ESG: GETTING THE "G" RIGHT
A Deep Dive Into Board Diversity
By Rachel Welch-Phillips
AMCHAM T&T's ESG Committee 1st Vice Chair
LINKAGE Q2 (2024) - INSPIRE INCLUSION
I
n recent years, the acronym "ESG" has gained significant traction in corporate boardrooms, investment circles and policy discussions. Standing for Environmental, Social, and Governance, ESG represents a set of criteria used to evaluate a company's operations and its impact on people and the planet. While all three components are essential and intertwined, the "G" – Governance – often receives less attention than its counterparts.
Governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It encompasses a range of factors, including board composition, executive compensation, shareholder rights, and transparency in decision-making. Good governance ensures that companies are managed in a responsible, accountable, and ethical manner, thereby safeguarding the interests of stakeholders. “Bad” governance can be very costly as we will explore here, but the focus in this article will be on board diversity.
What is board diversity?
Before we speak on board diversity, let us first touch on the role of the board. The board’s principal responsibility is to provide governance and oversight to an organisation by setting strategic direction in alignment with chosen values, establishing policies to guide operations and decision-making processes, and provide oversight of performance and management to ensure accountability and transparency. A board also holds fiduciary responsibilities (in most jurisdictions this is legislated) as well as responsibility for risk management and compliance. An effective board will assign clear roles and responsibilities to its members, be constituted with the appropriate competence and expertise, and collaborate with executive management.
So what makes a board an effective governance tool? A crucial aspect of strong corporate governance is board diversity. Most people immediately think of gender diversity when speaking to board diversity, however, gender is only one form of diversification on a board. What a company should strive to achieve in its board representation is proportional representation of the gender, ethnic, age, professional, geographic and cultural diversity of its stakeholders, particularly its consumer base.
Research has consistently shown that companies with diverse boards outperform their homogeneous counterparts, delivering superior financial returns and more innovative solutions. But how and why? The underlying principles are compelling. Diverse perspectives enable boards to consider a broader array of possibilities, identify blind spots and risks, challenge groupthink and ultimately provide more robust and innovative solutions. Having a board that mirrors the diversity of its stakeholders enhances the company's ability to understand and respond to their needs, preferences, and values, thereby improving its competitiveness and relevance in the marketplace and avoiding costly reputational backlash. Diversity on boards is also essential for fostering a culture of inclusion and belonging within organisations. When employees see people who look like them represented at the highest levels of leadership, they are more likely to feel valued, respected, and empowered to contribute their full potential. Diverse boards are therefore conduits to diverse workforces and higher retention rates.
There is also an increasingly significant reputational benefit. Stakeholder trust and loyalty is enhanced where there is comprehensive board diversity.
There are many real-world examples of corporate failures stemming from a lack of diversity in decision-making. In 2017, Pepsi received severe backlash over its ad which featured Kendall Jenner ending a heavily policed protest by giving a police officer a can of Pepsi. Although Pepsi thought it was sending a message of unity and peace, it was perceived to be trivialising the Black Lives Matter movement and police brutality by suggesting it could be solved with a soft drink. The ad was pulled within 24 hours and the estimated US$5 million it took to create was likely pocket change compared to the reputational hit that resulted for the brand. Questions then arose around how something like this could be missed, but a quick look at the group shot of the board of directors of PepsiCo in the 2017 Annual Report is quite telling. Not one black face. If you go down one step further and look at the group photo of PepsiCo leadership team in 2017 there are still no black faces. No evident millennials either. YouGov, a global public opinion and data company, reported that it took nine months for Pepsi’s perception to somewhat recover with millennials from the ad’s backlash, but a full year later in 2018 there was a 10% decrease from pre-ad metrics on the likelihood of that demographic choosing to purchase a Pepsi over other similar brands. It is starting to become easier to see how and why the ad’s negative perception that incensed millennials and members of the black community was missed. Those most attuned to it were likely not present in the decision-making.
Advertising aside, a lack of board diversity can result in costly failures due to an inability to innovate and keep pace with market trends. Without firsthand knowledge of different demographic segments and cultural nuances, companies risk developing products and services that fail to resonate with their target audience. This can lead to wasted resources, poor sales performance, and even bankruptcy. Kodak’s failure to keep up with the digital photography revolution as well as Blackberry getting left behind in the smart phone acceleration are commonly cited examples of decision-makers being “out of touch” with their consumer base. How much of a difference could it have made if there was a millennial presence on the board, or even a NextGen advisory board that fed valuable insights into the decision-making body? We will never know.
How is board diversity achieved?
Building a diverse board is a strategic process that involves intentional planning, recruitment and ongoing efforts to maintain and leverage effective diversity. It requires a strong understanding of the composition of the stakeholder base of the company and how it can be proportionately represented to best advantage. Some companies may elect to develop a diversity policy or diversity clause in their bylaws that governs the constitution of the board, and others may take a less formal approach through the use of guidelines for inclusive outreach in recruitment of members. Nonetheless, intentionality is required and the process is not one that happens overnight. Targeted recruitment can empower the more disenfranchised segments of the stakeholder base and training on unconscious bias for those involved in the selection process can allow for fair evaluation of candidates. However, recruitment is just the start. The board must foster an inclusive culture where diversity of perspective is welcomed and respected. Mentorship can support the integration and success of new members. Regular assessments of the effectiveness of strategies employed for diversification can allow the company to course correct along the journey. The status quo must be willing to be positively disrupted.
Conclusion
In conclusion, board diversity is not merely a box to check but a vital component for the sustained success and resilience of organisations. A diverse board brings a wealth of perspectives, experiences, and insights that can drive innovative solutions, enhance decision-making, and better reflect the stakeholders and communities an organization serves. By committing to intentional recruitment and fostering an inclusive culture, organizations can harness the full potential of their boards. As we move forward in an increasingly complex and interconnected world, embracing board diversity will be essential in navigating challenges, seizing opportunities, and achieving long-term organizational goals. Through deliberate efforts and steadfast commitment, organizations can build boards that are not only diverse but also effective, dynamic, and poised to lead with vision and integrity.
ABOUT THE AUTHOR
Rachel Welch-Phillips is the Head of Legal and Compliance Banking at Ansa Merchant Bank Limited. She is also the 1st Vice Chair of AMCHAM T&T's ESG Committee.