Finding the right balance in the boardroom: diversity versus experience
Board diversity is not a new discussion. Since 2001 there has been a myriad of reports highlighting the need for and benefits of gender, ethnic and social diversity of NEDs on boards.
The Financial Reporting Council (FRC), in their guidance on board effectiveness, says: “diversity in board composition is an important driver of a board’s effectiveness, creating a breadth of perspective among directors, and breaking down a tendency towards ‘group think’.”
Nonetheless, a recent study conducted by Winmark surveyed 84 pension schemes and undertook 13 in-depth interviews with chairs of trustee boards and other experts, found that board diversity (in regards to age, ethnicity and gender) was ranked last out of 25 governance elements.
This got me thinking:
- Why are boards undervaluing diversity when there are proven benefits?
- And how can internal audit add value to this business-critical area?
Boards, and their committees, including the audit committee, have an obligation to work in the best interests of the company and this means hiring the most experienced people to sit at the top table. Unfortunately, in the financial services sector, for example, those with experience are usually men by dint of the lack of diversity at the top up to this point.
This is compounded in the internal audit arena by the FRC guidance on the composition of the audit committee which requires that “at least one member of the audit committee has recent and relevant financial experience”. Again, here, women are likely to miss out.
So, what can internal audit do to ensure we strive towards equality on boards across companies in the UK?
- Internal audit needs to ensure that human resources and the nominations committee have the right processes in place. This could involve reviewing recruitment schemes to include a standard framework to ensure both the shortlist and interview panel are diverse; ensuring the skills matrix for interviews is up to date and relevant; and ensuring diversity and inclusion methods are encompassed throughout any interview training.
- Furthermore, as an element of good corporate governance, the board should set diversity objectives as a formal goal. Setting aspirational diversity targets will allow internal audit to hold the board accountable to achieving this.
- Monitoring and reporting is therefore critical. The nominations committee should report annually on the process used in relation to board appointments. The report should include a summary of the diversity policy; the progress made towards achieving the objectives and, if there are any new board appointments, whether the policy was met or, if not, why not.
- Finally, it is important that internal audit can audit the culture of the board. When doing so it is important to ask questions that highlight if the culture is a positive and inclusive one which allows for those with families to have flexibility. Questions could include; are meetings planned well in advance and at a convenient time to ensure all board members are able to attend? Is there flexibility or telecommuting opportunities?
Board diversity was mentioned by both the Conservative and Labour Parties in their manifesto pledges during the June 2017 general election. It is likely, therefore, that we will see action in this arena. This provides an opportunity for internal audit to play a role in ensuring diversity on boards and committees, without compromising on the quality of board composition.
This article was first published in October 2017.
