By Professor Parmi Natesan
If it is accepted that a board’s performance is directly linked to the performance of the organisation it governs, then the board’s composition is clearly a hugely important determinant of its effectiveness. This is particularly true now that boards are in the spotlight for the quality of the decisions they make, and also now that the business environment has become so complex, and the stakeholders that need to be satisfied are so varied. In this environment, goes the argument, the insights offered by a diverse group of directors will make for better oversight and decision-making.
This makes intuitive sense, but it’s also broadly borne out by research. Now-venerable research from the Boston Consulting Group’s Henderson Institute shows that companies with more diverse leadership teams report revenue from innovation that is higher than those with below-average diversity scores (45% to 26%). The same institute also showed that diversity is linked to future growth prospects.
For these reasons, as well as for fairness and moral redress, the JSE Regulations require a board diversity policy to be implemented, and King IV requires targets to be set for race and gender diversity on boards.
Is it genuine?
Once it’s agreed that diversity is a good thing, it’s worth taking a moment to consider what it actually looks like. And here, understandably but regrettably, there remains a tendency to take the easy way out—what I call the tick-box approach, the appearance of diversity.
In South Africa, and elsewhere too, diversity typically means more women (gender diversity) and more people of colour (racial diversity). Thus we hear about a “diverse appointment” being used to refer to a female or ACI (African, ‘Coloured’ or Indian) appointee, and companies proudly list the relative numbers of each on their boards and executive teams.
Greater representation of both women and people of colour is obviously a good start but, as the activist investor group Barrington Capital Group argued in a 2020 paper for the Harvard Law School Forum on Corporate Governance, demographic diversity is not the same as cognitive (or experiential, for that matter) diversity.
In other words, an overemphasis on demographic criteria can rob a board of the skills, industry knowledge and experience it needs.
Additionally, the point is often made that this tick-box approach means that the same old names keep cropping up on boards, which means that corporates are potentially missing out on the growing pool of ACI and female candidates who are experienced and competent to serve as directors.
How are we doing?
So if there is a good case for diversity, how much progress has been made?
The short answer would probably be “slow but steady”. When it comes to race, according to PwC’s Non-executive directors’ Practices and fees trends report (May 2023), black Africans now almost equal the percentage of white non-executive directors (47% to 44%), with Asians (5%) and ‘Coloureds’ (4%) corresponding fairly closely to national demographics. Excluding chairs, where whites continue to dominate (58%), black Africans (45% of non-executives) and whites (46%) are neck and neck for non-executive directorship positions.
As far as gender goes, females now make up 38% of non-executive positions, quite a way off their representation in the broader population, where women make up 51.1% of the total population.
For a deeper dive into the progress on gender diversity, reference can be made to the Business Engage report, 2021 – Status of gender on JSE-listed boards, published last year. (This report quotes the 2021 figures, which represent an improvement as compared to the previous four years unless otherwise stated.) Several points stand out.
One point is reporting and disclosure—if we can’t see what companies are doing, we can’t hold them to account. Even at this late stage, 17 of approximately 296 listed companies still don’t have their governance reporting easily available on their websites, and 41 did not report specifically on gender at board level. Only 10 listed a web address for their gender policy.
There has been a big decline in the number of companies that set themselves voluntary targets for gender diversity on the board (27 as opposed to 2020’s 95).
All of this is unacceptable: the JSE requires listed companies to have a policy on the promotion of diversity at board level and also states that listed companies should apply King IV, which in turn requires them to set gender targets and disclose not only the targets, but also progress against them.
At the other end of the scale are the 33 companies that have appointed one woman to their boards and consider that box ticked—the “one and doners”.
Twenty-seven crops up again as the total of JSE-listed companies that have achieved gender parity, with a further 20 just one appointment away from this goal.
As regards female non-executive directors, the Business Engage report broadly correlates with the PwC figures quoted above. It’s interesting but disheartening to note that as regards board committees, women only achieve parity representation on the social and ethics committee.
At the executive level, women have a long way to go, with only 6% of listed-company CEOs and 22% of CFOs being female.
In conclusion, then, I would tend to argue that while companies are making progress in becoming more diverse, it is happening rather too slowly. Given that women are graduating in greater numbers than men, and are thought to control the majority of consumer spending, one is surely forced to conclude that the undoubted benefits of true diversity have not yet been fully recognised.
Professor Parmi Natesan is the CEO of Institute of Directors in South Africa
