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Do Women Make Better Directors?

The Importance of Diversity of Thought and Decision-Making at the Board Table

LISA HEIDMAN LL.B.
SENIOR CLIENT PARTNER, THE BEDFORD CONSULTING GROUP,
NORTH AMERICAN DIRECTOR OF BEDFORD LEGAL

Dr. Chris Bart is the Founder, Principal and Lead Professor of The Directors College at McMaster University, Canada’s first university accredited corporate director certification program. Dr. Bart has published over 100 articles, cases and reviews, including two Canadian business best sellers for 2012: “A Tale of Two Employees and the Person Who Wanted to Lead Them” and “20 Essential Questions Directors of Not-For-Profit Organizations Should Ask About Strategy”.

Over the years, Dr. Bart has been the recipient of many awards and honours and has been invited to lecture at numerous institutions throughout the world. Dr. Bart is currently a member of the board of The Schreiber Bart Group (a private consulting company specializing in strategy execution) as well as Terra Firma Capital Corporation (TII.V) and its Audit Committee. He is a past Director of St. Joseph’s Hospital, Hamilton, the Harshman Foundation, the Canadian Foundation for Education and Research on Finance, the United Way of Burlington and Greater Hamilton and Eagle Precision Technologies (a former TSE listed company).

 Most recently, Dr. Chris Bart and research partner Dr. Gregory McQueen of A.T. Stills University in Arizona, an applied ethicist who lectures in the fields of bio medical ethics, ethics and cognitive moral reasoning as it applies to leadership decision-making and business management, examined results from a survey of decision-making processes of 624 Canadian directors.

The study’s controversial findings, that female board directors score higher on the ‘Complex Moral Reasoning’ dimension which essentially involves making consistently fair decisions when competing interests are at stake, was published in March 2013 in the International Journal of Business Governance and Ethics. The study, Why Women Make Better Directors, has created much stir in academic and online communities and prompted this discussion with Women of Influence on the importance of director education, board governance, board culture and dynamics as well as the value of diversity of thought and decision-making at the board and executive tables.

LISA: WHAT LED TO THE CREATION OF THE DIRECTORS COLLEGE AT THE DEGROOTE SCHOOL OF BUSINESS AT McMASTER UNIVERSITY?

CHRIS: Back in 2001-2002, there was a governance implosion, in which household corporation names like Enron, WorldCom, Tyco, Adelphia Communications and Hollinger were crashing in the wake of scandals involving their CEOs and CFOs. Suddenly, regulators, institutional investors and ordinary shareholders were asking ‘Where were the directors? Where were they as the custodians and stewards of the organization to provide oversight and prevent management from misusing and misappropriating resources and making bad decisions? How come they weren’t doing what was needed to prevent these scandals in the first place?’ It turns out that when we looked at who the directors were, they were a successful, accomplished, well educated, well respected group of largely men, who in these particular circumstances, were asleep at the switch.

LISA: WHAT FACTORS DO YOU ATTRIBUTE TO THIS CORPORATE GOVERNANCE DOWNFALL?

CHRIS: In the late 1990s and early 2000s, there were a series of structural governance issues and factors that contributed to these outcomes and corporate scandals. These included non-independent directors and CEOs serving as chairs of their boards but much more fundamentally, it really came down to the fact that those particular directors had either forgotten or never knew what their responsibilities as ‘governors’ really were. Also, at that time there was a culture and unspoken rule between the boards and their CEOs that these appointed directors were not going to ‘rock the boat’, that they were going to basically approve or rubber stamp everything that was put in front of them until management did something so damaging that they might have to slap their wrists. When management’s actions went over and above egregious though, we then quickly watched companies that should not have collapsed, collapse. Soon thereafter, the microscope was being keenly focused and the boom was being lowered on directors. The bottom line was that directors had really forgotten what the job of a director was really all about. They simply didn’t know what they should be doing as independent directors, that the end game of governance is to safeguard and protect the assets of the organization from misuse and misappropriation and to provide oversight to execute decisions to gain reasonable assurance that they are plausible and that they make sense. The Directors College was created to address this gap in director’s knowledge.

LISA: WHERE IS BOARD GOVERNANCE TODAY, COMPARED TO 10 YEARS AGO?

CHRIS: Most publicly listed boards in Canada today have a non-executive chair, a majority of independent directors, and a clearly defined statement of the roles of the board and it’s component parts. Boards today also have better processes for recruiting, selecting, evaluating and replacing directors, although there is much to improve on this front and more boards today have at least one “certified director”. That’s a lot of progressive change, but there is much more to do.

DR. CHRIS BART, FOUNDER, PRINCIPAL AND LEAD PROFESSOR OF THE DIRECTORS COLLEGE AT McMASTER UNIVERSITY AND LISA HEIDMAN, SENIOR CLIENT PARTNER, NORTH AMERICAN DIRECTOR BEDFORD LEGAL. PHOTO TAKEN AT THE SHANGRI-LA HOTEL, TORONTO, CANADA

LISA: WHERE DO YOUR THINK CANADIAN CORPORATE GOVERNANCE NEEDS TO GO IN THE NEXT DECADE?

CHRIS: At the top of the list is to define the role of the board in risk management. We also need to create better representation of women on our boards. It’s unconscionable that in a country with no shortage of talented, educated and successful women, their representation at the board level in Canada is stuck at approximately 10%. Finally, I think there is much to be done by boards regarding oversight of their strategy’s execution. Only 10% of organizational failures are due to bad strategies where 90% are due to poor execution. And so the question of ‘what are directors going to do about this?’ is highly relevant if we are ever going to climb out of our currently flat economy.

LISA: WHAT DO YOU THINK MAKES A GOOD DIRECTOR?

CHRIS: There are three C’s of being a good director. The first is Confidence. It’s having the confidence to say, I know what this governance thing is all about and I can go into that boardroom with confidence to do the things directors are supposed to do, because I know what to do. The second is Curiosity, as the essential task of directors is to ask informed questions. Bottom line, it should be impossible for management to put anything in front of you without prompting critical questions and discussion. The third is Courage, and this is the only C that cannot be given. It is the courage to go into the boardroom to do what you know you should do and what is expected of you. To be comfortable asking the difficult questions without worrying about hierarchy and authority or about the fact that some people around the table might feel uncomfortable. The combination of confidence, curiosity and courage is the foundation of exceptional directors and a healthy board culture, both of which are key to good governance.

LISA: WHAT DISTINGUISHES THE DIRECTORS COLLEGE AT MCMASTER UNIVERSITY FROM OTHER DIRECTORS PROGRAMS?

CHRIS: First and foremost, we focus on the behavioral and cultural elements of being a good director and on the board dynamics, collective behavior and decision-making of the board. We understand that being a great executive does not necessarily make you a great governor for an organization. This requires a different skill set, type of attitude and behavior to how you approach things. Throughout our director’s program, we administer a number of psychological tests, including The Defined Issues Test, in which we allow directors to really hold up the mirror and look at themselves. These tests highlight areas where you are strong, areas where you are weak, and tools to provide and equip you to change how you approach and solve complex problems. It also focuses on appreciating how others around the board table solve problems and the importance of these diverse decision-making skill sets, approaches and competencies to get through complex decisions and issues.

LISA: WHY IS THE FOCUS ON THE BEHAVIOR AND THE CULTURE OF THE BOARD SO IMPORTANT?

CHRIS: A lot of studies have been done on the changes in corporate governance that have taken place over the last decade with a view to seeing how they have contributed to an organization’s performance. After all, good governance is supposed to improve executive decision-making and provide better stewardship of the assets entrusted to management. However, when comparisons have been made between well governed and poorly governed companies, few performance differences have been found. Why? As it turns out, almost all of the major governance reforms and so-called best practices that have emerged in the past 10 years have either been structural or process driven changes in nature, for example, splitting the Chair and the CEO positions and ensuring regular board evaluations. But as Peter Drucker so famously noted decades ago, “Culture eats strategy for breakfast”. Similarly, good governance is not, and cannot, just be about changes to structure and process, it’s about changes to board culture and understanding that what happens when the boardroom doors are closed and the manner in which directors treat and interact with each other and with management, matters. It is only when there is a functional boardroom culture that directors can really get to the heart of their essential task which is to gain reasonable assurance that what management is telling them makes sense. Understanding board behavior, dynamics and culture is the next step in defining and developing great governance practices.

LISA: AS A FURTHER STEP THEN, UNDERSTANDING AND APPRECIATING THE UNIQUE COMPETENCIES AND LEADERSHIP STYLES OF DIRECTORS AND THEIR INDIVIDUAL AND COLLECTIVE APPROACHES TO DECISION-MAKING IS KEY TO CREATING AN EFFECTIVE BOARD CULTURE.

CHRIS: Yes it is. And that is all part of why diversity of thought and decision-making at the board is so essential to effective corporate governance. At The Directors College we focus on three major areas of director’s competencies: Creative Problem Solving Ability, Emotional Intelligence and Moral Reasoning. As an example of the first competency, Creative Problem Solving Ability is really split into four quadrants. You have the Fact Generators, those who gather all the facts and issues around the problem, the Conceptualizers, those who take the facts and organize them in a way that lets you see the cause and effect relationships, the Optimizers, those who look at the model you have created around the problem and say what the problem is that will break the log jam and the Implementers, those who organize to implement around the problem. The whole issue of dealing with a complex problem is the need to have diversity of thinking and decision-making around the boardroom table that comes with the problem solving skills gained from the professional and personal experiences of different individuals, each of whom represents different states of thinking that come into play in complex problem solving. Core to an effective board culture is understanding, valuing and respecting those differences.

LISA: THE BUSINESS CASE FOR DIVERSITY OF THOUGHT AND EXPERIENCE AT THE BOARD AND SENIOR EXECUTIVE TABLES IS PROVEN AND COMPELLING. WHY DO YOU THINK IT IS IMPORTANT TO HAVE MORE WOMEN ON BOARDS?

CHRIS: Just like at the executive table, where there is a required combination of skills and competencies to operate a corporation effectively, similarly, when there are different approaches to decision-making around the board table, it is likely to impact and improve the result. There has been considerable global research, including reports by McKinsey and Catalyst among others, which have clearly demonstrated that the presence of women on boards significantly contributes to a company’s improved organizational and financial performance. This collective research has proven that having female directors on a board can increase the return on sales, return on investment, return on capital and return on equity, so there is no doubt that women clearly add value to board decision-making and an effective board culture. The correlation between the presence of female board members and corporate performance demonstrates that having women on boards is no longer just the right thing to do, but also the smart thing to do. If the end game is good governance and enhanced executive decision-making in the best interests of the organization, how can we ignore 50% of the qualified and board-ready pool?

LISA: FROM A DEMONSTRATED BUSINESS CASE AND GENDER EQUALITY STANDPOINT, WE AGREE. THERE IS NO QUESTION THAT THERE IS VALUE IN DIVERSE BACKGROUNDS, APPROACHES AND SKILL SETS AT BOTH THE EXECUTIVE AND BOARD TABLES. IT’S A CONTROVERSIAL JUMP THOUGH TO CONNECT THE POSITIVE CORRELATION BETWEEN THE PRESENCE OF FEMALE DIRECTORS ON BOARDS AND THEIR COMPANY’S IMPROVED CORPORATE PERFORMANCE, TO THEN ASSERT THAT WOMEN MAKE BETTER DIRECTORS THAN MEN. HOW DID YOUR STUDY COME ABOUT, AND WHAT WERE ITS FINDINGS?

CHRIS: My own research, which has been regarded as one of the first of its kind, asks the question: We know women make a difference, we know women improve the performance of the organization, but why and how do they do it?

Using the Defined Issues Test instrument, 624 board directors (75% male, 25% female) were surveyed to determine their reliance on three reasoning methods, i.e. ‘Personal Interest’, ‘Normative ’ and ‘Complex Moral Reasoning ’ (“CMR”), to make decisions. We are all influenced by three levers with which we go about making decisions, Personal Interest Reasoning, where the decision maker is motivated by ego, selfishness and the desire to avoid trouble for self, Normative Reasoning, in which the decision maker avoids “rocking the boat”, by strictly observing the rule of law or adhering to existing group norms and Complex Moral Reasoning, in which the decision maker acknowledges and considers the rights of others in the pursuit of fairness by using a social cooperation and consensus building approach that is consistently applied in a non-arbitrary fashion.

Over the past 9 years we have been conducting this moral reasoning test for all the directors in The Directors College program. The results showed that female directors achieved significantly higher scores than their male counterparts on the CMR dimension that essentially involves making consistently fair decisions when competing interests are at stake. Since directors are compelled to make decisions in the best interest of the corporation while taking the viewpoints of multiple stakeholders into account, having a significant portion of female directors with highly developed CMR skills on a board would appear to be an important resource for making these kinds of decisions and making them more effectively. The good news is, directors as a group, score lowest on the Personal Interest level, the middle Normative score is on the group norm, “don’t rock the boat” lever, and the highest score was on Complex Moral Reasoning, which is ideal because the fiduciary duty of all directors in Canada is to act in the best interests of the organization while balancing the interests of all of its stakeholders. We then wondered if men and women approach decision-making differently and our findings were that there was no significant difference between scores on personal interest, but men scored significantly higher than women on normative reasoning and women scored significantly higher than men on complex moral reasoning. Importantly, these statistics are reporting averages of the directors groups surveyed, so it’s not saying that all women in all instances are effective Complex Moral Reasoners. What it is saying, is that if you were drawing from a pool of male and female directors, our study suggests that your chances of getting someone who has higher complex moral reasoning skills are better when you draw from the female pool of directors we surveyed.

LISA: CAN YOU APPRECIATE THAT WHAT HAS MADE YOUR STUDY, WHY WOMEN MAKE BETTER DIRECTORS, CONTROVERSIAL ARE THE IMPLICIT AND EXPLICIT CONCLUSIONS YOU HAVE DRAWN: THAT WOMEN THINK IN A CERTAIN WAY, BECAUSE THEY ARE WOMEN, AND FURTHER, YOUR ASSERTION THAT WOMEN ARE BETTER DIRECTORS AS A RESULT. WHY MUST WE BE “BETTER”? CAN WE NOT JUST AGREE THERE IS VALUE IN DIFFERENT STRENGTHS, BACKGROUNDS AND EXPERIENCES AND THAT THESE AFFECT DECISION-MAKING AT THE BOARD TABLE? AND FURTHER THAT THESE COMPETENCIES AND SKILL SETS MAY, OR MAY NOT BE GENDER BASED? CLEARLY MEN SHARE THESE SKILL SETS AND COMPETENCIES AS WELL AND MAKE EQUALLY EXCEPTIONAL DIRECTORS.

CHRIS: Of course they do and all of these shared director’s competencies drive effective decision-making around the board table – and that really is the point. Diverse views, backgrounds, experiences and thought processes need to be at the board table. That said, I go back to John Gray’s famous line, “men are from Mars and women are from Venus”. It really comes down to the fact that there are indeed differences in how we think as men and women, as executive leaders, and as directors, and to try and deny that would be putting our heads in the sand.

My hypothesis is further that the same forces that worked diligently to keep women out of the executive suites are also present at the board level. There are forces at work that simply do not want women at the board table because of the change in values, culture and behavior that their presence on a board represents and affects. It has been documented that the moment one female director joins the board, the culture and decision-making around the board table does indeed change, and further that decision-making is significantly impacted when there are not one but three women on the board.

All of this is about understanding and developing effective board culture, behavior and best governance practices. Women possess equal board-ready qualifications and experience, proven executive abilities, effective board decision-making skills and key desired board competencies to make an important contribution to a company’s governance, and it’s financial and operational performance. In light of our findings, it is my view that boards may be considered derelict in fulfilling their fiduciary responsibility to act in the best interests of the organization if  they are ignoring an easy and obvious way to increase their board’s effectiveness and their organization’s probability for success by not increasing the number of women on their boards.

In light of this discussion, the questions that all board chairs, their board selection committees and the Canadian government and it’s regulators should be asking are: What are we doing to ensure that we engage in diversity of thought and decision-making at our own board and executive tables? What steps are we taking to assess our existing or required board competencies and composition, to evaluate our board culture and dynamics, and to improve our board recruitment and selection processes to instill effective governance best practices? What diversity programs, policies and initiatives are we undertaking throughout our organizations, and what diversity targets and disclosure requirements are we setting, implementing, or legislating to facilitate change and pro-actively make certain that senior executive women have the same board opportunities across Canada as men? And as this study clearly posits: Isn’t it in the best interest of Canadian corporations and their shareholders to do so?

Lisa Heidman, LL.B., Senior Client Partner, The Bedford Consulting Group, North American Director of Bedford Legal, brings over 15 years of Legal, Board and Executive Search Experience working with Boards and their Senior Leadership Teams, placing Board, CEO and C-Suite Executives across functions. Appointed to the Board of Directors of Women of Influence in 2009. Lisa can be reached at lheidman@bedfordgroup.com.