Corporate governance involves the system of rules, practices, and processes by which an organisation is managed. It involves balancing the interests of an organisation’s stakeholders, such as shareholders, management, Board of Directors, financiers, the Government, consumers, suppliers, and the community[1].
The Board of directors plays a pivotal role in ensuring good corporate governance in every organisation[2]. This is so because they provide oversight in relation to the administration of the organisation and ensure that set goals and objectives are achieved while ensuring compliance with the requisite laws and regulations.
As such, it is essential to periodically assess the Board’s composition to ensure that it consists of persons with the right level of skills, expertise, and competence to drive the attainment of corporate goals and objectives. The need for Board diversity cannot be overemphasised because poor and/ or inadequate Board composition can result in negative Board performance and other forms of corporate failure.
The discussion on Board diversity has taken up an important place in corporate governance today because Board diversity is viewed as an apparatus for solid inward control framework, as it expands the Board’s proficient and powerful dynamic in administration.[3]
This paper will introduce the concept of Board diversity and its benefits. It will also address the challenges of Board diversity and offer recommendations to manage these challenges effectively.
THE CONCEPT OF BOARD DIVERSITY
Board diversity is a broad concept that cuts across expertise, managerial backgrounds, age, learning style, gender, language, education, ethnicity, and culture. The concept of Board diversity is interpreted differently in several organisations and jurisdictions. Some authors have characterised the diversity of the Board as an individual contrast of the Board[4]. Others have posited that the assortment of Board diversity arrangements range from women, ethnic and racial minorities on the Board, amongst others[5].
Although there are various positions on the meaning and concept of Board diversity, Board diversity may broadly refer to a Board composed of individuals with different educational abilities, ethnicities, cultures, genders, abilities, experiences, and perspectives, amongst others.
The concept of Board diversity also includes the inclusion of people outside the organisation, into the Board. In relation to this, Principles 6 and 7 of The Nigeria Code of Corporate Governance (NCCG) 2018 make it mandatory that the Board comprises Non-Executive Directors and Independent Non-Executive Directors. In line with Principles 6 and 7 of the NCCG, Section 275(1) of the Companies and Allied Matters Act (CAMA) 2020 mandates all public companies to have at least three (3) independent Non-executive directors on the Board.
Furthermore, Board diversity can be classified into two categories: demographic diversity and cognitive diversity. Demographic diversity focuses on incorporating race, identity, ethnicity, gender, and age into Board composition[6]. Cognitive diversity on the other hand is undetectable and focuses on diversity in obscure traits, such as knowledge, skill set, expertise/ industry experience, and authoritative participation[7].
Irrespective of the various categories of Board diversity, Board diversity widely encompasses a broad spectrum of demographic and cognitive attributes and characteristics in the Boardroom. Board diversity aims to encourage high objectivity, knowledge, skill, and expertise on the Board, and sustain shareholders’ trust and confidence.
REGULATORY FRAMEWORK FOR BOARD DIVERSITY IN NIGERIA
Most corporate scandals can be traced to negligence or ineptitude by the Board which if critically considered, has its roots in poor Board composition. This further reiterates the indispensability of Board diversity in Board composition.
In Nigeria, the Nigerian Code of Corporate Governance (NCCG) 2018, which provides recommendations for good corporate governance practices in Nigeria addresses the need for Board diversity.
In Principle 2 of the NCCG 2018, the code states that:
The effective discharge of the responsibilities of the Board and its committees is assured by an appropriate balance of skills and diversity (including experience and gender) without compromising competence, independence and integrity.
Principle 2 of the Code captures the bane of Board diversity which is to ensure that the Board possesses the requisite skills needed to make effective decisions for the growth and development of the organisation. Some of the recommended practices for Board diversity as outlined in principle 2 of the Code, are set out below:
- The Board should be of sufficient size to effectively undertake and fulfil its business; to oversee, monitor, direct, and control the company’s activities and be relative to the scale and complexity of its operations.
- The Board should assume responsibility for its composition by setting the direction and approving the processes for it to attain the appropriate balance of knowledge, skills, experience, diversity and independence to objectively and effectively discharge its governance role and responsibilities.
- The Board should consider the following factors in determining the requisite number of its members:
- Appropriate mix of knowledge, skills, and experience, including the business, commercial and industry experience needed to govern the Company;
- Appropriate mix of Executive, Non-Executive and Independent Non-Executive members such that majority of the Board are Non-Executive Directors. It is desirable that most of the Non-Executive Directors are independent
- Need for a sufficient number of members that qualify to serve on the committees of the Board;
- Need to secure quorum at meetings; and
- Diversity targets relating to the composition of the Board.
- The Board should promote diversity in its membership across a variety of attributes relevant for promoting better decision-making and effective governance. These attributes include field of knowledge, skills and experience, age, culture, and gender. The Board should have a policy to govern this process and establish measurable objectives for achieving diversity in gender and other areas.
- The Board should periodically invigorate its capabilities by ensuring the appointment of new members with relevant skills and fresh perspectives, while retaining valuable knowledge, skills, experience, and diversity; and maintaining continuity.
These principles elucidate the importance of a diverse Board and further recommend that corporations establish procedures for entrenching and promoting Board diversity. This will result in effective decision-making, innovation, better risk management and stronger consumer connections. Furthermore, Principle 2.4 emphasises the need for a Board diversity policy to govern the process of implementing Board diversity in any organisation.
The importance and relevance of Board diversity is also seen in relation to Board Evaluations, as the Code requires that the extent of the Board’s diversity should be considered in Board evaluations. On this point, Principle 14.3 of the NCCG 2018 states as follows:
The evaluation of the Board should consider the mix of skills, experience, objectivity, competence of members of the Board, its diversity (including gender), knowledge of the Company and its strategic direction, attendance at meetings, how the Board works together and other factors relevant to its effectiveness.
It is imperative to note that the broad requirements for Board diversity as set out in the NCCG 2018 are also contained in other sectoral Codes of Corporate Governance.
Consequently, Principle 3.2 of the Nigerian Communications Commission (NCC) Code of Corporate Governance for Telecommunications Companies 2016 also provides that:
The Board should ensure that it is so composed as to assure a mix of skills, diversity of experience, and gender.
Similarly, the Code of Corporate Governance for Public Companies issued by the Securities and Exchange Commission in 2014 provides that:
The Board should be of a sufficient size relative to the scale and complexity of the company’s operations and be composed in such a way as to ensure diversity of experience without compromising…
Though not detailed as to the extent or parameters for Board diversity, the various Codes of Corporate Governance all emphasise the need for Board diversity in Board composition, for good corporate governance. Accordingly, organisations are encouraged to adopt incorporate Board diversity in into their Board composition and structure, for good corporate governance.
BRIEF ANALYSIS OF THE REGULATORY FRAMEWORK FOR BOARD DIVERSITY IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
The United Kingdom (U.K.): Since the UK Corporate Governance Code was updated in 2018[8], it has included provisions for companies to report on Board diversity policy, with measurable targets and progress towards meeting them. The Code requires that there be a formal, rigorous, and transparent procedure for appointing new directors on the Board, supported by a justification that the search for such candidates and their appointments were made on merit, against objective criteria and with respect to the benefits of diversity on the Board[9].
The United States of America (U.S.A): Although several states in the United States of America have passed laws requiring companies to ensure diversity on their Boards, California has arguably enacted the most prescriptive Board diversity requirements. In 2018 and 2020, California passed legislation requiring public companies with headquarters in California to have a certain number of women and people from underrepresented communities on their Boards or be subject to fines ranging from $100,000 to $300,000 for each violation[10].
California’s Board gender diversity statute, SB 826 which was signed into law in 2018[11] requires public companies with their headquarters in California to have one (1) female director on a Board of five (5) directors and two (2) female directors on a Board of six (6) or more directors. Violations of this provisions results in a fine of $300,000. Every seat required to be filled by a female director, which is not filled by a female director is counted as a single violation.
Under the SEC requirements for companies in the United States, public companies must disclose the extent of diversity considerations in selecting nominees for the position of a director and, if a company has a Board diversity policy, the procedure for implementation and effectiveness of the policy is accessed[12].
BOARD DIVERSITY AND GOOD CORPORATE GOVERNANCE
Having explained Board diversity and highlighted the regulatory framework for Board diversity, it is important to consider the impact of Board diversity on good corporate governance for the sustainability of the organisation:
- Board diversity fosters creativity and provides a higher range of perspectives and solutions to challenges faced by an organisation. Individuals with varying life experiences are likely to approach similar problems differently. Diverse Boards rarely suffer groupthink, resulting typically in unchallenged, and poor-quality decision-making. A Board comprising of members with different perspectives is more likely to make well-informed decisions that will ensure the organisation’s success.
- A diverse Board promotes varied viewpoints and thought processes evolving through different social backgrounds. Having directors with indepth knowledge of the international market industry practices and applicable laws promotes the Board’s understanding of the different corporate governance practices in other jurisdictions and incorporate same as applicable. Furthermore, Organisations with diverse Boards gain access to different resources (including people) and connections. For example, directors with capital market experience can guide the Board on investment decisions and capital market-related issues, whilst directors with expertise in government strategies and policies would be instrumental in advising the Board on the proper procedure for obtaining the government’s approval for a project, and so on.
- The incorporation of gender diversity into Board composition also plays an important role in the perception of the Board in the eyes of the public. However, the role of women on Boards goes beyond enhancing the public appearance of the organisation, as it has been proven that organisations with more women on the Boards tend to have greater transparency and better corporate governance.[13]
CHALLENGES TO INTEGRATING BOARD DIVERSITY IN BOARD COMPOSITION
Despite the numerous merits of Board diversity for good corporate governance, there are some challenges to Board diversity, including:
- Conflict, lack of cooperation, trust, and insufficient communication: Demographic diversity may reduce communication among Board members,[14] create conflict, and reduce interpersonal relationships, trust, and group cohesiveness.[15] This may result primarily from the fact that most members from the various demographics do not share the same values.
- Lack of sufficient expertise and qualification of Board members: An incidental cost of choosing directors mainly for their demographic characteristics is the likelihood of neglecting other important factors such as education and experience. Furthermore, because qualified minority candidates may be short in supply, it is not uncommon for corporations to appoint directors with demographic qualities who may not meet the qualification requirements for appointment on the Board.
- Delay in Decision-making process: As stated earlier, a diverse Board will almost definitely experience diverse and sometimes conflicting opinions, which, if not correctly handled may clog the wheel of decision-making.
It is imperative to note that these challenges can be managed in various ways, including incorporating team bonding activities to foster communication, transparency, and trust among Board members.
IMPLEMENTING BOARD DIVERSITY FOR GOOD CORPORATE GOVERNANCE
Implementing Board diversity into Board practices for organisations may appear daunting. However, with the right Board diversity policy in place, Boards will be able to navigate through these challenges. A Board diversity policy provides a written, clearly defined, formal, and transparent procedure for the appointment of directors to the Board. The policy should state the criteria for the selection of directors which reflect the qualifications required, skills and experience, as well as the age range and gender composition of the Board.
In creating a Board diversity policy, the role of the Nomination and Governance committee is critical as the committee is charged with the responsibility of identifying and recommending suitable prospective directors to the Board[16]. Due to the sensitive role of the Nomination and Governance committee, Principle 11.2 of the NCCG 2018 recommends that:
Members of the committee responsible for nomination and governance should be Non-Executive Directors, and a majority of them should be Independent Non-Executive Directors where possible.
The Nomination and Governance committee should be responsible for drafting the Company’s Board diversity policy which should reflect a standardised and reformed selection process.[17] In drafting the policy, the committee should consider expertise, geographical representation, business expertise, personal qualities, ethics and integrity, gender balance, amongst others.[18]
Upon approval of the Board diversity policy by the Board, the Nomination and Governance Committee must ensure that all recommendations for Board vacancies align with the Company’s Board diversity policy.
CONCLUSION
The role of the Board in ensuring the success of any organisation is critical and indispensable. Therefore, it is necessary to occasionally review the Board composition to ensure that the Board consists of people with the right level of skills, experience, diversity, and competence to drive the attainment of corporate goals and objectives.
In achieving this, the Nomination and Governance Committee should pioneer the formulation of a Board diversity policy which will set out the guidelines and criteria for qualification and appointment to the Board. The diversity policy should reflect diversity in age, gender, experience, qualification, geography, and other factors that are applicable to the specific organisation.
The benefits of diverse perspectives and creativity that Board diversity brings into the decision-making process makes it a critical pillar of corporate governance in today’s world. To this end, the Nigerian Code of Corporate Governance and other sectoral codes provides recommendations to effectively incorporate Board diversity into Board composition.
It is hoped that companies will take a step back and reevaluate the extent of their Board diversity and make the required changes for good corporate governance[19].
