Diversifying the board (一)

ACCA P1考試：Diversifying the board – A step towards better governance (一)

The responsibilities of the board of directors have been on the corporate agenda for years. Acting as the agents of shareholders, directors are expected collectively to devise operational and financial strategies for the organisation and to monitor the effectiveness of the company’s practices.

The board of directors forms one of the pillars of a robust corporate governance framework. This is evidenced by the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance stating that 'the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders'. This, in turn, links to the fundamental concepts of corporate governance – namely, judgment, responsibility and accountability.

Recent academic literature suggests that one of the ways to enhance corporate governance, arguably, is to diversify the board, which is a new topic added to the Paper P1, Governance, Risk and Ethics syllabus in 2013. In the Paper P1 Study Guide, section A3i requires students to (i) explain the meaning of 'diversity' and (ii) critically evaluate issues of diversity on the board of directors. This article attempts to elaborate on this topic by first introducing the concept of board diversity and how it may benefit the organisation, which is followed by a discussion on the possible costs of board diversity. The article will then conclude with a comment on the current regulatory initiatives of board diversity.

DEFINITION OF BOARD DIVERSITY

Over the years, regulators have placed great emphasis on addressing different matters relating to the board of directors. Two prominent examples were: (i) stressing on the roles of non-executive directors as well as the importance of independence of the board in the Higgs Review in 2003; and (ii) emphasising the significance of balancing skills and experience of the board members as in the Walker Review in 2010. Until recently, there has been an urge for diversifying the board. Intuitively, diversity means having a range of many people that are different from each other. There is, however, no uniform definition of board diversity. Traditionally speaking, one can consider factors like age, race, gender, educational background and professional qualifications of the directors to make the board less homogenous. Some may interpret board diversity by taking into account such less tangible factors as life experience and personal attitudes.

In short, board diversity aims to cultivate a broad spectrum of demographic attributes and characteristics in the boardroom. A simple and common measure to promote heterogeneity in the boardroom – commonly known as gender diversity – is to include female representation on the board.

BENEFITS OF BOARD DIVERSITY

Diversifying the board is said broadly to have the following benefits:

• More effective decision making.

• Better utilisation of the talent pool.

• Enhancement of corporate reputation and investor relations by establishing the company as a responsible corporate citizen.