A lack of diversity and engagement in the boardroom is damaging companies with global businesses
On September 1, the Hong Kong Exchanges and Clearing's code provision aimed at encouraging greater diversity in the board composition of Hong Kong-listed companies came into force. Coming hot on the heels of the exchange's requirement in 2012 that one-third of board members must be independent non-executive directors, the code could help spark profound changes in the way boards operate and how they interact with company management.
Steve Mullinjer, regional leader for Asia-Pacific and the Middle East at executive search firm Heidrick & Struggles, says the need for more diverse thinking is a result of rapid globalisation.
"The catalyst has been the exponential increase in globalisation in the past 15 to 20 years, with a proliferation of different agendas, cultures and strategies," he says.
Heidrick & Struggles is currently working with Andrew Kakabadse, professor of governance and leadership at Henley Business School, to find ways to help boards better engage with their senior leadership teams in order to increase productivity.
Based on research gleaned from surveys of leading FTSE companies, Kakabadse has found that many boards around the world are highly disengaged from the rest of their companies.
"Over 80 per cent of board members could not tell you - just didn't know - what the competitive advantage of their firm was," Kakabadse says.
Among top management, he found that 33 per cent lacked a shared vision, mission and strategy, and 66 per cent knew what was wrong with their companies, but were too inhibited to talk frankly to the board.
Boards, in turn, lacked the detailed knowledge of the company that they needed to be effective mentors. That lack of engagement between boards and management damages companies, Kakabadse says.
"Management becomes very defensive with the board. [They] don't want to give them information, or instead give them inappropriate or inadequate information just to keep them off their backs," he says.
He believes that the extent to which board diversity should be pursued is based on business needs. "For example, at EasyJet, I think on the board they only have one person who knows something about airlines. But they do have people who know about media and northern Europe, and individuals who have an insight into what gives EasyJet a competitive advantage in each of the markets it operates in," he says.
Board members need to be interventionists, but to not cross a line into interfering - a balancing act that can be hard to achieve. There are other situations that also need to be avoided. Directors often sit on too many boards, diluting their ability to be effective. Meanwhile, some directors are personally close to the chairperson; as a result, when problems or differences of opinion arise, some of these directors feel unable to voice dissent or to propose changes that might be unpopular with the chairperson or other board members.
For companies with operations spanning several different markets around the world, the way forward is to build board diversity around the diversity that already exists in these markets, Kakabadse says.
That means there is no single formula that will work for every company. Successful companies, however, tend to focus on three key elements: enterprise value, diversity of thinking, and a culture that promotes both mission and engagement.
"What we're finding is for the successful MNC, they're operating across so many different markets, so many different domains, [that they] need a management team that is versatile in the way it responds to each local market, but still has a core identity," Kakabadse says.
The importance of that core identity - or strong corporate culture - resonates with Louisa Wong Rousseau, group managing director of Bo Le Associates, who says that building an open and transparent company culture is vital.
"When the whole team feels that they are striving for a common goal, the well-being of the company will be the priority. Personal relationships, amongst other factors, should not be reasons that will prevent the board or the chairperson from carrying out deeds that will help improve the company," she says.
Companies should work to develop an open, transparent culture and a diverse board comprised of people who each have their own unique talents, she adds. This creates an atmosphere of mutual trust as there is something to learn from everyone. "The combined efforts of this team of equipped specialists can yield the best results for a company that is looking to improve the company's performance," she says.
Fern Ngai, CEO of Community Business - which has been actively promoting board diversity for years - believes that the chairperson plays a major role in creating an environment where diverse views are welcome.
"By creating a culture where all board members have a voice and engage in healthy debate, groupthink is avoided, as well as unconscious collusion where individuals avoid personal discomfort by not rocking the boat," she says. Ultimately, she adds, this leads to stronger decision-making, better performance and higher competitiveness.
It is also essential to ensure the genuine independence of directors. "There is a strong argument against recruiting new directors through the 'old boys club', which unfortunately still prevails in the business world," Ngai says.
Chris Chan, professor of Ivey Business School in Asia and developer of the corporate governance element of the University of Hong Kong's MBA programme, agrees that independence is crucial.
"Have a reasonable degree of diversity, but the next question is, do you exercise that diversity and become more independent? Those two things need to be coupled together," he says.
Directors need to be independent enough to raise questions and challenge management decisions, while board diversity needs to be linked not only to the company, but also to the corporate structure, he adds.
In companies with an international focus, independence may be less of an issue. Because such entities are exposed to multiple jurisdictions and regulations, they tend to be more accountable, have more diverse boards, and exercise more independence. That independence filters down from the board to the management and has a positive effect on the company.
"[This] creates the need for management to be more accountable, because senior management then needs to be very mindful of how their decisions impact their businesses around the region or world," Chan says.
But in companies with many shareholders, or family businesses where board members and senior management may be comprised of members from the same family, independent directors are particularly important in voicing the concerns and opinions of minority shareholders.
"For example, at Google and Facebook, the founders only own about 10 per cent [of their companies] and the rest is owned by millions of people," Chan says.