Leading diversity in the boardroom: board evaluation project 2017

Abstract

Listed companies are obligated to conduct annual internal evaluations and triennial external board evaluations. The board evaluation industry is concentrated in a small number of organisations conducting the majority of FTSE 350 companies’ evaluations. Recognising the evaluator community has rare and privileged access to Chairs, their boards, and witnessing the impact of boardroom composition, we conducted interviews with 11 experienced board evaluators, operating independently or within firms that offer wider sets of services, to ascertain their views on gender diversity in the boardroom. Board evaluation can be crudely divided into those focused on more procedural reviews and those engaging with behavioural elements. Our interviews revealed that, through more behaviourally focused reviews, board evaluators demonstrate a deep understanding of the impact they see of group composition on boardroom behaviour, culture and effectiveness. These evaluators were extremely clear about the considerable benefits of a critical mass of diversity in the boardroom (often defined as three ‘diverse’ individuals). They evidence this through the dynamics of debate and decision-making. Evaluators can advise Chairs on how to optimise the benefits of a diverse board, providing challenge and support, particularly in the areas of feedback, induction and developing a diverse pipeline of talent, in the pursuit of highly effective team performance. On the understanding that behavioural reviews are more likely to comprehensively address issues of diversity, we suggest that the Financial Reporting Council recommend that board evaluation disclosure in the Annual Report includes information on whether a behavioural or a procedural external evaluation was undertaken, in addition to a summary of actions taken since the evaluation. We also recommend that the board evaluation industry adopts minimum standards for reviews, in the form of a Code of Conduct, kitemark or other method, by mutual agreement. The minimum standards should address the areas raised in this report, i.e. on diversity and dynamics, culture and behaviour, on feedback, induction and the talent pipeline. Our findings are unique in terms of behavioural insight into the dynamics of the boardroom and should encourage more Chairs to strive for, and more investors to insist on, maximising the benefits of a critical mass of boardroom diversity.