218 CORPORATE GOVERNANCE Board Dynamics and the In? uence of Professional Background, Gender and Ethnic Diversity of Directors* Nicholas van der Walt** and Coral Ingley Exploring the appointment of directors of different professional backgrounds, levels of independence, age, gender and ethnicity, this paper develops a taxonomy describing what is meant by diversity on the board and its implications for decision-making. Board con? guration is considered in terms of empirical evidence highlighting the criteria used in appointing directors and the associated implications of social capital for board dynamics.
Issues raised include the in? uence of these on board performance and the ability of individual directors to make an effective contribution as board members. The conclusions highlight the various mythologies associated with the value of board diversity. Keywords: Diversity, board composition, social capital, board dynamics, social network ties Introduction W *This paper was presented at the 5th International Conference on Corporate Governance and Direction, 8–10 October 2002, at the Centre for Board Effectiveness, Henley Management College. * Address for correspondence: Department of Management and International Business, Massey University, Albany, Auckland, New Zealand. Tel: 649 443 9799; Fax: 649 441 8109. orld events, challenges and social trends of the past two decades have forced changes in the composition and functioning of boards of directors. Public initiatives for board reforms are focusing not just on issues of compliance and legislating for tougher regulation of publicly held corporations, but increasingly on how boards work (Simmers, 1998).
The call for reform has generated extensive debate over the characteristics of good governance and how to develop more effective boards. As a group, a board of directors combines a mix of competencies and capabilities that collectively represents a pool of social capital for their organisation. The social capital contributed by directors is a measure of the value added by the board in executing its governance function (Carpenter and Westphal, 2001). Used in this sense, the concept of social capital originates in the disciplines of politics and political science.
From a political perspective, the central premise of social capital is that social networks (of which boards of directors and corporate organisations are examples) have value. Social capital arises from the idea of civil society, civic engagement and democratic governance (Putnam, 1995), referring to the collective value of all “social networks” and the inclinations that arise from these networks for the people in them to do things for each other (known as “norms of reciprocity”). The term social capital emphasises a wide variety of speci? c bene? ts that ? w from the trust, reciprocity, information and cooperation associated with social networks. Social capital creates value for the people linked by the social ties created by these networks and can have ? ow-on effects beyond the immediate connections as well (Putnam, 1995; The World Bank Group, 1999; Westphal, 1999). Applying this thinking in the corporate context, a board can be viewed as exemplifying such a social network. In the civic context, there are many forms of social capital and the challenge, according to © Blackwell Publishing Ltd 2003. 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Volume 11
Number 3 July 2003 BOARD DYNAMICS 219 the Civic Practices Network as presented in their website, is to locate and mobilise those forms that can contribute to public problemsolving and democratic participation. This means not only making clear distinctions between those forms of civic association that are illiberal and exclusivist, and those that are not. It means understanding how homogeneous forms of social capital based on common racial, class and ethnic ties can complement heterogeneous forms that create broader linkages across these boundaries, and how policy designs and institutional partnerships can provide the needed supports.
In short, this entails modernising the links between democracy and civil society in ways appropriate for a society that is increasingly diverse and complex (Sirianni and Friedland, 1995). As cited by Westphal and Milton with reference to corporate boards and the larger social structural context in which demographic differences are embedded, “Boards have traditionally been viewed as a homogenous group of elites who have similar socioeconomic backgrounds, hold degrees from the same schools, have similar educational and professional training, and, as a result, have very similar views about business practices” (2000, p. 66). The idea of board diversity re? ects the structure of society – the fact that we are now a much more multicultural, and ostensibly, gender sensitive society, and that personal backgrounds are also diverse. Within this context, companies today face a more complex economy which demands more sophisticated talent with global acumen, multi-cultural ? uency, technological literacy, entrepreneurial skills, and the ability to manage increasingly de-layered, disaggregated organisations (Chambers et al. , 1998). Boards have begun to realise that they can bene? from diversity, that they need to move from corporate monoculture and boardroom uniformity, and think about whether they have the right composition to provide the diverse perspectives that today’s businesses require (Smith, 2001a; Biggins, 1999; Grady, 1999; Milliken and Martins, 1996). As social networks (Carpenter and Westphal, 2001; Koenig and Cogel, 1981), boards need to examine how they can build the links that re? ect democracy and civil society in its diversity, within their governance role as this relates to the organisations they serve and the wider community within which they exist.
Measurable progress toward more balanced and diversi? ed corporate boards has been slow, however, and there is by no means universal acceptance of arguments in favour of greater boardroom diversity. Key questions concern whether evidence supports the idea that increased diversity leads to increased shareholder value and whether, in fact, increased diversity in the boardroom actually matters at all (Smith, 2001a). This paper de? nes what is meant by board diversity and examines some of the dif? ulties associated with efforts to diversify boards away from homogeneous board cultures of managerial elites (Burgess and Tharenou, 2000; Smith, 2001a). Discussion The emphasis given in the literature to achieving greater diversity on corporate boards implies its importance, yet the slow progress toward this aim begs the question as to why this might be so. Before addressing the issues around arguments for and against board diversity and impediments to change, it is necessary to clarify what is meant by this term. Diversity de? ned
Burton (1991) argues that in the context of management, diversity is an expression of the broadening of the merit principle rather than an argument for representation. According to Burton, the concept of diversity goes beyond that of active representation in that it seeks not representatives of particular, identi? ed interests, but people with certain characteristics arising out of various experiences which might effectively be brought to bear on a policy issue but which have not been used in the past (1991, p. 43). Burton thus highlights, in effect, a “skill” versus “representation” argument for diversity.
With corporate governance, the concept of diversity relates to board composition and the varied combination of attributes, characteristics and expertise contributed by individual board members in relation to board process and decision-making. In the widest sense, the various types of diversity that may be represented among directors in the boardroom include age, gender, ethnicity, culture, religion, constituency representation, independence, professional background, knowledge, technical skills and expertise, commercial and industry experience, career and life experience (Milliken and Martins, 1996).
Boardroom diversity, thus, refers to the mix of human (intellectual and social) capital – where human capital is de? ned as the skills, general or speci? c, acquired by an individual in the course of training and experience (Dictionary of Business, 1996) – that a board of directors © Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 220 CORPORATE GOVERNANCE comprises collectively and draws upon in undertaking its governance function. Despite the growing attention given to this issue, however, the evidence indicates only slow and incremental progress toward achieving more balanced boards in terms of diversity.
As Robinson and Dechant observe, “diversity is often not a top business priority. Other business initiatives that present more compelling, factual evidence of payback on investment win out over diversity initiatives, which seem to offer less predictable and tangible bene? ts” (1997, p. 21). While the idea of building social capital through harnessing diversity has value in the wider context of modern society, the issue for the corporate sector concerns the value of diversity in the institutional context of corporate governance.
This value will vary according to governance structure; in the public sector, for example, the emphasis will be on seeking social justice outcomes, while in the private sector the governance focus will be on board value creation in respect of organisational performance and shareholder return (Van der Walt et al. , 2002). Rationale: Why diversity? The case for diversity can be made on a number of grounds. These include theoretical arguments, a moral obligation by boards to shareholders (Carver, 2002) and stakeholders (Keasey et al. , 1997), corporate philanthropy (Coffey and Wang, 1998), and for commercial reasons.
Organisations also re? ect the society within which they exist and for democratic reasons are increasingly expected to represent that societal diversity in their governance, the application of this reasoning being especially evident in public sector governance policy. Each of these perspectives is examined as reasons for promoting the case for diversity in the boardroom. Theoretical perspectives Two main theoretical perspectives in the management and corporate governance literature underlie the rationale for board diversity. The ? rst is agency theory, which can be brie? summarised as the board’s monitoring role (in its stewardship capacity) in protecting shareholder interests from the self-interests (the agency costs) of management. The second perspective relating to arguments in favour of diversity is the resource dependence view, which regards the board as an essential link between the organisation and the key resources necessary to maximise its performance. These theoretical underpinnings high- light the role of the board in carrying out its governance function. Agency theory relates to two key issues: the in? ence of board composition on organisational performance and the impact of corporate leadership structure (i. e. the duality of the chief executive/board chairman role) on organisational performance. Considerable emphasis has been given to the issue of board composition from an agency perspective, which suggests that with a greater proportion of outside directors boards will be better able to monitor self-interested actions by managers and will thereby minimise agency costs. The issue of duality in the role of chief executive and chairman of the board has also received much attention.
From an agency perspective this role, commonly combined in US companies, is best separated or at least counterbalanced by a lead outside director to reduce the opportunity for a powerful chief executive to dominate the board (Ingley and van der Walt, 2001). The main issue concerning agency cost is the independence of directors and the balance between executive and non-executive directors on boards. Director independence is not a precise concept, but is sometimes speci? ed in corporate governance guidelines and rules (e. g. in the US SEC Regulation 14A Item 6b).
The Hampel Committee Report (1998) states that a balanced board should include a balance of executive and non-executive directors so that no individual or small group of individuals can dominate the decision-making of the board (Corporate Governance: A Guide for the Governing Board, Deloitte Touche Tohmatsu, 1999). Independence is more likely to be assured when the director is not a large shareholder, has not been employed in any executive capacity by the corporation within the previous few years, is not retained by the corporation as a professional advisor, is not a signi? ant supplier to or customer of the corporation, and has no signi? cant contractual relationship with the corporation other than as a director (Deloitte Touche Tohmatsu, 1999). Taking the resource dependence view, the board is seen as a potentially important strategic resource for the organisation, especially in linking the ? rm to external resources, such as providing a linkage to a nation’s business elite, access to capital, connections to competitors, or market and industry intelligence (Ingley and van der Walt, 2001).
Diversity in this context argues for a broader range of backgrounds among external directors in providing this resource. Additional key roles of the board are those of providing advice and counsel to the chief Volume 11 Number 3 July 2003 © Blackwell Publishing Ltd 2003 BOARD DYNAMICS 221 executive and management, and contributing to, or approving strategy. Neither agency theory nor the resource dependence view adequately takes into account these key aspects of governance, which are also central to the rationale for iversity in the boardroom, depending on the organisation’s life-cycle stage and its operating environment (Carpenter and Westphal, 2001; Ingley and van der Walt, 2001). The moral basis of board authority Carver (2002) argues that the rationale for diversity in the boardroom lies within the concept of ownership and the [moral] obligation of boards in their stewardship role. Representing ownership requires that a board represent the diversity within the ownership. For the array of humankind and human opinion in the ownership to ? d its way into governance, the most obvious mechanism, according to Carver, is to constitute the board to be a re? ection of the ownership. While this argument has relevance to both the public sector and the private sector, it is strongest in relation to the former, where social justice is a dominant governance value. Moral and philanthropic perspectives on board diversity are associated with the idea of social responsibility – being perceived as a good corporate citizen, being seen not to discriminate and to comply with diversity norms, along with gaining a sense of legitimacy, credibility and integrity (Fondas, 2000, Mattis, 2000).
Under the social responsibility concept, the governance role of the board is expanded beyond the narrower idea of maximisation of shareholder welfare alone, to include the ethical treatment of the organisation’s stakeholders (Keasey et al. , 1997). The notion that organisations have a responsibility to multiple constituents and stakeholders, including the community and the wider society within which they exist, is based on two related premises. The ? rst is that communities in effect give organisations permission to exist and therefore have a right to expect accountability from those organisations.
The second premise concerns a shift away from traditional autocratic rule of organisations to a more democratic process of governance (Garratt, 1997). The business case for diversity Irrespective of the apparent validity of theoretical arguments and the worthiness of moral and philanthropic justi? cations for boardroom diversity, as Robinson and Dechant contend, “the bottom-line focus of today’s business environment requires that diversity initiatives be treated like any other business investment. . . This requires [the creation of] a clear, compelling business case for diversity linked to the company’s strategic business objectives” (1997, p. 30). Mattis (2000) notes that in the US it is increasingly easy to make what might be called the general business case for diversity – the changing demographics of both the labour and consumer markets due to immigration and the differential birth rates of Caucasians and other racial/ethnic groups (and also the in? uence of women; McGregor, 2000).
Diversity management in the US, according to Cassell “is based on the notion that given changing demographic trends and skill shortages, the effective use of diverse skills within an organization makes good business sense” (2000, p. 269). The business case for diversity has been most clearly articulated in the US and in relation to gender diversity on corporate boards. Mattis (2000) observes that in some industries, it is possible to advance a speci? c business case for increasing women’s representation in leadership roles, most notably, in companies that employ large numbers of women or market their products directly to women.
In contrast, she comments, only a small number of companies have gone so far as to develop a business case for diversity that is unique to their particular products, services and business operating environment. Cassell asserts that, with regard to gender and equity, the business case for diversity has found favour with employers and employees and has “moved the discussion about women’s position away from concepts such as democracy and equality to those of organizational effectiveness, business bene? ts and competitive edges” (2000, p. 270).
However, as Holton (2000) questions, does it matter whether the number of women directors increases? Holton argues that opinion in general is divided into two groups of people: those who already see that the issue is important and that action should be taken to improve the number of women directors. These often tend to be the same group who see a rationale for equal opportunities and diversity and can appreciate the business case for recruiting women and providing them with the same equal opportunities as their male colleagues. The second group is those who are uninterested or unclear about the need for change.
Having examined a range of grounds on which a sound case can be made, the value of embracing the idea of diversity can be established on the basis of speci? c business bene? ts © Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 222 CORPORATE GOVERNANCE that may enhance board decision-making and organisational effectiveness. Positive business impact of greater diversity in the boardroom In management terms, to increase diversity is to provide a rich source of innovative ideas and practical resources for dealing with dif? ult policy issues, to enlarge the basis on which policy develops, and to expand the issues over which negotiation will take place (Burton, 1991). Jones et al. argue that “a concept of multi-voiced international discourse on issues of difference in organisations is a better model than ‘knowledge transfer’, with its implications of passing on the latest advances in knowledge and practice” (2000, p. 364). In the boardroom context, diversity is purported to assure a broad base of wisdom (Carver, 2002), so that boards composed of quali? ed individuals who re? ct a diversity of experience, gender and ethnicity take advantage of their differences to work successfully together on behalf of the organisation (Rutledge, 1998, in Andringa and Engstrom, 1998). Thus, appointments with different backgrounds and bases of expertise offer different experiences and can make a valuable contribution to board decisions by providing unique perspectives on strategic issues (Bryan, 1995; Westphal and Milton, 2000). According to Carver (2000), it is important that the board becomes the channel through which ownership diversity is expressed.
Selby notes that “directors with diverse skills, experiences and backgrounds are more likely to raise questions that add to, rather than simply echo, the voice of management” (2001, p. 239). With particular reference to gender diversity, Burke argues that “increasing women’s board presence enriches board information, perspectives, debate and decision making” (2000, p. 193). Women directors can also help corporations gain competitive advantage by dealing more effectively with diversity in their product and labour markets (Bilimoria and Wheeler, 2000).
As summarised by Biggins: “Diverse boards help to better represent all shareholders, nurture better appreciation of ‘intangibles’ like work/life issues, and can help recruit and retain top executive women and minorities” (1999, p. 2). Singh et al. (2000) argue that a lack of diversity can be associated with negative performance, especially where boards are highly interconnected (e. g. through interlocking directorships), while Mattis (2000) contends that a lack of diversity on a board can contribute to lack of critical thinking and innovation.
Figure 1 highlights the key elements that in? uence the diversity outcome for an organisation. The ? gure shows that factors associated with board diversity (or lack of it) involve the complex interplay of organisational and stakeholder dynamics and their in? uence on board decision-making and director selection; board and individual director motivations and responses to the organisation’s governance role; and the board and organisational performance outcome. Dif? culties: What is the evidence that diversity matters?
Nucor chief executive Ken Iverson (1995) avers that: “No study has proved that diver- Organisational Performance Outcome Reason for Acceptance Of Board Position Board Performance Outcome Reason for Appointment To Board Diversity Outcome Response as Minority on Board Organisational Dynamic Response of Board to Diversity Stakeholder Dynamic Figure 1: Governance dynamics, performance and diversity outcomes Volume 11 Number 3 July 2003 © Blackwell Publishing Ltd 2003 BOARD DYNAMICS 223 sity makes a better board” (McMenamin, cited in Fondas, 2000, p. 71). Dalton and Catherine (1998) conducted a meta-analysis of data from 85 studies and found no evidence of a consistent, systematic relationship between governance structure and ? nancial performance, irrespective of the type of performance indicator, the size of the ? rm or the manner in which board composition is measured. In contrast, Leighton asserts that: “there is considerable evidence to suggest that diversity on boards is a matter of sound corporate strategy, not a bow to political correctness.
This is not, however, fully appreciated as yet . . . ” (2000, p. 259). Others (e. g. Singh et al. , 2000, p. 19; Biggins, 1999) believe that diversity is a key part of good governance. Regarding the value of good governance, Biggins (1999) contends that while boards are not social agencies and it is not their job to create cultural diversity, they are discovering that a diverse board helps generate better returns for shareholders. Singh et al. (2000), and Bilimoria and Wheeler (2000) note that some major investors (e. . large pension funds) show a preference to invest in ? rms demonstrating diversity in board appointments. Bilimoria and Wheeler highlight the pressure institutional investors and other shareholder associations have begun to place on corporate boards to increase, in particular, the representation and use of women directors. Corporate governance reform campaigns by investors, such as TIAA/CREF, US Trust Co. and others, have targeted speci? c companies for shareholder proposals aimed at increasing board diversity.
The Investor Responsibility Research Center’s (IRRC) (1993) survey on voting by institutional investors on corporate governance issues indicated that 39 per cent of respondents noted that their guidelines require them to withhold their votes in cases where there is a lack of women or minorities on a board (Bilimoria and Wheeler, 2000, p. 139). This result re? ects other evidence from studies showing that a 16 per cent premium on investment is accorded to companies regarded by these pressure groups as demonstrating good corporate governance (Hawkins, 1997; Bhagat and Black, 1997; Felton et al. , 1997). Other dif? ulties associated with the notion of diversity relate to board composition, social capital and dynamics in the boardroom. For example, with regard to the issue of social similarity versus diversity in the boardroom, the academic literature states that demographic differences lower social cohesion and that social barriers reduce the likelihood that minority viewpoints will be incorporated into group decisions (Nemeth, 1986; O’Reilly et al. , 1988; Smith et al. , 1994; Hambrick et al. , 1996). This issue is explored in greater depth later in the paper, in relation to criteria for selecting directors to boards.
A further dif? culty concerns the ef? ciency of large boards and the tendency for appointment of women directors to be in addition to existing board members rather than as replacements (e. g. Bilimoria and Wheeler, 2000). On this issue, Goodstein et al. warn that, “as boards increase in size and diversity to ful? l their institutional and governance functions, they may not be ideally suited to taking timely strategic action in response to critical environmental changes” (1994, p. 172). Dealing with the dif? culties Appointment of directors – what is the experience?
Recent surveys carried out within the US illustrate the current level of diversity in board composition. Eighty-two per cent of Standard and Poors 1500 companies have a majority of independent directors; 7 per cent of directors are from minority ethnic groups (IRRC, 2001a) while 60 per cent of corporate boards now have ethnic minority directors – up from 18 per cent in 1998 (Korn Ferry International, 2000); 11 per cent of directors are women (IRRC, 2001a), 73 per cent of corporate boards have women directors and 25 per cent have more than 2 women on their boards (Korn Ferry International, 2000).
With much of the impetus for diversity originating from the US, it is an international trend that there are now more women on corporate boards than 20 years ago (Hughes, 2002; Holton, 2000), but they still only represent between 5 and 11 per cent of the appointments (Bilimoria and Wheeler, 2000, p. 139; Burke, 2000, p. 186; Pajo et al. , 1997 in McGregor, 1997). In Britain, the issue of women on boards has attracted attention and whilst more women than ever before are taking a seat on the board, the appointment of women to top boards is still rare and they remain a distinct minority (Holton, 2000).
The situation in the UK is more positive, according to Holton (2000), than in many other countries, with the exception of the US. In Switzerland, Spain and Italy, Israel, New Zealand and Australia, South Africa, the Netherlands and Greece, the situation is similar to the UK, with few women at director level. Gender diversity is a new concept in Europe, where board positions held by women range from less than 1 per cent in Italy to 4 per cent in Switzerland (Corporate Board, 1999).
In Belgium, women hold hardly any © Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 224 CORPORATE GOVERNANCE board-level appointments. Holton notes that in France and Sweden there have been greater advances in the public sector than in the private sector, whilst in Norway women hold less than 10 per cent of appointments. In Canada, boards comprise 6 per cent women and 94 percent men (Burke, 2000).
Diversity in the New Zealand context A recent Korn Ferry International (2000) survey of corporate boards in New Zealand found that women represented 14 per cent of directors (re? ecting a higher proportion in the public sector, due to legislative and statutory requirements). Male directors tended to be older than women directors, with the majority of male executive directors clustered in the 51–55 age group and non-executive directors mainly aged between 56 and 60.
The majority of women directors tended, on the other hand, to be aged 50 and under and clustered in the 41–50 age group (Howie, 2000; McGregor, 2000; The Dominion, 2000). Among male directors, the Korn Ferry International (2000) survey found that more than one-third (35 per cent) had CEO experience, with 30 per cent being retired CEOs and 3 per cent current CEOs from the same organisations on whose boards they serve; additionally, 2 per cent were current CEOs of other organisations. A further third of male directors were current executives in other organisations.
With regard to non-executive male directors, the majority (56 per cent) were concentrated in a narrow range of industry backgrounds: 23 per cent in accountancy, 21 per cent in agricultural business, and 12 per cent in ? nancial services and law (Howie, 2000; The Dominion, 2000). This demographic pro? le raises questions about the level of independence of directors on the country’s corporate boards. Female representation on corporate boards of directors has become a political issue in New Zealand. This issue was given impetus when Jenny Shipley, the ? st female Prime Minister, undertook to raise the proportion of women on statutory boards to 50 per cent by 2000 (Pajo et al. , 1997). Currently there is legislation that compels organisations to make appointments with regard to diversity. This includes the State Sector Act 1988 and the Employment Equity Act 1990 (Cassell, 2000). Gender representation on New Zealand public sector boards is presently approximately 70 per cent males and 30 per cent females, while in the private sector the proportion favours male representation by 90 per cent (Smith, 2001b).
Wheeler (2001) observes a concern of the New Zealand Government that the diversity of the community be re? ected in the boards that govern the management of its assets without compromising the high standard of commercial performance that is required of the State-Owned Enterprises and the Crown Research Institutes. An important policy challenge, therefore, is to formulate methods and processes to ensure that such imbalances as exist in this area can be corrected systematically over time.
The primary reason for the imbalance, according to Wheeler, is that in order to meet the commercial requirements of the legislation relating to these entities and to ensure an appropriate mix of skills and competence on the board, the Crown Company Monitoring and Advisory Unit (CCMAU) responsible for recommending candidates for director appointments to Crown company and State sector boards has had, in the past, to draw from the predominantly male sectors of the population where the desired skills and experience have traditionally been found in greatest abundance.
The matter of a shortage of suitably quali? ed individuals for board positions is referred to as an issue also in the US and the UK (e. g. Biggins, 1999). Gender and diversity While diversity is not de? ned solely in terms of gender, nevertheless the main focus in the literature has been on this issue. Overall, women have made the greatest progress in attaining board positions, but in the US in particular, ethnic minorities have also made signi? ant strides (Biggins, 1999), as can be noted from statistics highlighted earlier in this paper. Age, especially the value of having the perspectives of younger directors on boards, is likewise beginning to emerge as an aspect of diversity worthy of attention (e. g. Smith, 2001a). In this regard, statistics showing that women directors tend to be younger than their male counterparts have also been noted in the literature (e. g. Bilimoria and Wheeler, 2000) and earlier in this paper (e. g. McGregor, 2000).
Consideration of the progress in redressing gender imbalance in the boardroom has tended to concentrate on the rationale for diversity and the value women can add as directors, the selection criteria and motivations for board positions and the rate of success in appointing more women to boards. What also needs to be considered are the implications for corporate governance from modern political thinking when the concept of diversity is actually introduced in the boardroom. As Burke and Mattis ask: “What happens to board dynamics and process when one woman is added – if anything? What happens to board dynamics and process Volume 11
Number 3 July 2003 © Blackwell Publishing Ltd 2003 BOARD DYNAMICS 225 when a second woman is added – if anything? ” (2000, p. 8). Do women on boards make a difference? Implications of social capital for board dynamics Adding value – contribution to the board While Carver (2002) argues that representing ownership requires that a board represent the diversity within that ownership, he also reasons that there is no way that a board can be constituted so that it represents all diversity present in the ownership. Carver highlights a tendency toward tokenism and the idea that one member of a minority represents all members of that group.
He cautions against the possibility whereby having a carefully chosen “representative” membership can seduce a board into slackness about actually gathering input from such groups. Thus representing diversity on the board in itself is not suf? cient; it must become the channel through which diversity is expressed. Andringa and Engstrom (1998) believe that diversity and inclusiveness are important issues in building quality boards for the twenty-? rst century, while Burke (2000) contends that diversity should be presented as a positive contribution based on value, merit and organisational enhancement, as opposed to tokenism, af? mative action quotas or stakeholder representation. Burke (1997) argues that both men and women are appointed to corporate boards because of their abilities, ? rst and foremost. Cassell maintains that “the basic premise of equal opportunities is that talent and ability is equally spread throughout all groups including men and women, able-bodied and people with disabilities, all ethnic groups, etc” (2000, p. 268). The same could be argued for diversity; thus, it makes good sense for directors to be selected from a wider pool of talent and ability. Biggins (1999) observes that as long as boardroom diversity remains an af? mative action issue, progress will likely continue to lag, while Leighton (2000) cautions that af? rmative action would be a step backward. He believes such action would seriously underestimate the issues of director quali? cations and the necessity for effective teamwork on the part of corporate boards. Other types of value that women can add to boards include the opportunity to serve as role models, to function as champions for change on women’s issues of recruitment, retention and advancement, and to carry important symbolic value, both within and outside the organisation, indicating that high performing omen can be upwardly mobile (Bilimoria and Wheeler, 2000; Burke, 2000; Mattis, 2000, 1993). As women and minorities build their numbers in the high-executive ranks, they will offer more quali? ed candidates for board positions (Biggins, 1999). Research suggests that, consistent with the resource dependence view, women’s presence also serves the organisation’s interest to build links to its environment, bringing strategic input (and social capital) to the boards on which they serve (Fondas, 2000; Bilimoria and Wheeler, 2000).
Women directors may be able to ask questions more freely than male directors, so that more productive discourse is generated (Bilimoria and Wheeler, 2000). Burke also suggests that women may bring particular sensitivities with them on issues important to women. However, he asserts that women serving on corporate boards want to be seen as directors ? rst, women second. They want to be known for their competence on board issues rather than as having a feminist agenda. Recruiting women to corporate boards then becomes a source of competitive advantage and a bottom-line business issue.
Reasons for appointing women to boards A range of factors can be identi? ed as motivators for appointing – or not appointing – women to boards. These include changing demographic trends and the available pool of suitably quali? ed candidates, their individual characteristics and a variety of situational factors (Bilimoria and Wheeler, 2000; Burgess and Tharenou, 2000; Burke, 2000; Mattis, 2000). Burke (2000) highlights several reasons for having more quali? ed women on boards.
These concern board structure and CEOs as the prevalent choice for director appointments, based on the belief that these individuals have the expertise to provide high-level advice, and can better understand executive challenges and performance evaluation (Biggins, 1999). First, according to Burke, there are not enough quali? ed male CEOs to go around. CEOs currently on boards decline three times as many board invitations as do directors from other professions. The continuing reliance on male CEOs results in lower quality men being appointed as the available pool of candidates shrinks.
In addition, states Burke, male CEOs serving on boards have indicated a variety of constraints on their ability to contribute, such as lack of expertise, little time for preparation and lack of information. Given this situation, it is necessary that selection of board members go beyond the traditional search for male CEOs as candidates. © Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 226 CORPORATE GOVERNANCE Highlighting more politically based motivations, Bilimoria and Wheeler (2000) note that empirical research has indicated considerable role confusion and anxiety associated with and by women board members. While many women board members view themselves as directors and not women directors, many believe that an important reason they were recruited is because they are women and therefore add a different perspective to board process and decision-making” (Bilimoria and Wheeler, 2000, p. 139). How women contribute a different perspective to this process is discussed later in relation to potential barriers to their appointment to corporate boards and ability to exert in? uence as directors.
As highlighted by McGregor (2000) and elaborated on further by Bilimoria and Wheeler: Despite the fear cited by many CEOs that women will disrupt an otherwise cooperative boardroom climate by raising dif? cult women’s issues in an adversarial manner as a reason for not hiring women directors, and despite women directors’ own consciousness of being perceived as having a women’s agenda or being a singleissue woman, these women recognise their responsibility to address issues relating to women’s recruitment, retention, development and advancement in organisations and see these as appropriate business issues for board discussion. Bilimoria and Wheeler, 2000, p. 140) From their research, Burgess and Tharenou (2000) believe that becoming a non-executive director (versus an executive director) is related to individuals’ skill, knowledge and expertise from education, advancement in management and age. This is consistent with women being appointed to boards based on their professional background and business acumen. Human capital theory proposes that investments in human capital such as education and company tenure result in economic advantages of advancement and higher salaries.
Burgess and Tharenou argue that investments in human capital increase women’s skills and knowledge for senior positions, as for men, helping them to have the visibility to be freely chosen for boards. Results from their research suggest that women who have more skill, knowledge and expertise for executive work from age, education and managerial advancement are more likely to be non-executive directors than executive directors.
Organisational factors also play a part in appointing women as directors, according to Burgess and Tharenou (2000), whereby the nature of the organisation in which a woman is employed is likely to be related to her selec- tion for board positions. Burgess and Tharenou, as well as Burke (2000), argue that executive women who work in larger rather than smaller organisations may be more likely to be chosen for appointment to boards.
Large organisations offer women visibility and credibility through their having executive roles in large enterprises and a greater chance to gain the kind of experience board chairs and company CEOs think board members should have. There are also opportunities for women to be appointed non-executive board members if they are in the public sector which, as with large organisations, may have pressures on them to conform to external demands for diversity (Burgess and Tharenou, 2000; Burke, 2000).
Burgess and Tharenou (2000) argue that non-executive board status, as opposed to executive board status, is also related to gender similarity through the women working in less male-dominated managerial hierarchies and having lengthy close relationships with other women board members. Women may be chosen to become non-executive directors to ful? l a token status, as indicated by their being on male boards. Burgess and Tharenou conclude from their study that women are thus appointed to boards based on their human capital, their social capital and opportunity.
Table 1 presents some of the motivators in offers of board positions to minorities, as suggested from the New Zealand corporate governance literature (e. g. Smith, 2001a, 2001b; Wheeler, 2001; Cassell, 2000; McGregor, 2000). These motivators are categorised by their particular relevance to the type of organisation in which these board positions are offered (see Van der Walt et al. , 2002). Board composition, selection and dynamics Today the requirement is for boards to appoint directors who can add value to board process and the governance function.
Much greater attention is paid to selecting directors on the basis of a range of criteria based on merit and the performance requirements of the board and the organisation (Lewis, 2001; Burke, 2000). As Hilmer notes, “while board composition is important, so is the quality and ability of each individual on the board” (1998, p. 62). Expanding further, Hilmer contends that “effective board membership requires high levels of intellectual ability, experience, soundness of judgment and integrity.
There is also the question of the collective capacity of the board in terms of the mix of abilities, experiences and personalities that best make up the board as a collective body” (1998, p. 62). Volume 11 Number 3 July 2003 © Blackwell Publishing Ltd 2003 BOARD DYNAMICS 227 Table 1: Motivators behind offering board positions to people of different backgrounds Private companies Publicly listed companies Stateowned enterprises Crown companies Cooperatives, mutual, employeeowned entities ? ? ? ? ? Charities, trusts, commissions Local government trading enterprises
Visible commitment to diversity Af? rmative action Market re? ection Tokenism Representation Professional discipline Industry/sector background Skills, expertise, acumen Knowledge, experience Statutory/legislative requirements Governance guidelines Access to strategic resources Corporate image External pressure for diversity Visibility Social similarity, friendship, familyties Independent perspective Community leadership ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Biggins (1999) states that today the criteria for selecting board members focus more closely on their ability to contribute to strategic and ? duciary objectives. The aim of introducing greater diversity into the board mix is to better balance the skills and attributes that are needed for quality decision-making. The appointment of women to boards is one part of achieving this aim and it is apparent from the literature that the quality of female appointments tends to be high. As Selby states, “any candidate for a corporate board position must hold a position of professional esponsibility and status that is comparable to that of the other members of the board” (2000, p. 247). He begins with the assumption that women selected for corporate directorships are respected and accomplished professionals. Findings by various researchers have consistently found that women are equally, if not better, quali? ed than men on the director characteristics of type, professional background, occupation, business directorships and nonbusiness directorships, although their tenure on corporate boards has been shorter than men’s (Burke, 2000; McGregor, 2000; Kesner, Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 228 CORPORATE GOVERNANCE 1998; Bilimoria and Piderit, 1994). Other writing suggests that, because the average female board member is younger than her male counterpart, boards bene? t from the infusion of new ideas and approaches into business deliberations (Bilimoria and Wheeler, 2000). However, Marshall (2001) argues that for board positions it is still easier to ? nd a white male with the right quali? ations than a minority person or a woman with similar credentials. Appointing directors with the aim of achieving a better balance in board composition is one issue relating to diversity – a related issue is the interplay of dynamics among board members when diversity is introduced into the board mix. The literature identi? es several areas where there is the potential for certain factors to have a signi? cant impact on boardroom dynamics and the effective functioning of the board as a collective decisionmaking body.
These areas of interplay among board members relate to matters concerning selection of directors and their characteristics, director independence and objectivity, contribution to board function, the politics of power and dominance in the boardroom and the quality of debate on governance issues. These issues may also present barriers to women’s appointment or limit their effective contribution as board members. Where boards have in the past functioned as “old boy’s clubs”, most boards today include both executive and non-executive directors, but charges of “clubbiness” still echo (Bennis, 2001; Lewis, 2001; Grady, 1999; Garratt, 1997).
McGregor writes of “the boardroom mystique expressed by a closed, clubby and elitist culture” (2000, p. 136), especially “in the private sector with its enormous ? nancial power and socio-economic signi? cance, where male cultural norms are so pervasive” and where “the boardrooms of corporate companies in the private sector remain citadels of patriarchal values” (2000, p. 129). Directors are almost always cut from the same cloth: men who live in the same city and have similar backgrounds. Boards so constituted lack the diverse perspective needed to challenge the thinking of management (Grady, 1999, p. 8). “Such uniformity” adds Grady, “tends to undermine the quality and variety of boardroom debate. Opportunities can be missed because directors lack a diverse or global point of view”. Barriers and impediments to board appointment and ability to in? uence board process Among a series of barriers to women’s appointment to corporate boards, Holton (2000), Burke (2000) and Mattis (1993) identify the director selection process, which relies to a great extent on the “old boys network” and conservative, old-fashioned attitudes about the role of women.
Furthermore, corporate boards may be unaware of the roles that women members can play in promoting the advancement of women in their own companies. Also highlighted as barriers are factors such as risk aversion by corporate boards (Mattis, 1993); unclear or closed recruitment processes at board level; stringent criteria requiring major publicly listed company experience for candidates; and (as already mentioned) dif? culties for companies in identifying suitable candidates (Holton, 2000).
Burgess and Tharenou (2000) highlight a range of factors relating to the interpersonal domain, along with the institutional, governance and strategic functions of the board as providing reasons for the barriers that women may face in seeking director positions. Factors likely to create direct barriers for women to be appointed to boards are lack of interpersonal support and gender dissimilarity. These factors are also likely to indirectly impede their appointment through limiting their advancement to top management positions.
According to Burgess and Tharenou, social similarity (e. g. from education, demography) may be especially important for appointment to boards. Social similarity means that individuals will often have shared values and attitudes and derive self-esteem from group membership. Individuals are attracted to and prefer those similar to them. Similarity leads to self-validation, ease of communication and trusting relationships. The preference for those that are perceived as similar is particularly prevalent in situations of uncertainty nd unfamiliarity. Choosing whom to appoint to boards is an uncertain situation and there is likely to be a range of factors that may make individuals effective board members (Burgess and Tharenou, 2000). Burke (2000) and Biggins (1999) both argue that male CEOs and male board chairmen are more comfortable with others like them – that is, other white male CEOs. Moreover, they are more likely to have in their personal and professional networks other men who qualify for candidature. Quali? ed women are likely to be less visible to these men.
Since top managers, typically the CEO, usually nominate candidates for directorships, women can be at a disadvantage if not known by the nominators in terms of being in the same social circle, executive circle and/or members of other corporate boards (Fondas, 2000; Burgess and Tharenou, 2000). Similarity reduces uncertainty, thus likely helping men’s Volume 11 Number 3 July 2003 © Blackwell Publishing Ltd 2003 BOARD DYNAMICS 229 appointment to boards (Burgess and Tharenou, 2000). However, not only does this spread male candidates thin, it also limits the positions available to quali? d (though not boardexperienced) women and ethnic minorities (Biggins, 1999). Such factors as social and gender similarity are thus likely to present barriers to women being appointed to boards. As alluded to earlier with regard to social similarity versus diversity, some writers even suggest that a homogeneous group of directors can deliberate and arrive at decisions more ef? ciently than they might if the director group was more diverse (Burke, 2000). The role of ritual in meetings as social binding behaviour may also arise as a factor in the ability of women and other minority groups to participate.
McGregor (2000) argues, however, that the gender dynamic in the boardroom can discriminate for as well as against women. She contends that the boardroom ethos, or the “conspiracy of discretion”, is not well understood by women who aspire to directorships. The notion of the boardroom as the apex of business power has promoted the fallacy that super-human qualities are needed to gain admission. What is seldom talked of, according to McGregor, is the need for complementarity of attributes and the acknowledgement of the bene? ts of a necessary skills mix on effective corporate boards.
While companies have come under pressure within the last decade to appoint more women and minorities to their boards of directors, Fondas (2000) suggests that a closer look reveals that CEO power and organisational legitimacy are not served by further increasing the number of women on corporate boards. A question is whether women will have a bene? cial effect on the board’s mandate to monitor and control management. As stated earlier, research evidence suggests that women may enhance the board’s performance of its governance role in facilitating effective debate on governance issues.
Fondas (2000) concludes that boards with larger proportions of women on them are less inclined to let CEOs dominate proceedings and more likely to engage in “power sharing” and that boards with one or more female directors have signi? cantly more in? uence over management decisions than boards without female directors. According to Fondas, this may be due to a number of factors giving them a different “voice” or perspective, but in order for this perspective to have an impact on the board’s decisions it has to be voiced in a setting where norms of collegiality, equality, consensus and private decisionmaking prevail.
In addition, women directors are usually outsiders and therefore more likely to be objective and independent. This independence, she suggests, may partially explain why the presence of women enhances board in? uence over management (Fondas, 2000). Associated with the level of independence, a latent reason CEOs may resist appointing more women, according to Fondas (2000), is that doing so increases the number of outsiders on the board, thereby potentially diminishing the CEO’s power.
It is not, however, discrimination against women per se, but a bias against independents and outsiders. Fondas highlights the importance of power dynamics in the boardroom, noting also that inside directors are subordinates of the CEO in the ? rm’s management hierarchy and are thus subject to other power issues (Fondas, 2000). Board activities that link the board to its environment reduce uncertainty and secure from external constituencies resources critical to the organisation’s success. These resources include access to capital but also prestige and legitimacy.
Firms will create larger, more diverse boards in order to establish and maintain linkages to other businesses, government and social organisations (resource dependence perspective). Evaluating the contribution of women directors to the board’s institutional function is complex. On the one hand, women often provide needed links, e. g. having a community pro? le as being a reason for appointment. On the other hand, the presence of women directors may provide the appearance of legitimacy and compliance without further purpose.
This means that as long as companies have only token numbers of women on their boards, there is no increase in legitimacy by appointing more. In a 1995 study by Catalyst, the top two motives given by CEOs for appointing women directors were (1) image in the community and/or with a constituency and (2) image with shareholders, of the company’s commitment to diversity (Fondas, 2000). Fondas (2000) also highlights the strategic function of the board as an area where women may encounter barriers to their ability to exert in? uence in board process.
The strategic function of the board involves making critical decisions, particularly in relation to strategic change, so the organisation can adapt to environmental changes. Little empirical or theoretical research has been conducted on the board’s role in strategic decisions and strategic outcomes (Ingley and van der Walt, 2001; Fondas, 2000; Mattis, 2000; Johnson et al. , 1996), but there is a consensus that the board’s strategic function is relatively more important when the organisation is experiencing either poor performance or environmental turbulence or both (Mattis, 2000). Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 230 CORPORATE GOVERNANCE Women directors are more likely today to have corporate, business careers than previous women (who usually had not-for-pro? t experience). This suggests, according to Fondas (2000), that women may play a larger strategic role than they did previously, because their experience is more aligned with the company’s needs. However, women directors also report dissatisfaction with board experiences as including the board’s lack of impact on corporate policy.
Fondas believes it is possible that women directors with their higher expectations of board service experience frustration with their lack of in? uence over what they perceive as strategic issues. One reason for this frustration, she suggests, may be that board in? uence over strategy is done by way of committee rather than by direct engagement in strategy formulation. According to a study by Bilimoria and Piderit (1994), women serve predominantly on less important and less strategic board committees (e. g. public relations), while men tend to serve on committees with a larger strategic role (e. . executive, remuneration, ? nance). In relation to this issue faced by demographic minorities and not just women, Westphal and Milton (2000) highlight the social psychological dynamics underlying resistance by majority group members to minority in? uence, which can be understood in terms of inter-group relations. They cite research suggesting that individuals classify themselves and others into social categories of in-groups comprising majority members and out-groups to which minorities are assigned. From such categorisation a variety of biases and other negative outcomes may result.
Research evidence, according to Westphal and Milton, indicates that such biases may be positive in processing majority in-group communications and negative in processing minority out-group communications. Concerning board process, out-group biases may lead majority directors to dismiss or devalue the input of demographic minorities on the board and may occur even when the minority status is minimal or arbitrary. This means that out-group biases can limit the potential for minority board members to contribute to board decision-making through a reduced ability to be heard and therefore to in? ence the decision process and outcome. Commenting more broadly on board dynamics and director selection, Bennis (2001) argues that diversity on a board may lead to a “devil’s advocate” stance in questioning and to a “Noah’s Ark” syndrome where ? ling into the boardroom one-by-one must be representatives of every type. For diversity to ? ourish, Carver (2000) argues, it must be socially acceptable to examine all ideas, regardless of origin, otherwise the rich variety of opinion can become either so suppressed or so strident as to become ineffective. Carver warns that it is easy for a board to become so ? ated on presenting a united front that it seeks to play down any disagreements. Such a board, he admonishes, has forgotten that its real strength is being able to make a single-minded decision from a diverse base (Carver, 2002). The predicament, then, is “how to create a board responsible to shareholders without creating a Noah’s Ark of dissident voices? ” (Bennis, 2001, p. 7). Thus it is important to facilitate both diversity and unity: to optimise the richness of diversity in board composition and opinion, yet still assimilate variety into one voice.
A model must address the need to speak with one voice without quashing dissent or feigning unanimity (Carver, 1997). Table 2 categorises from the New Zealand corporate governance literature (e. g. Smith, 2001a, 2001b; Wheeler, 2001; Cassell, 2000; McGregor, 2000) some of the suggested motivations by directors, including women and minorities, for accepting board positions. These motivations are classi? ed by their particular relevance to boards by type of organisation (see Van der Walt et al. , 2002).
As McGregor (2000) states, a seat on the board is highly symbolic of power, status and leadership in business. However, there is very little information on the motivation of women, and men, in joining corporate boards. Both men and women seem to be motivated by opportunities to learn and be challenged and not motivated by compensation and perks (Burke, 2000; Mattis, 1993). Taxonomy Table 3 draws together the main types of diversity that boards may seek in evaluating and aligning their board structure and composition with the strategic needs of the organisation.
The various types of diversity are classi? ed by their relative importance in the public and/or private sector. In this context, the public sector includes local authority boards, and the private sector includes boards of voluntary and nonpro? t organisations. Conclusions Mythologies and the value of board diversity The literature strongly supports the idea of diversity, at least in a social and moral sense, although the business case is less convincingly Volume 11 Number 3 July 2003 © Blackwell Publishing Ltd 2003 BOARD DYNAMICS 231
Table 2: Motivations behind acceptance of board positions Private companies Publicly listed companies Stateowned enterprises Crown companies Cooperatives, mutual, employeeowned entities ? ? ? ? ? ? ? ? ? Charities, trusts, commissions Local government trading enterprises Status Prestige Fees, bene? ts Altruism, philanthropy Contribution Opportunity Representation Challenge Interest in company/ organisation Means for gaining other appointments ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Table 3: Taxonomy.
Diversity in the public and private sectors Skills/quali? cations /expertise/ experience Age Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector Representation Constitutional requirement Access Contribution Public sector/private sector Public sector Public sector/private sector Public sector
Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Private sector Gender Ethnicity Public sector Discipline Public sector/private sector Public sector/private sector Public sector/private sector Public sector/private sector Private sector Private sector Independence Culture Industry background Religion Private sector © Blackwell Publishing Ltd 2003 Volume 11 Number 3 July 2003 232 CORPORATE GOVERNANCE argued on the basis of hard evidence.
Smith (2001a) maintains that many myths and misconceptions are held about who should serve on corporate boards, questioning the diversity issue with regard to the real importance of having, for example, young blood or a gender balance. Could it be, he implies, that too much or the wrong emphasis has been placed on achieving diversity? While boards need to be re? ective of their ownership and the wider social environment, diversity per se is insuf? cient in building effective corporate boards. The boards of today’s companies need to focus foremost on merit criteria for director selection and, ideally, to comprise quali? d individuals re? ecting in the mix – gender and a range of expertise, experience and ethnicity. Boards also need to be cognisant of the potential to add value by utilising the social capital contributed collectively by their directors as a strategic resource for their organisation. The challenge for those representing minority voices in the boardroom, Smith argues, is to make their views heard. The challenge for boards is to bring together in a cohesive manner the balance of expertise and perspectives required for effective functioning and decision-making. References Andringa, R.
C. and Engstrom, T. W. (1998) Nonpro? t Board Answer Book: Practical Guidelines for Board Members and Chief Executives, 2nd edn. Washington: National Center for Nonpro? t Boards. Bennis, W. (2001) Corporate Boards, Executive Excellence, February 7–8. Bhagat, S. and Black, B. (1997) The Board Game, Chief Executive, 128, 82–83. Biggins, J. V. (1999) Making Board Diversity Work, Corporate Board, 20(117), 11–17. Bilimoria, D. and Piderit, S. K. (1994) Board Committee Membership: Effects of Sex-based Bias, Academy of Management Journal, 37(6), 1453–1477. Bilimoria, D. and Wheeler, J. V. 2000) Women corporate directors: Current research and future directions. In R. J. Burke and M. C. Mattis (eds) Women in Management: Current Research Issues, Vol. II, Ch. 10, 138–163. London: Sage. Bryan, J. H. (1995) Allegiance to a Diverse Board, Directors & Boards, Spring, 6–8. Burgess, Z. M. and Tharenou, P. (2000) What distinguishes women nonexecutive directors from executive directors? In R. J. Burke and M. C. Mattis (eds) Women in Management: International Challenges and Opportunities, 111–127. Dordrecht: Kluwer