Topics: Corporate Social Responsibility
Topics: Corporate Social Responsibility
October 5, 2020
October 5, 2020
I write out of serious concern for you. In my role as your secretary and advisor, too often have I seen your faces—blinking, mouth-agape stricken with horror—as your carefully choreographed reality crashed down around you, often due to a proxy contest, legal action, labor dispute, or a bravely written whistleblower report. We are at a particularly important decision point in history, one where boards will either take a deep breath and turn their gaze internally or continue their path of frustration, blame, and dissonance. I want to help you, and through you, help so many who depend on your virtue and critical thinking—your employees, the communities in which you operate, your clients, suppliers, and other stakeholders—by focusing on diversity at the board level.
Diversity is both a fundamental principle of decision-making and a common topic of lip service in the boardroom. Boards include a diversity box to check in their director recruitment matrix, and all nod in unison while afraid to look ignorant and ask, “Why do we need diversity in the boardroom? Because we’ve been told it is the right thing to do?”
What is the goal? Or as more commonly expressed, what is the role of the board? To represent the interests of the shareholders, right? The answer gets more complicated the closer you look. For the sake of argument, let’s agree that the board’s role is to represent shareholders’ interests, which in recent history has been reduced to simply making money. A corporation’s purpose is to make money and the board’s role is one of oversight of the management of the corporation in pursuit of profit, the shareholder’s interest. This has been the warble of courts and corporate legal scholars since the 1970s.
So, how does diversity on the board assist in the pursuit of profit? Directors check the diversity box on the matrix while mumbling the need to hire the “best” candidate for the position. Is that someone to fulfill the “audit committee financial expert” requirement of the Sarbanes Oxley Act of 2002? Or maybe someone with CEO experience who understands how to run a business? In truth, these are distractions and belie antiquated thinking. Finding a qualified, diverse candidate in today’s world simply requires the minimal effort of looking outside the board’s usual group of friends and colleagues. Candidates are available to check any box in a board’s matrix, and a diverse candidate is nearly always the better choice because diversity of experience provides a different perspective, improving decision-making.
Triangulation is a fundamental principle of geometry where all six pieces of information of a triangle—the three lengths of its sides and the degree of its three angles—can be determined with only three pieces of information. This principle is used throughout the real world, from surveying to navigation, in satellites beaming GPS signals to earth, and even in determining the direction and trajectory of weapons. It also applies to decision making.
To be blunt, six old white guys viewing a problem from the same perspective are only going to make the right decision by luck. The addition of a seventh, eighth, ninth, or tenth old white guy won’t increase the accuracy. The addition of a single divergent perspective will. Diversity of experiences creates diversity of thought, improving decision-making.
The skill sets and perspectives gained through a life lived as a member of a minority group is more invaluable than ever. As Friedrich Neitzsche wrote in 1886, “Insanity in individuals is something rare—but in groups, parties, nations, and epochs, it is the rule.” Similarly, it is the director whose life experiences differ from those of the larger body who is most able to recognize the insanity of the group decision. She is the one to clap you awake from the siren call of groupthink. Have a look around your boardroom and tell me how many of your colleagues would challenge and pull you out of groupthink? A diverse board makes better decisions and better decisions result in a more efficient, well-run, and profitable business.
Yes, the role of the board is to represent the interests of shareholders, but modern thinking has reduced the idea of shareholder primacy to simply constitute making money. But when we put this idea under the microscope, we see that the interests of the shareholders—to maximize an organization’s profitability—begin to align with the interests of other stakeholders: the employees, the communities, clients, and suppliers. What appear to be different and conflicting interests at a macro scale, all consist of the same structural elements when magnified.
To “maximize” a corporation’s profitability is to create the greatest difference between its costs and revenue, in a given period of time. The proper period of time to measure is a topic of debate.
If the proper measurement is a longer period of time, it requires a balance of all stakeholder interests. Just as my garden won’t survive if I focus only on watering it and neglect its other needs, your organization won’t survive over the long term if it is focused solely on profit. Just as my garden will grow nicely enough for a few days on water alone, so do profits. But, maximizing growth requires a healthy balance of interests. The garden needs a balanced regimen of water as well as the right amount of sunlight and fertilizer. Companies, too, require balance. When employees are happy and healthy, they are more productive. Fair ethical corporate governance results in fewer disputes, lower legal costs, lower healthcare costs, and greater productivity.
Another view of a board’s role, one that predates the shareholder primacy doctrine, is that a board represents the interests of both the shareholders and the corporation, equally. This shift in view has profound consequences and is grounded in the roots of corporate law and corporations as entities unto themselves. This view is prevalent both historically and in jurisdictions outside of the United States. The historical purpose of a corporation was to create an entity to survive beyond the lives of its members.
As an example, Canada recognizes a “tripartite” fiduciary duty for corporate directors: an overarching duty to the corporation, a duty to the shareholders, and a duty to the stakeholders. A healthy ecosystem is necessary for prolonged, sustainable growth.
We find ourselves in turbulent times where adaptability carries great value. As I peruse the Wall Street Joural these past weeks, article after article references environmental, social, and governance issues:
“New Strategy Targets Climate Investors”
“All the talking corporate executives have been doing about diversity hasn’t worked, it’s time for action.”
“Activists turn their sights to pushing firms to do good.”
“Do-Good Funds Shine Amid Wider Slump”
The largest institutional investors have come to the same conclusion as I’ve outlined in this letter: Good corporate governance results in sustainable profits. They recognize that greater profits are possible over a longer period through ethical corporate governance, of which diversity is a fundamental principle. Shareholder interests are aligned broadly with stakeholder interests, so to represent shareholder interests is to represent stakeholder interests.
The path in pursuing this holistic view begins with better decision-making from the board. I hope I’ve convinced you that this is only possible through diversity. Diversity of experience provides diversity of perspective, improving decision-making. Understanding the importance of diversity on your board is the first step toward fair and ethical corporate governance and increased value for your organization.
NACD: Tools and resources to help guide you in unpredictable times.