Ensuring cognitive diversity on corporate boards

Corporate boards need to have an appropriate level of independence and diversity of thought to make decisions in the best interests of their companies. The pandemic has heightened the importance of effective leadership in tackling challenges and creating innovative solutions to steer companies through uncharted territories.

Directors with diverse backgrounds bring different perspectives and ideas that can help to avoid groupthink and enhance the board's deliberations and decision-making processes.

Unfortunately, Singapore boards are not diverse enough.

This was borne out in the inaugural Singapore Board Diversity Index produced by the Singapore Institute of Directors and Willis Towers Watson. The index, which is believed to be first of its kind, assessed more than 700 companies with primary listings on the Singapore Exchange (SGX), against eight dimensions of board diversity - gender, age, tenure, board independence, cultural ethnicity, international experience, domain expertise, and industry knowledge. Instead of focusing on a single diversity metric, the overall diversity score gives a more holistic view of a board's diversity attributes.

The fault lines

The report showed mixed results on the lower side for most attributes of diversity. Whilst most of the large-cap companies exemplified board diversity across the different attributes, the median for all SGX-listed companies was below the passing scores. In particular, the mid-cap and small-cap companies have a lot more room for improvement.

Nearly half of SGX-listed companies do not have even one woman on their boards, and only 11 per cent of all board seats are held by women. The situation is better among the top 100 SGX companies (by market capitalisation), which according to the Council of Board Diversity, have 16.2 per cent of board seats held by women. There is obviously still some way to go before achieving gender balance on boards.

Currently, a third of all directors are between the ages of 60 and 70, with less than 5 per cent below the age of 40. Also, nearly a quarter of all non-executive directors have a tenure of greater than nine years. Age and tenure diversity are important as they provide perspectives from different generations, and balance fresh ideas with institutional knowledge and context.

Turning to industry and domain expertise, there seems to be a disproportionate concentration within a handful of functions and industries. More than two-thirds of directors have business management, accounting, and legal backgrounds, and nearly half the directors have deep expertise in industrials, financial services, and professional services companies. This is not to say that those directors are not well-versed in other areas too.

The concentration of directors with similar backgrounds in industry expertise indicates a lack of balance of experience across multiple industries. Boards need to examine how they react to crises, and consider whether they have the necessary skills within the board to react well. Progressive boards should target directors across other diverse disciplines, such as technology, investment banking, mergers and acquisitions, public relations, human resources, and risk management.

Board independence is critical. Currently only approximately 40 per cent of companies have majority independent directors, and non-independent directors make up nearly half of all board seats. With the nine-year rule of independence taking effect from 2022 onwards, companies will need to pay extra attention to board renewal and succession planning.

So what should companies do?

The pandemic has highlighted how unprepared companies were, in general, to deal with uncertainty and change. If boards do not have the necessary skills to react well, then what are they doing now to fix this?

Nomination committees should critically review their board compositions and work towards achieving more diverse representation on boards, such that the majority, and ideally more than 80 per cent of directors should be independent.

Additionally, depending on business needs, individual companies could also focus on other forms of diversity - for example, educational backgrounds, social status, etc. Cognitive diversity is the inclusion of people who have different ways of thinking, different viewpoints and different skillsets. It is important for Singapore companies to challenge the traditional ways of sourcing directors and to look beyond personal networks.

Looking at individual attributes of cognitive diversity is important, but it may not tell the whole story. For example, some companies may have strong age diversity, but that may be owing to next-generation family members being appointed on the board. These companies may not fare so well on the independence factors, so it's important to look at all attributes holistically.

Diversity is important not just for diversity's sake, but because a cognitively diverse board brings different experiences and viewpoints to the board's deliberations. This implies that boards also need to be inclusive and respect the different perspectives that directors have to offer. The contention of ideas in a diverse group must be constructive to promote wide-ranging discussions, leading to better decisions and enhanced business performance.

Companies would do well to also assess the diversity of their directors' stewardship capabilities; an understanding of which could help enhance board's dynamics. The board chair and the committee chairs play a critical role in ensuring healthy engagement among directors, and harnessing the benefits of diverse perspectives. Even contrarian views can help refine original proposals leading to better, more-measured outcomes.

Companies have the transformative power and social responsibility to contribute to an open, inclusive, and diverse society. A cognitively diverse board is the enabler for this as it sets the tone at the top and is the place to start.

The writer is a member of the Board Diversity and Appointments Committee of the Singapore Institute of Directors.

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