Dada Adefolami:
“Diversifying the board is not without costs. Though a board is inherently subject to conflict as it is formed by individuals collectively, having a diverse board may potentially increase friction between members, especially when new directors with different backgrounds are stereotyped by existing members as atypical. This may split the board into subgroups, which reduces group cohesiveness and impairs trust among members, leading to reluctance to share information within the board.”

A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors. It is often simply referred to as “the board”. A board’s activities are determined by the powers, duties, and responsibilities

Diversifying selection, describes changes in population genetics in which extreme values for a trait are favoured over intermediate values. In this case, the variance of the trait increases and the population is divided into two distinct groups. In this more individuals acquire peripheral character value at both ends of the distribution curve. The board of directors forms one of the pillars of a robust corporate governance framework. This is evidenced by the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance stating that ‘the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board and the board’s accountability to the company and the shareholders’. This, in turn, links to the fundamental concepts of corporate governance – namely, judgment, responsibility and accountability.

One of the ways to enhance corporate governance is to diversify the board, and the possible costs of board diversity.

Board Diversity
Over the years, regulators have placed great emphasis on addressing different matters relating to the board of directors. Two prominent examples were: (i) stressing on the roles of non-executive directors as well as the importance of independence of the board in the Higgs Review in 2003; and (ii) emphasising the significance of balancing skills and experience of the board members as in the Walker Review in 2010. Until recently, there has been an urge for diversifying the board. Intuitively, diversity means having a range of many people that are different from each other. There is, however, no uniform definition of board diversity. Traditionally speaking, one can consider factors like age, race, gender, educational background and professional qualifications of the directors to make the board less homogenous. Some may interpret board diversity by taking into account such less tangible factors as life experience and personal attitudes.

In short, board diversity aims to cultivate a broad spectrum of demographic attributes and characteristics in the boardroom. A simple and common measure to promote heterogeneity in the boardroom – commonly known as gender diversity – is to include female representation on the board.

Benefits of board diversity
Diversifying the board is said broadly to have the following benefits:
1. More effective decision making.
2. Better utilisation of the talent pool.
3. Enhancement of corporate reputation and investor relations by establishing the company as a responsible corporate citizen.

1. More effective decision making
It is believed that a diverse board is able to make decisions more effectively by reducing the risk of ‘groupthink’, paying more attention to managing and controlling risks as well as having a better understanding of the company’s consumers. These benefits are further elaborated below.

Directors are responsible, for devising strategies through critical analysis and effective problem solving. One of the pitfalls behind the decision-making process in the boardroom is ‘groupthink’, which is described as a psychological behaviour of minimising conflicts and reaching a consensus decision without critically evaluating alternative ideas in a cohesive in-group environment. Combining contributions of a group of people with different skills, backgrounds and experiences is assumed to be able to approach problems from a greater range of perspectives, to raise challenging questions and to debate more vigorously within top management groups. Such a multiple-perspective analysis of problems can change the boardroom dynamics and is more likely to be of higher quality than decisions made under a ‘groupthink’ environment.

Diversified board members are more likely to possess different personal characteristics, which lead to dissimilar leadership, thinking, emotional styles and even risk preferences and behaviours. Not only may this foster creativity in delivering solutions to problems, but also provide a more comprehensive oversight to the operations of the organisation through a further enhancement of the company’s sensitivity to a wider range of possible risks such as reputation and compliance risks. This may then support a greater supervision on the boards in its performance evaluation and in the decision-making process.

Companies are competing in a global environment nowadays. In order to achieve organisational goals and objectives, directors need to understand diverse stakeholders’ claims – in particular the needs of customers – well. A balanced board will have more representatives of users and customers of its products in the boardroom to make informed judgment. This may be especially important for consumer-facing industries to have female directors and for multinational companies to include foreign nationals on the board. Dissimilar backgrounds, experience and social networks in the boardroom may therefore improve their understanding of the stakeholders, provide diverse connections with the external environment and help address stakeholders’ claims in a more responsive manner.