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Cultural Homogeneity Creates Risk for Boards

 


Chief Executive | October 6, 2015


The Corporate Board published a byline by Russell Reynolds Associates CEO, Clarke Murphy, on how "Cultural Homogeneity Creates Risk for Boards." The following is an excerpt of the article.

When organizations think about risk, perhaps the most worrisome are those that can’t be anticipated. Boards expend tremendous effort in eliminating or at least minimizing their blind spots; that search for better information and awareness can be all-consuming.

What is fascinating about this quandary is that many boards today have a blind spot that is inherent to their construction—their cultural homogeneity creates an atmosphere of limited debate where even large-scale risks can easily escape detection.

Increasingly, board watchers link group homogeneity and risk via the concept of “groupthink”—when a group of individuals who all think along similar lines will, by their nature, come up with a similar set of answers to a given question, and will miss—or will have only one way of looking at—the same submerged issues.

Not surprisingly, study after study links homogenous boards to heightened risk. Academic studies have found elevated firm-level risk at those companies with less diverse boards; such companies were also less innovative, as demonstrated by lower R&D intensity. Conversely, a recent Wake Forest study found that companies with diverse boards selected less risky projects, paid higher shareholder dividends, and had lower stock volatility.

Looking at the wealth of data in favor of diverse boards, one might ask: how do so many boards end up so homogenous? Many answers lie in the mechanics of board construction. A recent PwC survey noted that 90% of directors go to their board colleagues for recommendations on possible new directors, which would seem to continually reinforce a closed system. Gender diversity on is also negatively impacted by the dearth of women in the senior executive positions from which board members are chosen. In both cases, the homogeneity problem starts with the talent pool itself, before short-list selections are even made.

What, then, can organizations do to minimize the risks associated with a homogenous board? One natural solution is to broaden the frame for particular board seats—define the universe of possible candidates more broadly to bring in more diverse candidates. A particularly fruitful variant of this approach involves selecting candidates who are one level down from the level generally considered (for example, EVPs with large-scale P&L responsibility in lieu of CEOs), as these candidates (in addition to being more diverse) tend to approach board roles with more gusto, focus, and diversity of approach than their more senior peers.

To read the full article, click here.

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Cultural Homogeneity Creates Risk for Boards