Sharan Gill, writer, lawyer and CSj contributor, reviews a thought leadership paper published by The Chartered Governance Institute that proposes a new approach to bringing the full benefits of diverse thinking to boards of directors.
The issue of diversity in the boardroom has taken on a new dimension since the publication of the paper entitled, Diversity of Thought: How You Can Prepare Your Board for Complex Decisions, by the Thought Leadership Committee of The Chartered Governance Institute (CGI) in December 2020. Backed with hard data collated on board practices, it proposes a novel approach to a concept rapidly growing in prominence – diversity of thought.
There is little argument that diversity holds the potential to improve both the composition of boards, by bringing together different perspectives, and the way that boards address complex challenges. However, much of the emphasis has been on external or visible barometers, measuring diversity of thought processes or how boards think individually or collectively seemed too vague to measure in real and practical terms. And yet the importance of the diversity of such thought processes cannot be understated. The paper, authored by Lloyd Mander, puts forward a compelling argument for defining the concept of diversity of thought. It then goes further to propose a unique formula for measuring diversity of thought within the boardroom.
What are the key elements of diversity of thought?
The paper starts off by proposing a clearer way of defining diversity of thought, quite simply by identifying two key elements: firstly, the potential of individual group members to think differently from each other, and secondly, the group dynamics that influence whether group members are open to sharing their thoughts.
1. Individual group members
The paper emphasises the inherent potential of individual group members who think differently from each other. Boards containing individuals who think differently will be able to ‘conceptualise problems in new ways and increase the number of potential solutions available to them,’ the paper says. Boards comprised of individuals with varied backgrounds will also be more likely to promote decisions based on facts rather than influence, authority or group allegiance. Their decision-making process is also likely to be more focused and less prone to the distortions of ‘groupthink’. Stakeholders will be the ultimate beneficiaries as diverse groups are more likely to address their differing interests.
The paper points out, however, that a diverse board will not necessarily lead to diversity of thought. As Peter Turnbull, International President, CGI, points out in his foreword to the paper, ‘diversity of thought is often conflated with diversity of membership’. Though it is generally accepted that boards benefit from having members who differ in their experience, functional skill and/or network connection, this will not necessarily increase diverse thinking because ‘experiences, perspectives and thought preferences may actually be similar across the group,’ the paper says. It gives a striking example of a female accountant on an all-male board of accountants. While this one perceptibly different member may provide diversity of thought on a gender-based issue, as a fellow accountant she is quite likely to approach issues in the same way as her fellow members on the board.
2. The dynamics of group culture
Assuming then that an organisation has taken pains to ensure sufficient diversity in the composition of its board, what should the next step be? The paper’s approach is unequivocal: psychological safety in the boardroom is critical. The board must have a culture that supports individuals prepared to share what they are thinking, ‘all board members should not only have a seat at the table but a genuine voice too,’ the paper says. Board members should avoid forming alliances with one another, actively seek out information from reliable sources and, most importantly, share with the board members what they have been thinking at the designated time of the meeting.
Which issues benefit most from diversity of thought?
The paper emphasises that it is important at the outset to establish which issues would benefit most from diversity of thought. Borrowing from the ‘Cynefin framework’ introduced by David Snowden and Mary Boone in a 2007 article in the Harvard Business Review, the paper distinguishes between issues of a ‘complicated’ and ‘complex’ nature. Complicated issues are those where there is a clear relationship between cause and effect. Such issues may have many interacting parts but as long as the input can be understood the output can be reliably predicted. Preparing financial statements is an example of a complicated issue and the paper points out that the people best placed to handle this task are individuals with the relevant expertise.
‘Complex’ issues, by contrast, are less predictable and there may often be no definitive ‘best solution’ to them. Many issues facing organisations tend to be complex in nature, such as predicting changes in markets, selecting a new CEO, or deciding where to allocate resources. Deliberations of a ‘complex’ nature will benefit most from a decision-making group with wide-ranging diversity of thought.
Can diversity of thought be measured?
The paper’s author, Lloyd Mander, has developed a formula for evaluating the potential of a particular board to achieve diversity of thought – the Diversity of Thought (DOT) Scorecard.
Evaluating group potential for diverse thinking
Group members complete an online questionnaire where they self-report on the experiences, perspectives and thought preferences that underlie their mindset. A proprietary algorithm then evaluates their responses and determines a score for the group on an index from 0 to 100. A higher score would indicate greater potential for diversity of thought.
Measuring group realisation of diverse thinking
Potential is not always realised, however, hence the next step involves filling in a further questionnaire that will aid in understanding the group’s decision-making culture in terms of inclusion in decision-making, psychological safety and independence. The responses are converted into an overall group decision-making culture score between +100 and -100. Higher positive scores indicate the group is more likely to actually realise the potential for diversity of thought.
Conclusions drawn from the New Zealand study
The paper highlights the scores from a study sample consisting of 28 New Zealand boards from both commercial and non-profit organisations. The size of the board groups ranged from 5 to 15 members, with the CEO included in each board evaluated. Using the sample data, the paper attempts to draw general conclusions on the extent to which diversity of thought is present within boards. Interestingly though, it also sheds light on factors that may encourage or otherwise skewer the process.
Scores in the study sample ranged from the 20s to the 70s (out of 100) indicating substantial differences in the degree to which diversity of thought was present. Board size seems to matter; larger boards had higher diversity of thought with a correlation of 0.6 between group size and score. Nevertheless, though larger groups are more likely to include individuals with differing perspectives, the scores showed a ‘very strong’ negative relationship (-0.9 correlation) between increased board size and the average ‘culture’ score. This would seem to indicate that the bigger the board, the more reluctant individual members would be to present dissenting views.
Measuring board committees
The study also evaluated different board committees, using parallel methods. While both composition and functioning of these committees had a ‘critical impact’ on diversity of thought, it is particularly interesting to note that those addressing issues of complexity had a lower average diversity of thought score than those dealing with complicated issues, such as audit or finance. This would appear to indicate that perhaps boards should look more closely at which members to allocate to the different committees.
Are boards realising their full potential for diverse thinking?
One of the key themes of the paper is that boards need a good decision-making culture to fully realise their potential for diversity of thought. Results from the New Zealand study reveal that over half of the boards contained between one and five board members who perceive that they are not appropriately included in decision-making. These results suggest that, even where boards have a high inherent potential for wide-ranging diversity, they face a material risk of not realising this potential.
Moreover, the paper suggests that boards tend as a whole to have a more positive decision-making culture than executive teams. This may be because boards are more likely to be established as unified decision-making groups with less of a hierarchical structure and directors face less of a removal risk than executive team members. This suggests that the author’s DOT Scorecard algorithm would be particularly effective within executive committees in assessing whether lower scores indicate a reluctance to go against the flow, or indeed the CEO, within management teams.
Proposals for the future
The board is the ultimate decision-making group for an organisation. The paper makes the pertinent point that the most progressive boards of today are already including diversity of thought as a key component of their board recruitment strategy. Moreover, it suggests that regulators and stakeholders are likely to increasingly expect an appropriate degree of diversity of thought on boards in the future.
The need for an organisation to manage and report on its board’s diversity of thought, alongside other metrics, is also emphasised. Evidence for a board’s current diversity of thought status, along with its progress and commitment to a positive decision-making culture, needs to be provided through routine ‘external monitoring, evaluation and formal training in decision-making,’ the paper suggests.
The paper proposes that board chairs and other board members may be held more directly accountable for developing and maintaining an effective decision-making culture. Within the context of board dynamics today however, questions naturally arise as to whether the board is actively seeking the diversity of thought that is required, and whether steps are being taken to ensure that approaches to diversity of thought are not blinkered. To ensure that these questions are in the forefront of directors’ minds would be a start, and board chairmen, governance professionals and external consultants, for example search firms, will play a key role in addressing these questions. It is all too easy to fall into the default mode of selecting new board members from among the controlling directors’ circle of friends, with just an outward semblance of diversity.
As for the future, the paper makes the succinct point, ‘boards have an incredible opportunity to apply diversity of thought so that they can make the best possible decisions’. This paper has provided a workable formula to measure diversity of thought on boards, and it is for organisations to decide how they intend to meet the ever-increasing expectations of regulators and stakeholders in this regard.
Sharan Gill is a lawyer and writer based in Hong Kong. Her review of another CGI thought leadership paper – Enhancing Individual Director Accountability – was published in the September 2020 edition of CSj, available on the e-CSj website: http://csj.hkics.org.hk. The paper reviewed in this article is available on The Chartered Governance Institute website: www.cgiglobal.org.