Federal Politics

License article

Diversity the answer for boardrooms

Einstein defined insanity as doing the same thing over and over again and expecting different results. What the recent High Court judgment on James Hardie tells us is that it is time to change or we will repeat the insanity.

Most directors in boardrooms come from the same pool: pale, male and stale. There are no requirements for any formal qualifications for Australian public company directorship - directors are chosen by the current board, then subject to shareholder approval. Boards often recruit from their direct acquaintance, providing a selection process that may not confront unconscious bias - selecting directors in ones own image.

That appointment process runs the danger of replicating the existing incumbents or their stereotypes, leading to a closed candidate pool. When chosen by friends, the new kid on the board block is less likely to challenge their patron.

Paraphrasing Warren Buffett's Berkshire Hathaway 2002 annual report, we need ''directors who are business-savvy, interested, shareholder-oriented, and who will think and speak independently''. We need boardrooms to be places where collegiality does not trump independence. Good governance practices demand intelligent directors with inquiring minds, a diverse range of expertise, skills and experience who are not bound by collegiate decision-making or patronage.

There is no new dark magic in the High Court's rejection of the non-executive directors' appeal in the James Hardie decision. The court found that ''the minutes are the minutes'' as recorded when the directors did not complain as to accuracy. This decision complements the existing bleakness of Australia's non-executive director landscape, where more than 700 pieces of legislation impose personal liability on directors, often reversing the burden of proof expected by most Australian citizens.

Since last year's Centro decision, directors are asking why anyone would risk their hard-earned reputation as a public non-executive director whose ability to effect corporate transformation is often limited, and where their personal liability and damage to reputation is limitless. This has been expressed privately by a growing number of public company directors and the Australian Institute of Company Directors.


There is a real and growing risk in Australia that the qualified, competent board directors we require to provide the essential guidance, checks and balance to management will cease participating as non-executive directors in public companies. That would leave only directors who are executive, non-independent, ignorant of their immense role and responsibility to the company or, at worst, fraudsters who know enough to stay ahead of the regulators - all flawed governance models that have previously been rejected.

How do we stop repeating the poor governance practices of the past in the current climate? We need to call the emperor on his lack of clothes and address the gap between expectation and reality for non-executive directors.

This current hesitation among existing non-executive directors is the perfect opportunity for those who are truly interested in greater long-term shareholder returns to appoint or champion directors from the legions of qualified, experienced, intelligent, non-current directors.

Heed the Catalyst and McKinsey data showing that companies with the highest representation of women in their top management teams produce better financial performance. The data proves that diversity, including of gender, at board and senior management level produces increased returns on equity.

Before the retort ''but there are no women'' - Australian universities have long graduated a majority of women in many facilities and scores of women are graduating from the Australian corporate governance courses. The qualified women are there - you just need to look in a different place.

Reflect upon the global financial crisis - have the incumbents done such a good job? It was not caused by natural disasters, famine, flood, tempest, drought or wind. It was man-made. If those transactions had been scrutinised by more diverse minds the outcome may have been different.

Lest I be accused of bias, some of my best friends, relations and clients are male and I would not change them. Diversity supporters are not saying men are wrong and women are right - just that women and men are different and that bringing together the differences in experience, cognitive and emotional approach, risk appetites and problem solving skills can produce tangible benefits to risk analysis in commercial enterprises.

Gender is the low-hanging fruit of diversity. By addressing unconscious bias in director selection we can also take on diversity in its other forms including age and ethnicity to achieve true stakeholder engagement and commercial success. Additionally, with greater board diversity we will also produce role models for the diversity changes required within management.

In defence of non-executive directors, we never hear about the great work done behind the scenes by the vast majority. We only hear about the occasional corporate disasters. We must address the expectation gap between what a non-executive director can actually achieve as opposed to the unreal expectation of shareholders and analysts demanding short-term profit that cannot produce sustainable results or companies.

Australia needs a reality check: most directors do not wear their underpants over their tights and their coats do not endow them with superpowers. Governments, regulators and society must recognise that non-executive director liability should reflect actual power in a company.

As shareholders we need to assist ourselves by addressing the risk-liability imbalance for non-executive directors and appoint directors who will speak and act boldly and independently, using their broad experience and the full range of cognitive skills. Go on - give your super a chance by giving the girls and the boys a fair chance. Recognise that the emperor might also be wearing a twin set, pearls, Jimmy Choos or Mr Rose.

Fiona Shand is the principal of Shand & Associates and The Walton Group.