While the accumulating data are compelling there is still the issue of basing appointments on merit and not some other factor such as quotas. This is a broader challenge as it is by no means simple to define ‘merit’ in a board context.
Still one of the best texts on the subject comes from Australian company director and board reviewer Colin Carter in his book Back to the drawing board.
Carter’s central point is boards are social, private entities whose success or failure is not readily measured on some ‘dashboard’. Because of this essential nature, Carter argued expectations of boards are too high.
Ultimately, the measure of a functioning board is they ‘can smell the smoke under the door’. From both his time reviewing boards and being on them, he argued it is even less realistic to be able to link specific directors to specific outcomes in any normal course of events.
"We know boards do something but we can't measure it," he once told me. "Boards are accountable for letting festering problems run too long but they should not be expected to know what's going on down in the engine room.”
“But if the signs are there, the market knows, everyone knows, then they are accountable. It is a question of whether their smoke detectors are working.”
That was more than a decade ago but it still holds true today. The discussion was at a time when the board and senior management of a major bank had imploded as a result of a rogue-trading scandal which saw both the chairman and CEO depart.
Interestingly, the primary agitator at the time was the only female director on the board.
So what should be considered when discussing ‘merit’?
The evidence tells us there should be diversity but what kind? Gender? National? Industry? The essence here is the ability, in Carter’s words, to “smell the smoke”.
As the Australian Prudential Regulation Authority has made clear in responses to malfunctions over more than a decade, it is essential to avoid group think, to ask questions, to bring a different perspective.
While diversity is valuable for many reasons – typically a company’s customer base is pretty diverse, for one – it is this capacity to question the received wisdom which is vital.
Lack of merit is hardly gender specific. At a recent forum of major shareholders I attended in Tokyo on the subject of the value of environmental, social and governance (ESG) criteria, one panel was quizzed on whether the drive to install more female directors when the pool was still small might result in some less-than-effective directors being appointed; their presence based more on their network and demography than their skills.
One – male – chief investment officer of an enormous pension fund replied he didn’t “spend much time worrying about that given it’s been the case with so many male directors for so long”.
One of the most salutary lessons, however, is from a ‘fantasy board’ that really did exist.
This board had everything, every box was ticked. Its directors were global figures; Nobel Prize winners; industry champions; the racial and gender diversity was exemplary. It belonged to Enron.
Andrew Cornell is managing editor at bluenotes