STRENGTHENING BOARDS THROUGH DIVERSITY – A TWO-SIDED MARKET THAT CAN BE EFFECTIVELY SERVICED BY INTERMEDIARIES

Akshaya Kamalnath, Lecturer, Auckland University of Technology

The current focus on the monitoring role of the board has come under much criticism. Independent directors play a significant role in this model. However, their ability to truly function independently has been rightly questioned in the last decade. Independent directors are impeded by two main problems: lack of access to relevant information, for which they are reliant on management; and the high likelihood of being captured (to varying degrees) by management. There have been various suggestions to fix these problems, ranging from enhancing board diversity to drastically reforming the current model of corporate boards.

In a forthcoming article, I argue that diversity holds the promise of slowly reforming the current board model, so long as well-considered measures are taken. To that end, this article proposes a model of board governance that relies on ‘providers of supplemental board services’ as intermediaries to facilitate diversity on boards. This model will, on the one hand, allow companies to attract the best and diverse directors and on the other hand, allow board candidates (especially diverse candidates) to make well-informed decisions about taking on directorships. Eventually, companies may choose to share these reports with investors and the general public, to signal both their commitment to diversity and governance. Finally, the proposed model has the potential to drive boards to take on more of an advisory role along with the current focus on monitoring.

As a first step, the benefits of diversity to both monitoring and strategic/ operational functions of the board should be explored. The logic of diverse boards being better at monitoring flows partly from the assumption that diverse candidates are likely to come from different social circles and hence will not hesitate to question management.  The other part of the logic is that diverse candidates bring different life experiences which in turn, help them provide alternative perspectives to the board discussion.  It is hoped that these different perspectives will help overcome “groupthink” (members of a cohesive group, striving for unanimity, are unable to realistically appraise alternative courses of action).  However, it is not common for the board to have a culture where dissentient views are encouraged. Relying on diverse board members to overcome a culture where alternate views are discouraged, so as to enhance the monitoring function of the board, puts an unreasonable burden on these members. 

Third-party providers of supplemental board services like executive and director searches and board evaluations are already used by companies and could be further utilized to service both sides of the market – companies and diverse candidates for executive and board positions. Executive search firms also consult with boards to provide advisory services which include assessing board culture, creating an inclusive board culture, inducting new board members, improving the relationship between the CEO and the board, clarifying the role of the board, its committees and members.  Crucially, it also includes board evaluation services.  While board evaluation is not a new idea, most company boards conduct a self-assessment.  Outsourcing it to a third-party firm can bring objectivity to the process. Since these same third-party firms also act as intermediaries for director appointments, it can be used as an important metric for candidates to assess the company.

The article can be downloaded here and the author welcomes feedback and comments.

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