Board diversity and balance key to firms’ growth

More often than not, a considerable share of corporate discussions revolves around how diverse or balanced a company’s board is, it’s size and the complexity of the business it carries out.

There appears to be a direct correlation between board diversity and a company’s financial performance. Some quarters fully attribute good financial performance to its board diversity while others simply brush it off as “good governance or better leadership on the board”.

However, recent studies have shown that board diversity has a direct effect on the performance of a company. Before I get to that, it is important to begin by understanding what a diverse and balanced board is.

Board diversity is simply having a group of people that are different from each other; people who harbour different demonstrable skills, professional qualifications, characteristics and general experiences. This is a great way of broadening the board’s talent pool, as it makes it less homogeneous.

A company’s board of directors should reflect a robust corporate governance framework as required under the principles of the Organisation for Economic Co-operation and Development (OECD). Regulators such as the Capital Markets Authority (CMA) have persistently insisted on a proper composition of a company’s board—one that meets the standards of good corporate governance.

However, our regulators have predominantly emphasised on board composition rather than the boards’ diversity. This has in turn focused on the role of executive and non-executive directors as well as independent directors, with little attention paid to diversity.

In as much as there is no uniform definition of board diversity, our regulators should always take cognizance of the fact that Kenya is a multi-racial and predominantly multi-ethnic country. As such, listed companies and government parastatals should exhibit cultural diversity.

As previously mentioned, there is no uniform definition of board diversity. Nonetheless, it is important to consider factors such as race, ethnicity, gender, educational background and general professional qualifications, to make the boards less homogeneous.

Other than the performance benefits that accompany having a pool of diverse talents with a wide spectrum, board diversity equally reflects societal structures, by clearly representing ethnicity, gender and professional background in their choice of members of the board. This reflection of the societal structure ideally reflects their customers, stakeholders and employees.

Corporate financial performance has been credited to the board’s composition and diversity. A well diverse board has been shown to be more effective in decision making, since the board is exposed to a pool of talent that goes a long way in eliminating “group thinking” on boards.

The pivotal point would therefore be how well companies can structure their board composition to uphold diversity whilst still protecting the best interests of the company. The difficulty would however be in whether or not these diversity mandates can survive legal scrutiny.

This is because the principal consideration would be on the best interest of the corporations, which interests are best served by having a board of directors that are fully qualified with the right professional backing to lead such a corporation.

Board diversity forms a critical part of corporate governance, as the same can increase board independence. The general frame of corporate governance calls for a more independent board which can be fully achieved in a more balanced and diverse board.

It is clear that the role of a board is to advise and supervise, and therefore a board should be properly structured and composed so as to carry out these duties. Its composition should promote diversity in a way that will ensure that the work of the board is carried out effectively and in the most efficient manner.

Therefore, the request for a better boardroom diversity is based primarily on normative and ethical grounds of equity and fairness. Hence, board diversity should be advocated by all key stakeholders including the Capital Markets Authority as a means of providing new insights and perspectives in publicly listed companies.