the identified current resources. The final step is to score (on a 1-10 scale) and tabulate the capacity of each current resource to help achieve strategic objectives and desired competencies.

A profile will quickly emerge that highlights areas where the organization possesses great strengths (those columns with the highest tabulated scores) as well as areas of need (the lowest scores) – the latter representing gaps that can, and should, be filled with uniquely skilled external directors.

The Effective Antidote

To be most effective now and in the future, E&C leaders must view the world through a different lens – a power that’s enabled by a diverse corporate board that possesses competencies and backgrounds that uniquely fit the needs of the organization that it serves. Skip this important step, and both innovation and creativity will suffer.

Further, decision-making quality can be diminished if we settle for the “tried and true.” Instead of building bridges to diverse thinking and fresh ideas, leaders can wind up with moats that thwart creative solutions to long-standing problems.

The good news is that much of the antidote to this problem lies in the pursuit of diversity. In fact, having a variety of perspectives and experiences is critical for tackling the challenges in today’s economy. A board of directors that can improve its quality of decision-making by leveraging the power of diversity will both foster innovation and elevate corporate performance.

Originally printed in CFMA Building Profits Magazine, March/April 2019 edition.


Endnotes

1assets.kpmg/content/dam/kpmg/cn/pdf/en/2016/09/kpmg-aci-globalpulse-survey.pdf.
2www.fminet.com/wp-content/uploads/2018/09/2018-CIRT-Corporate-Governance-Report.pdf.
3www.mckinsey.com/~/media/mckinsey/business%20functions/organization/our%20insights/delivering%20through%20diversity/delivering-through-diversity_full-report.ashx.
4www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity.
5www.linkedin.com/pulse/three-reasons-fight-assimilation-fostergenuine-caterina-bulgarella.
6www.fminet.com/wp-content/uploads/2018/09/2018-CIRT-Corporate-Governance-Report.pdf.
7Ibid.
8Ibid.
9www.fminet.com/wp-content/uploads/2018/09/2018-CIRT-Corporate-Governance-Report.pdf.
10Ibid.
11http://boardleadership.nacdonline.org/rs/815-YTL-682/images/NACD%20BRC%20Culture%20as%20Corporate%20Asset%2010.6.17.pdf.
12www.fminet.com/wp-content/uploads/2018/09/2018-CIRT-Corporate-Governance-Report.pdf.
13Ibid.
14Ibid.
15Ibid.
16Dvorak, Kyla. “High-performing board of directors.” FMI.
17www.fminet.com/wp-content/uploads/2018/09/2018-CIRT-Corporate-Governance-Report.pdf.
18Ibid.
19www.nacdonline.org/analytics/survey.cfm?ItemNumber=54547.

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