What makes an effective corporate board is the question on the minds of many CEO’s and board members headed to the Strategic Growth Forum in Palm Springs today sponsored by Ernst & Young. The topic surfaces on any number of a panels and embedded in keynote speeches.
As a participant on the panel “Untapped value? Look to your board,” I have often asked myself this question over the more than a twenty years on which I’ve served on corporate boards. Recognizing that every board has a unique culture it is easy to say one size does not fit all.
However, I have come to learn that trust and transparency among the board members and with the CEO are essential for a positive outcome. Without these two factors, boards inevitably resort to backroom deals that eventually become dividers of those at the table. Battles ensue.
Today, board diversity is beginning to yield stronger boards. This is a fact. And in my opinion, as a result, the old rules of group think will begin to fade away. Diversity has many faces, not only in gender and race but in nationality, areas of expertise and geographic location. The latter is particularly important in the global economy. The hunt for talent among board members is heating up as more boards begin to realize that a carefully constructed board is essential for competitive success.
The proof that diversified boards, particularly related to women, is abundant. In study after study on a global basis, boards with three or more women on the board have significantly better performance. In the most recently released research by Catalyst, boards with three or more women have:
• Return on Equity: On average, companies with the highest percentages of women board directors outperformed those with the least by 53 percent.
• Return on Sales: On average, companies with the highest percentages of women board directors outperformed those with the least by 42 percent.
• Return on Invested Capital: On average, companies with the highest percentages of women board directors outperformed those with the least by 66 percent.
Why do I relate these results to better trust and transparency on boards? Are we smarter, wiser, and better prepared? No, not really. I think it’s because women don’t belong to the older generation of boards who primarily engaged in forms of group think. Women have had to get to this position by performance over politics. I am making a leap of faith without imperial evidence that diversity in the other categories noted above will yield similar results but it is what I believe.
The good news is that is there is an increasing supply of women, minorities, and multinationals who are qualified to serve on boards. There are also Initiatives to identify and register these candidates by the Corporate Board at NYSE/Euronext, The Women’s Forum and the SAISConference among many others.
So yes, trust and transparency are very important for functioning boards. Broadening the base towards more diversity will yield more transparent talk in the board room. That, I think is a good thing.