To achieve optimal board diversification, distinct ways of thinking should be sought first and foremost, argues The Pensions Trust's Sarah Smart in the latest Informed Comment.
But is the principle of diversity, which is so beneficial for our investments, also a ‘no brainer’ for our trustee boards?
If it is, what sort of diversity do we really need, and do we need to be doing more to achieve it?
How boards can achieve diversity:
embrace a way of working that lets diversity of thought thrive, which may well lead to more votes being taken;
recruit chairs of trustees who are good at handling debate that comes from lots of different viewpoints and guiding that debate towards a good decision;
understand what mix of both technical, personal and emotional skills we want on our trustee boards and recruit accordingly.
The benefit of diversification in investing is that it can often reduce risk without reducing returns.
It has become a common strapline used by diversified growth funds to claim to deliver equity-like returns with half the volatility. How do they do this? Through diversification.
Can the same benefits be delivered for trustee boards? Let’s imagine what an undiversified trustee board looks like: a board with only one person on it. One considerable benefit of such a board would be that it would be much more efficient than many trustee boards we have today.
But there would be some considerable downsides too: there would be much greater risk that the individual would have a conflicted viewpoint and restricted level of knowledge, thereby leading to ill-considered decisions being made on behalf of the scheme members.
Not all diversity is equal
I think we would all agree that some diversity on the trustee board is a good thing. It may slow down the actions taken, but should greatly reduce the risk of ill-considered decisions being made. But it is not necessarily the case that all or any sort of diversity will achieve this objective.
Consider again our investment example. We have seen that there can be such a thing as ‘phantom diversification’ in investments. Some asset classes we might think provide diversification benefits compared with equities, such as private equity or commodities, actually provided nothing of the sort when things got tough economically.
Similarly, it might look like we have a diversified board just because it is made up of people of different gender, age, race, sexuality, but it is perfectly possible that all these people may react to a certain issue in exactly the same way and so the result is no diversification of thought.
To achieve diversification that minimises the risk of bad decisions, I believe we should look for different background and ways of thinking first and foremost. But that is perhaps easier said than done..
Is an uncompromising drive for consensus an obstacle for diversity?
I often attend events with my fellow chairs of trustees. When we discuss governance issues, I frequently hear my peers comment that if a decision had to go to a vote they would feel they had failed in their job. I wonder if this uncompromising drive for consensus is in fact a major obstacle for diversity.
An exercise we have recently undertaken with our board is to ask them what they would ‘see, hear and feel’ if a certain goal were to be achieved.
If I imagine that we have achieved our goal of getting the sort of diversity onto trustee (and other) boards that leads to good decision making, I think I would see far more votes being taken around boardroom tables.
This is a demonstration of the different viewpoints that have gone in to helping the board reach a good decision – one which the whole board stands behind even if they did not all vote for it.
Sarah Smart is chair of the trustee board at The Pensions Trust
