Worldwide, there’s significant movement toward increasing board diversity for publicly traded companies, either by way of a quota system or, as in Canada, a “comply or explain” regime. Much of the focus has been on increasing gender diversity.
Though “slow and steady” has been the mantra for years, greater gender diversity on boards is clearly progressing. In the march to progress, says Neil Kravitz, a partner at Fasken Martineau DuMoulin LLP in Montréal, larger institutional entities have tended to more fully embrace the concept — think financial institutions and banks.
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For other entities, he says, the move toward increased diversity had a slower start but has gained momentum. “While there has been some activist shareholder activity pushing for proposals related to board diversity at shareholder meetings, the number of such proposals has actually gone down in the last few years.” In Kravitz’s opinion, this may be a sign that companies are addressing the issue and have increased their focus on diversity.
Still, as Canada seeks to increase its foreign trade, this country’s boards may come under increased scrutiny. “The approach by companies to diversity varies by market and industry as you would expect, because there are a variety of stakeholder profiles,” says Brock Gibson, Chair of Blake, Cassels & Graydon LLP, who practises in Calgary and Toronto. “But the trend is definitely toward more diversity in leadership and governance as our customers, investors and corporate relationships become more international.”
DIVERSITY PIPELINE
One commonly cited difficulty in gender diversity initiatives concerns the pipeline of diverse people to fill those positions, says Samantha Horn, a partner at Stikeman Elliott LLP in Toronto. “In many cases, it’s stated that a potential board member needs to have P&L experience or CEO or C-Suite experience in order to be eligible for consideration on a board. Given the lack of gender diversity in the C-Suite, this causes pipeline issues.”
However, Horn says she’s hearing from clients that companies may need to think about the expertise needed on their board and ensure they have the functional diversity needed to address the issues the company may face. While some of that experience may be C-Suite experience, some may also be human capital experience, crisis management, privacy, etc. “Similarly, clients are talking about a need for board refreshment and renewal. This speaks to a broader concept of diversity, not just gender but also diversity of age and experience.”
Directorships are increasingly seen as more valuable as boards in Canada become smaller, says Noralee Bradley, a partner in the Calgary office of Osler, Hoskin & Harcourt LLP. She has experience as a board member and is often consulted for suggestions as to potential female board candidates. In seeking diversity as one of the components, Bradley says “boards still have to be concerned about someone contributing on a broader scale during what could be — even for boards that have term limits — a long-term relationship.” Board members should bring not only functional skills, but also be able to contribute on a strategic level. “You want to be sure you’re not just getting a specialist who will contribute in a very narrow way.”
When it comes to expanding the candidate pipeline, Kravitz says clients are looking beyond traditional networks. “They’re asking me, ‘From a diversity perspective, can you identify potential board members? What are other companies doing? Do you know of strong directors on other boards we might want to have on our board?’”
According to Kravitz, one of the challenges is to break away from the traditional approach and go outside the existing network of board members and management. For example, he says a common board recruitment trend involves professional search firms that are being used to expand the universe of qualified candidates, in addition to those that the company identifies on its own. “All of this is a process that builds on itself. As diversity increases on boards because of regulation and an increased focus by companies, you have more known candidates from a diverse background. Progress begets progress.”
Indeed, says Bradley, governance committees and board chairs need to appreciate there is a deeper pool of talent out there. Sometimes it just means viewing the recruitment through a different lens. “The exercise of ensuring you have diversity on the candidate list may take some additional time and resources, but I think boards are pleasantly surprised with the results — there’s a lot of talent out there. They just needed to look for it.”
On that point, she continues, the board community has taken on the issue of diversity in a more constructive way in the past few years. “When the ‘comply or explain’ regulations were first released, the diversity issue was an annoyance to many. Now, when talking to clients, it is automatically on the agenda and the conversation is about how to get access to that talent list — to ‘comply’ rather than what is the bare minimum I have to disclose to ‘explain.’”
FIRST BOARD EXPERIENCE
A challenge for aspiring directors, says Gibson, is to get board experience. “As they say, the first step can be the most difficult.” What he’s noticed “is a trend among some of our leading clients, where they’re looking at their women executives — including in-house counsel — who have leadership-position skills and allowing them to go on boards in other industries to be able to get experience.”
It’s a win-win situation for all concerned, he says, as women serving on boards outside their own company gain a better perspective on interfacing with their own board of directors, which could potentially make them better candidates for more senior executive positions.
According to Horn, many of the issues around increased gender diversity on public company boards are also relevant to private company boards — both because they may eventually be sold to a public company or go public themselves in the near future. “Private boards, like public boards, are looking for the best people in order to manage and guide the company in the best manner possible.”
OVER-BOARDING DANGER
Yet as women increasingly take a higher proportion of seats on the board, is there a danger the choices might skew consistently toward the same tried and true names? Is there a conscious or even unconscious lean toward being overcautious — selecting only women who have already proven their mettle on boards?
Bradley says talented women directors are being approached by multiple companies. And sometimes the answer is “‘thanks, but no, as I have maxed out on the number of boards that I can take on.’ Women who accept board positions want to contribute at the highest level, and taking on too many positions may impede their ability to perform to that standard or run the risk of having a negative reaction from governance watchdogs.”
This brings to the forefront the contentious issue of over-boarding, says Bradley. “Institutional Shareholder Services and Glass Lewis, providers of global governance services, have indicated they will issue voting alerts on directors who serve on more than a certain number of boards. The board network has to be expanded.”
BEST INTERESTS
Clearly, regulators are trying to encourage public companies to look for more gender diversity on their boards and in leadership. It’s part of a broader initiative in business circles, says Gibson. He cites movements such as the 30% Club, where he is an advisory board member. The goal is to persuade public companies and businesses to increase gender diversity at the board and leadership levels, he says, “not by virtue of quotas or rules, but through a better understanding of why having gender diversity is in the best interests of the business organizations that we all lead.”
When Kravitz talks with clients, he finds they view diversity not just for diversity’s sake, but because diversity is a strength for a board. He says studies show a diverse group “makes better decisions than a homogeneous group, even if the members of the homogeneous group are on paper ‘more capable.’” As a result, companies want to increase diversity on their boards not just because it’s the right thing to do, or to comply with the rules, but because it’s also the smart thing to do.
