Why boardroom diversity matters

Diversity in the boardroom is one of a number of steps boards can take to ensure they avoid the kind of disastrous collapses and scandals that we have seen in recent years and which could become more common, according to a new book.

Disaster in the boardroom: Six Dysfunctions Everyone Should Understand by Gerry Brown and Randall S Peterson is a forensic study of business disasters and how boardroom corruption or incompetence is often a factor. It says boards should act as independent guardians, able to spot potential disaster on the horizon and suggest corrective action, but too often they fail.

It looks back at around 70 different cases and at research suggesting around 40 per cent of corporate boards around the world are dysfunctional in some significant way.  It discusses how scandals have been tackled in the past, often through legislative action which takes time, may be badly designed and is often repealed by subsequent governments. Moreover, it says shareholders are often too removed to know what is going on a day-to-day basis in a business.

Culture change

The authors argue that the culture of boards needs to change, that they need to learn to act independently and understand and safeguard the interests of all their stakeholders, including their shareholders, but also their customers and wider society. That includes taxpayers who have to bail them out if they fail and their employees who may lose their jobs if they fail and suffer the wider social consequences of unemployment.

“The failure of governance is not just an economic problem. It is a social and moral one as well. This is not merely a matter of money, but of human beings, their livelihoods, their families and their health and wellbeing,” they write.

The book argues further that Covid-19 has exposed many weaknesses and failures in business governance, particularly when it comes to disaster planning. And it says these failures are in part due to ignorance about what boards do, CEOs’ personality flaws and poor recruitment practices when it comes to board members as well as to a complacent or unquestioning board culture where board members are not encouraged to speak up. It outlines six types of dysfunction including bystander boards where responsibility is diffused and imbalanced boards where key voices are missing.

The authors write: “The less diverse the board is, the less likely it is to understand when key viewpoints are absent. Homogenous boards tend to make decisions that are not fully informed [ie by the missing voices].”

They say that boards need to function like a team in which each member has something unique to contribute. They write: “Demographics are not the only important issue, and token appointments of minorities or people with disabilities will not necessarily lead to an effective board. Gender, disability, age and ethnicity are all important, but so too are things like educational background, socio-economic background, neurodiversity and lived experience…However, those different backgrounds and lived experiences that we seek are more likely to be found among different demographic groups.”

They cite, for instance, research showing different priorities between male and female directors when it comes to human rights and sustainability.  They add that one token appointee cannot make a difference on their own because single voices often get ignored. “Truth needs to be supported for it to persuade the rest of the board to accept it,” they state.

The book ends with an urgent call for reform, saying that in 10 years’ time businesses will face more complex problems. The authors write: “We need solutions to the problems these crises pose before the situation gets even tougher. Now, more than ever, good governance is absolutely vital. But we are not getting it. Something is broken. We need urgently to fix it.”

*Disaster in the boardroom: Six Dysfunctions Everyone Should Understand by Gerry Brown and Randall S Peterson is published by Palgrave Macmillan. 

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