Ho diverse is your board?


The benefits of board diversity for Australian SMEs

Only 25% of company directors feel the current level of diversity on Australian boards is satisfactory, according to the Australian Institute of Company Directors (AICD) Director Sentiment Index. That’s a risk for companies, regardless of size. The more alike your board directors are — whether in gender, cultural background, age or professional experience — the poorer their decision-making is likely to be, and the less flexible and resilient the organisation.

Gender diversity is improving on Australian company boards

The focus on gender diversity of company directors over recent years appears to be showing results. The Board Diversity Index 2021 studied boards of ASX300 companies over five years since 2016 and noted an increase of almost 60% in board seats occupied by women. The report found only 14 of the 300 companies now had no women on their board.

Board diversity in Australia is no longer a concern for the ‘top end of town’. The Australian Institute of Company Directors reports that the most significant improvement in gender diversity it has seen has been in the ASX 201-300 category, where the proportion of women has increased by more than seven percent in the past two years.

Stop press: company board diversity is not just about gender

But gender is not the only issue board directors are thinking about, as reflected in the Director Sentiment Index. While just over half of the respondents felt they still had work to do on increasing the gender balance, there was much more concern about broader lack of skill diversity.

Many of these boards seem to be looking beyond their traditional networks to seek different skills and fresh perspectives from a range of genders, ethnicities, cultures, ages and professional skills and experiences. As we discuss below, tapping into a wide range of perspectives is proving to be good for business, and may be necessary as organisations grapple with emerging economic, cultural and technological challenges.

Board diversity is good for business

So why diversity? In short, research continues to show it benefits organisations’ commercial performance, flexibility and resilience in several key aspects.

Improved financial performance

In terms of financial performance, the Australian Workplace Gender Equality Agency’s 2020 Gender Equity Insights report argues it can trace a direct causal link between increasing the proportion of female leaders in a company and its financial performance. According to their research, companies that increased their share of women on their board of directors were more likely to outperform their peers across company performance indicators.

Improved decision-making and resilience

Research into corporate diversity also suggests that diverse boards are smarter, and make better decisions. Bringing different perspectives and ideas to bear may provide more options and help solve new and complex challenges. A recent report from McKinsey, for example, argues that diverse and inclusive companies are characterised by innovation and resilience – the qualities that will be needed to recover from current crises.

But research suggests a more subtle effect: being in a diverse group helps individuals to think more critically, be less willing to make assumptions or take mental shortcuts.

Understanding community expectations

As communities evolve and become more diverse, it can also be important that a company’s board of directors reflects that diversity. While board diversity is no guarantee of cultural sensitivity, it may help organisations to avoid egregious PR missteps such as skincare brand Dove being forced to apologise for ‘whitening’ ads; or to adapt more quickly to public consensus, such as in the 2021 rebranding of Coon Cheese.

Social and economic pressures

Consumers, investors and employees may also pressure organisations to demonstrate greater diversity as part of a broader preference to spend with, invest in and work for, organisations based on their values and their social, environmental as well as commercial performance.

Diversity in small business

Diversity isn’t just an issue for large companies, it affects small-medium enterprises and family businesses too, as KPMG’s Australian Family Business Survey found. The survey, published in September 2021, indicated diversity is also important for the long-term sustainability of family businesses. As well as social, consumer and economic pressures, these businesses may be facing inter-generational pressures from within the family. Listening to a range of different perspectives can help ensure small and family companies are able to adapt and grow as the environment changes.

Beware of tokenism

It’s not a good use of anyone’s time to appoint someone as a token representative. The point is to take advantage of the opportunity to exchange different views and perspectives. That may mean you need to take proactive steps to ensure you hear from all the different voices (see the tips listed below).

In family companies, this can be particularly important. Family dynamics may mean that board members routinely defer to the views of board members who are senior or who have more business experience.

Tips for taking competitive advantage of a diverse company board in Australia

Consider mechanisms to ensure all views are heard

Successful family companies interviewed for the KPMG research suggested strategies such as setting up family councils, advisory boards or sub-committees.

Look at practical barriers to participation

To ensure greatest participation, it’s also important to think about any practical barriers to participation – timing of board meetings to ensure young parents, care givers, or family members working outside the family business can attend.

Be proactive in identifying skill gaps

Successful organisations may actively assess where they need different views or skill sets. They may then choose to recruit new people onto the board, or offer training to develop new skills among existing board members.

Plan to diversify and create opportunities to diversify

Even if your board is stable and there are no directors due to retire, it is important to start thinking about how to shape your board. You may wish to add board seats to create an opportunity to diversify. Even if that’s not appropriate, identifying the skills and experience gaps, seeking out new candidate pools can take time and some strategic thinking.

Make board diversity a priority for your Australian company

Without a sense of urgency, there are likely to be many other issues demanding your attention, and it can fall down the list. If you think increasing board diversity is important for your organisation, you need to make it a priority and take active steps to address it.

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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