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How to make corporate boards more diverse

More diverse boards make better, more profitable decisions

“We’d love to get a woman, but we don’t want to sacrifice quality.”

Pamela Warren sighs wearily. A Toronto-based headhunter at executive recruiting firm Egon Zehnder who focuses on director searches and diversity issues, she still hears that kind of comment from her clients.

Ever since the Ontario Securities Commission implemented a rule last year that TSX-listed companies must address gender diversity on their boards or explain why they haven’t, corporate Canada has been scrambling to hire female directors. Consulting firm Spencer Stuart reports that last year 43% of new board appointments among Canada’s 100 largest companies were women, a leap from 28% in 2013 and three times the rate in 2009.

Numerous studies have linked boardroom diversity with better financial performance, governance and innovation, and the companies implementing it are seeing results. “We firmly believe that a diversity of perspectives leads to better decisions and helps drive corporate performance,” says Steve Williams, CEO of Suncor, whose 12-member board includes three women and a First Nations executive, and factors in age, gender, ethnicity and aboriginal status in filling vacancies.

But this progress may not be all that it seems. In the rush to avoid public shaming, companies are taking shortcuts that can undermine the very benefits diversity brings. A tokenistic mindset—let’s get a woman, a minority and throw in some foreigners for good measure—misses the point: It’s the combination of perspectives, experiences and skills that matters, as it helps curb groupthink and anticipate more curves in the road.

While female directors currently enjoy the spotlight, much less attention is paid to other aspects of diversity. Consider age: Canadian directors are old and getting older. According to the Canadian Board Diversity Council (CBDC), only 7% of directors at the country’s 500 biggest companies are under the age of 50. The average age of independent directors at S&P 500 companies is now 63. At a time when new technologies and business models are transforming the global economy, generational perspectives can vary dramatically. “Governance is changing right before our eyes, and you quickly become outdated once you leave the executive suite,” says Richard Leblanc, a governance expert who teaches at York University. “You don’t want people in their high 60s and 70s—you want 40s, 50s, early 60s, people at the peak of their careers.”

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So why do old white guys continue to dominate boardrooms? Largely because nine in 10 directors rely on their personal networks of other senior male executives to fill board vacancies, rather than investing in a thorough recruiting effort, the CBDC reports. Instead of sticking with the old boys’ network, boards should search a broader and deeper prospect pool, based on what gaps exist in their current members’ expertise. It’s also time to redefine what constitutes a board candidate. “Do all directors need to be former CEOs or CFOs?” asks Nancy Hopkins, a lawyer who sits on several private- and public-sector boards. “That creates a view that’s not diverse, no matter if there’s an assortment of genders and ethnicities.”

Yet boards still give short shrift to entrepreneurs, lawyers and leaders in government, academia and consulting. “When someone is looking for a female director, the same 15 names come up,” says Warren. That’s in part because companies reach for the limited list of well-known women with board experience. To combat the myth about there being a dearth of qualified candidates, the CBDC has compiled the Diversity 50 list of “board-ready” women and minorities, ranging from academics to entrepreneurs to C-suite executives. Warren further urges boards to focus not just on CVs but on potential—whether a candidate has curiosity, insight, engagement, determination.

Fundamentally, diversity needs to be contextual. The board’s makeup should reflect the community served by the company. A mining multinational could benefit from a director with an education or communications background to help foster links in remote parts of the world, while telcos or consumer brands should consider Starbucks’ example of recruiting a millennial with new media expertise. When optics take priority, diversity efforts can backfire. A decade ago, several Wall Street banks brought in directors from academia, NGOs and other atypical backgrounds. Many of these individuals lacked the expertise to rein in management and, when the financial crisis hit, the know-how to act decisively. “The boards looked good on paper, but it’s got to be diversity that’s right for the company,” says Dominic Barton, global managing director of McKinsey & Co.

This story originally appeared in Canadian Business.

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