No Good Governance Without Diversity


Susan Watson

Susan Watson

 

Professor Susan Watson is Dean at the University of Auckland Business School and a Professor of Law in the Faculty of Law, specialising in corporate law and governance.

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On International Women’s Day, Professor Susan Watson challenges New Zealand businesses to maintain a culture where diversity is recognised as a critical and inherent feature of good governance

Choose to Challenge, the theme of this year’s International Women’s Day, provides an opportunity for us to stop and consider aspects of women’s progress in the business world. One telling measure is the number of women at decision-making levels.

The figure for female directorships of S&P/NZX 50 companies as at February 2020 was 29 percent, up from 27.6 percent in 2018. It’s an increase, but a small one. We fare better in the public service in New Zealand where the proportion of women in leadership now sits close to 50 percent.

You may wonder why this matters? One reason is that diversity at leadership level should improve a board’s ability to make well-informed decisions. These decisions should be capable of withstanding critical examination of the risks and alternatives for the business. As well as reflecting society, board diversity simply provides more viewpoints.
Bad decision-making occurs when unchecked bias or single perspectives go unchallenged. Therefore, boards without diverse perspectives potentially have a lot to lose.

What about profit? Does having more women at senior management level impact corporate fiscal performance? Research evaluating the financial benefits of having more women in decision-making positions is mixed, with the link difficult to prove (or disprove).

One report published by Credit Suisse in 2016 found companies with at least one woman director received a better return on investments compared with those with all-male boards. It found that companies where women made up at least 15 percent of senior management were 50 percent more profitable than those with fewer than 10 percent.

However, critics argue that these types of correlations are naïve, and that more sophisticated analysis is required to prove that female-diverse boards are the main reason for the increased profitability. More women on boards may indicate other factors like how innovative the company is, or its size, as larger firms are likely to employ more women at every level, and business size is a factor in determining profitability.

But any debate about the merits of board diversity needs to consider more than just profit. The idea that a public company’s only social responsibility is to increase its profits in the short term for current shareholders is outdated and discredited, with acceptance that this way of thinking and operating contributed to the Global Financial Crisis. Many businesses are now shifting beyond a focus on profit maximisation in the short term, to multifaceted decision-making including considering purpose and also environmental, social and governance (ESG) factors.

In fact, evidence is emerging that a shift in focus to the growth in the value of the corporate entity over the long term, will ultimately enrich shareholders, while also ensuring the interests of other corporate constituents in the entity are taken into account. Also, corporate sustainability will require boards to consider the externalities created by the company like, for example, harm to the environment, to ensure they retain their social licence to operate. Although shareholders provide funds for companies, and companies cannot operate without investors, it is the state that permits incorporation and the state that bestows the benefits of statutory limited liability and status as a legal person.

Society as a whole can expect – and demand – high standards and quality of decision-making from companies, commensurate with their licence to operate. One of our expectations should be a diverse leadership model drawing on expertise that reflects society as much as possible. Why should women, or indeed anybody with a profile different to the traditional board director, only be accepted at the corporate table if they can prove they will improve the bottom line more than a board that is not diverse?

Equally significant, with this corporate shift to considering purpose and people and profits, as well as environmental, social and other governance factors, it is logical to conclude that companies with diverse leadership teams will be better equipped for the multifaceted decision-making required for contemporary corporate governance. Although the link between diverse boards and increased profitability may be hard to prove, we do know that diverse collectives can draw on different bodies of knowledge and life experiences; it is why we have juries. Ask yourself, how can we be innovative and successful if our top decision-makers do not reflect the diversity of our society?

At the University of Auckland Business School we are developing a new qualification – a Postgraduate Certificate in Leadership and Governance – in response to these changes in governance. My challenge to business leaders everywhere on International Women’s Day, is to establish and maintain a culture where diversity – including gender – is recognised as a critical and inherent feature of good governance.

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