Additional notes for Corporate Secretary Think Tank Canada Panel, 2 October 2013
Panel: Gender Diversity on Boards, 1:45-3:00pm
Methodology
The following reflects, in no particular order, (i) my work in advising regulators (e.g., OSFI, OSC, AGCO, FiCom, others) in respect of governance (including diversity and director competencies); (ii) interviews with male and female directors concerning diversity; (iii) my advice and assessment of award winning boards known for leading diversity practices; (iv) my work with governance reforms in recommending women to all male boards, and improving director recruitment, assessment and retirement practices. The data collection has included individual director interviews and observing the board in action.
Diversity red flags include, in no particular order:
- Self interest by over-boarded and/or over-tenured male (and on occasion, female) Directors who wiggle or refuse to go, buttressed by unsubstantiated anecdotal belief or myth, such as CEOs make better Directors, women are not “qualified,” or there are not enough qualified women Directors to be found, typically within their own networks, etc.;
- Applying industry “experience” to prospective directors and not to incumbent Directors: Blocks women, and regulator has never used word “experience” to my knowledge;
- “CEO” preference, where CEO has never been used by a regulator, nor is this title determinative of director performance, nor is it a competency or a skill: Use “enterprise leadership” or “leadership” instead;
- A preference for CEO directors is not evidence-based, including the views of directors themselves: CEOs are seen as dominant, poor listeners, and stretched, and 80% of directors do not believe active CEOs are better directors than non-CEOs: “Are Current CEOs the Best Board Members? CGRP-18,” Stanford University, 2011). Directors who are retired CEOs are not seen as better than average board members by a majority of other directors (ibid.);
- Perversion of the competency matrix requirement (NP 58-201 3.12-14), focusing on “experience,” when the regulators (including whom I have advised) use “expertise” (OSFI) and “competency” and “skills” (OSC/CSA); Expertise (my view, not in regulation) = SKEET (skills, knowledge, education, experience and training), meaning experience is but one way to acquire expertise. Competency can be defined as: a cluster of related knowledge, attitudes and skills that affect a major part of one’s job; that correlates to performance; that can be measured against standards; and can be improved via training and development (S. Parry, “Just What is a Competency,” June 1998). Expertise and competency are broad concepts, in other words;
- Larger issue permitting self dealing and preference: There is opaqueness and regulatory temperance as to what it means to be “qualified” to be a Director, even on a public company board in Canada. The requirements are minimalist: You do not even need to be financially literate, at least initially, even to serve on an audit committee: You need to be over 18, not bankrupt, and not insane (and found to be such by a court). There are no requirements for continuing education or a code of conduct, unlike other fiduciaries;
- Academic evidence is that busy boards (a majority of busy directors on three or more boards) contribute to worse long-term performance and oversight, and that over-tenured directors (beyond nine years) diminish firm value [see my Activist panel notes and references];
- Evidence is women augment male director attendance; gender diverse boards allocate more time to monitoring; and “CEO turnover is more sensitive to stock return performance with a greater proportion of women on boards” – in other words, gender diverse boards are more likely to fire a non-performing CEO (Adams and Ferreira, 2008). Note also busy boards (see above) are less likely to fire non-performing CEOs (Fich and Shivdasani, 2006). Keep in mind: The choice of CEO is the most important decision a board makes and has the greatest affect on company performance;
- Not recruiting first time directors: Focus on board “experience” (rather than governance expertise) blocks women, whereas 80% of directors serve on only one board and no empirical evidence confirms multiple directorships contribute to performance and oversight (indeed the evidence is the opposite);
- Recruiting Directors previously known to the board may be at variance with the Board’s ability to push back (constructively challenge) against each other and Management
- “Boards with more directors that didn’t have prior relationships with other directors tend to address affective conflict more quickly than boards where directors had prior relationships. I believe this is because of the deleterious impact on extra-boardroom relationships – directors with prior relationships don’t address affective conflict because they don’t want their behavior “corrections” to impact the prior business dealings (or relationship) they have outside the boardroom.” (SCharas, PhD candidate, email to the author, whom the author is supervising (disclosure));
- In other words, men may be “conflict-averse” (which perpetuates boardroom groupthink and management capture) because there is a greater cost due to relationships (social, economic, political, religious, other etc.) outside of the boardroom, because these Directors, in turn, were recruited because of this relationship and personal knowledge;
- “A prior study published in the HBR has found that teams that have women on them out-perform those that don’t for overall team effectiveness.” (ibid., Solange Charas, email to the author, 28 September, 2013) (http://hbr.org/2011/06/defend-your-research-what-makes-a-team-smarter-more-women/).
- Lack of robust independent director assessment, with consequences and direct link to re-nomination: perpetuates non/under performing Directors and frustrates renewal:
- Blockage of third party reviews of board and director effectiveness, by Manager or a Director: Regulators now are requiring regular third party (objective) reviews;
- Boilerplate one sentence disclosure of board effectiveness review;
- Lack of Canadian political leadership (until very recently in Ontario): Canada (other than Quebec) is late to boardroom diversification;
- Lack of agreement among provinces and stalling of corporate governance guideline development, including director recruitment, expertise and tenure (Canada is one of the few industrial countries that has not updated listed company requirements until before the financial crisis – NP 58-201);
- Use of largely binary regulatory guidelines [NP 58-201] governing director recruitment, rather than principles and practices that achieve the objectives of the principles [OSC proposal in 2008]: Leading practices are omitted, and undue deference / influence to those with vested interest in the status quo [read: conflicted], including stakeholders, who may be a vocal minority in the public debate or on a Board;
- Gamed or otherwise defective director bios (puffery, positions, roles occupied over a career), rather than disclosure of specific competencies and skills, at board and committee level, underscored by how and when the competency and skill was acquired, and how each competency contributes directly to the value creation plan and oversight of the company and its Management;
- Defining diversity expansively / downward to include almost anything (e.g., perspective, thought, viewpoint): Blocks women;
- Trade associations, funded by memberships, beholden to status quo members: undue deference to those with vested interests: Blocks women;
- Gaming of retirement age (69, 70, 72, now 75) and resistance to term and directorship limits by self-interested Directors;
- Resistance to competency matrix disclosure and transparent director nomination and selection practices: inadequate regulatory guidance;
- Undue influence of Management on the competency matrix (design and administration), whereas Nomination Committee must be independent (including its work);
- Pro forma management friendly governance documents proffered by management counsel or developed by Management (conflict in either case) vs. the Board or Committee or independent counsel, accountable to the Board, not Management;
- Gamed or defective director competency matrix (matrix not disclosed; competencies ill-defined, or unbalanced; scale ill-defined; no third party check): permitting fuzziness and back-dooring of preselected candidates, often known to one Director [see above study and “Friends Don’t Let Friends Join Their Board” by Amanda Gerut, Sept 30, 2013 (proprietary – see AgendaWeek.com);
- Pre-ranking and not interviewing prospective Directors; Not disclosing origination of a Director (how he or she came to be known to the Board);
- Not consulting with major long-term Shareholders on prospective Directors, and institutional shareholders, further, and perhaps more importantly, not having a roster of qualified directors and advancing proxy access;
- Search firm who also assists Management (executive search - conflict), or reporting to a particular Director (as opposed to a Committee), or not behaviorally validating Directors through rigorous processes: No code of conduct or industry practices for director search firms; and
- Matrix analysis by corporate secretary or general counsel who do not possess independence or expertise to do so.
Richard W. Leblanc, PhD