Menu

Diversity at the boardroom, by Eduardo Muela


To effectively fulfil all its responsibilities, the independence of criteria, objectivity and an adequate and diverse composition of the Board, are a must.





1. Preliminary

The main responsibility of the Boardof directors is to guarantee the corporate strategic orientation, but in addition, the Board is responsible for controlling senior management in order to obtain an adequate return for the shareholders and is also responsible for the effective supervision of risk management and compliance systems.

To effectively fulfil all its responsibilities, the independence of criteria, objectivity and an adequate and diverse composition of the Board,  are a must.

The word diversity in the context of corporate governance is generally associated with gender, and this is relevant indeed, especially when in the majority of the Boards the masculine gender still predominates.

But in addition to gender diversity, it is essential the consideration in the Board rooms the variety of knowledge (experience and training), mentality, nationality, age and diverse ethnic groups. In any case, diversity is very relevant for any collegiate body, providing several points of view on the same problem or on a specific decision. There is nothing less inspiring than the "single opinion" and the lack of debate, which always implies an absence of contrast in opinions and information.

A Board implies the coexistence of different members with different profiles, but always on the same playing field, sharing responsibilities and of course sharing experiences in a way that is complementary to each other.

The benefits of diversity in its broadest sense are not only applicable to listed companies and financial entities that are subject to specific regulations that propose and impose diversity on the Boardrooms, but also apply to any company that wants to grow and become a great company.

2. The OECD Principles of corporate governance

The G20 and the Organization for Economic Cooperation and Development (OECD) where the governments of 36 countries work together to share experiences and find solutions to common problems related to companies corporate governance established a framework with its Principles of Corporate Governance updated in 2015 and published in 2016. Within these principles, diversity is addressed with a practical orientation for its application at the national level.

After the analysis of these principles from diversity point of view, the conclusion is that for the OECD the fundamental pillars of diversity are four:

Programs and measures to promote diversity

In the first place, if we want to avoid the “single opinion” and transfer the diversity to deliberations of the Boardroom, the Board itself must consider whether, as a whole, has the right balance in configuration, knowledge and skills.

Once the aforementioned analysis has been done, the next step will be to agree and launch a tailor made program to achieve the necessary balance in the Board and senior management.

If we want this these programs and measures to be truly effective, voluntary recommendations should be promoted by governments. But an alternative is that the governments establish voluntary objectives and impose information obligations regarding diversity.
Additionally, and as a stronger measure, quotas can be imposed on the Board to force diversity.

Selection

If we want a Board of directors working properly it is necessary to guarantee the existence of a formal and transparent process of proposal and election of the members.

It is also necessary that the shareholders play an active role in the proposal and election of the directors. The Board, or by delegation the Appointments Committee, must ensure that the selection process is accomplished, safeguarding that the process is transparent. Additionally, the Board of directors must define the general or individual profile of the directors that the company may need from time to time, taking into account the knowledge and skills necessary to complement the capabilities of the Board as a whole.

The Board or the Appointments Committee is also responsible for designating potential candidates who meet the relevant profile, as well as for proposing them to the shareholders, and for analysing the candidates proposed by those shareholders who have the right to submit nominations.

To obtain adequate diversity, it is necessary to carry out open selection processes that  review a wide range of candidates and it is also desirable that these processes  are carried out by an independent professional.

Training

It is essential to implement training programs drafted according to the needs of the company and it is highly recommended to involve in the training activities, internal and external trainers duly coordinated.

This is the way to keep updated  the members of the Board in relation to regulation, risks, products and other relevant issues. The Board is joint and several responsible for acquiring the necessary skills.

Regular evaluation and adaptation to changes
The Board of directors must carry out  a regular review and assessment of results and skills. In short, diversity must be valued.

3. The Spanish Good Governance Code of Listed Companies

The Spanish Good Governance Code, in its latest version of 2015, is designed for listed companies, regardless of their size and level of capitalization and establishes principles and recommendations. Several of these principles and recommendations refer directly to diversity.

In point III.3.2 Board of directors structure and membership, the size, diversity and policy for directors selection is directors is examined:
Principle 10: The Board of directors should have the optimal size to facilitate its efficient functioning, the participation of all members and agile decision-making. Director selection policy should seek a balance of knowledge, experience and gender in the Board’s membership.

For the Code, the structure and membership of the Board is a cornerstone of good corporate governance that conditions its effectiveness and influences both the quality of its decisions and ability to successfully promote the corporate interest. The Board should have the right size to efficiently discharge its responsibilities and for its decisions to be debated in depth and enriched with contrasting opinions.

Regarding the diversity in the composition of the Board of directors, the Code itself recalls the importance of diversity, alluding to the inclusion in the Capital Companies Law of Article 529 bis, which prescribes  the following:

Article 529 bis. Necessity for the Board of directors
1. Listed companies must be governed by a Board of directors
2. The Board of directors must ensure that selection procedures for its members favour diversity based on gender, experience and  knowledge and do not suffer from implicit bias that may imply any discrimination, and in particular, that may facilitate the selection of female directors.

It is recommended that companies specify their commitment to a diverse composition of the Board of directors from the initial phase of selection of possible candidates. In addition, given the insufficient presence of women on the Boardrooms, it is recommended that specific objectives be included to promote it.

In the Code, support for diversity focuses more on gender, which is important, but there are other factors of diversity that are also important.

Recommendation 14
The Board of directors should approve a director selection policy that:
a) Is concrete and verifiable;
b) Ensures that appointment or re-election proposals are based on a prior
analysis of the Board’s needs; and
c) Favours a diversity of knowledge, experience and gender.
The results of the prior analysis of Board needs should be written up in the nomination committee’s explanatory report, to be published when the general meeting is convened that will ratify the appointment and re-election of each director.
The director selection policy should pursue the goal of having at least 30% of total Board places occupied by women directors before the year 2020.
The nomination committee should run an annual check on compliance with the director selection policy and set out its findings in the annual corporate governance report.

Regarding the regular evaluation that allows the Board to adapt to the new circumstances, the recommendation is made to carry out an annual evaluation, a corrective action plan for the deficiencies, among others, regarding diversity in the composition and competencies. All this is reinforced by the recommendation of an evaluation every three years by an external and independent expert.

Recommendation 36
The Board in full should conduct an annual evaluation, adopting, where necessary, an action plan to correct weakness detected in:
a) The quality and efficiency of the Board’s operation.
b) The performance and membership of its committees.
c) The diversity of Board membership and competences.
d) The performance of the chairman of the Boardof directors and the company’s chief executive.
e) The performance and contribution of individual directors, with particular attention to the chairmen of Board committees.

The evaluation of Board committees should start from the reports they sendthe Boardof directors, while that of the Board itself should start from the report of the nomination committee.
Every three years, the Boardof directors should engage an external facilitator to aid in the evaluation process. This facilitator’s independence should be verified by the nomination committee.
Any business dealings that the facilitator or members of its corporate group maintain with the company or members of its corporate group should be detailed in the annual corporate governance report.

The process followed and areas evaluated should be detailed in the annual corporate governance report.

In order to strengthen the oversight of diversity, Recommendation 53, letter h) of the Code, establishes oversight by the Audit Committee, the Appointments Committee, or the Corporate Social Responsibility Committee for the coordination of  non-financial and diversity reporting processes in accordance with applicable legislation and international benchmarks.

4. Conclusions

Diversity in the decision-making bodies of the companies has multiple facades: gender, age, nationality, mentality, training and experience.

In general and despite the recommendations and legislative measures to promote diversity and especially sponsoring the integration of women in the Boards, the reality is that female presence continues to be scarce.

But the reason to promote the presence of women in the Boards would not be only by application of the principle of equality, moreover, the rationale is that women are 49.5% of the world population and there is no margin to doubt that the decision making process in the Board would be far more appropriate considering the opinion and analysis of women members.

It is uncommon to find in the Board experts in technology, information systems and cybersecurity, with disruptive orientations that promote new approaches and ultimately, promote innovation.

Special mention deserves, in my opinion, the shortage of young directors. Young members can instruct  the older about the current and potential unknown markets, as well as explain the behaviour of the new generations of consumers, whether they are "Generación Y" (millenials), "Generación Z" (post millenials or centenials) or "Generation T" (tactile).

The benefits of having a Board with members of different age groups would be at least similar to the benefits of other types of diversity, and it is incontestable that people from different age groups bring different life experiences and perspectives to the important work of the Boards.

Although the support for diversity in corporate governance is based on "soft" regulation or recommendations, and we always have at hand the very convenient principle of "comply or explain", we have to consider  "the market judgment" that in a competitive environment will penalize companies with an old, non-diverse Board of directors with little rotation and that does not take into account new technologies and innovation. Presumably investors will understand that these societies are less competitive and their governing bodies less able to take good decisions.

If we really want diversity in the Boardrooms, a strategic decision must be taken, together with a development program drafted with a relevant advice in its design and implementation.

Diversity in the Boardrooms is not a temporary fashion without a future; "it's here to stay" and is essential in all the areas of a company, especially in the management and corporate governance system and is definitely one of the keys for success.

Eduardo Muela Rodríguez

Diversity at the boardroom, by Eduardo Muela
Secretary of the Board of Directors at Andbank España, S.A., Secretary of the Board of Directors (non-member) at Andbank Wealth Management, S.A., S.G.I.I.C., member of the Board of Directors of Medipatrimonia Invest, member of the Board of Directors of Gestora del Fondo General de Garantía de Inversiones, S.A. (FOGAIN), Professor of Securities Market Law at IE Business School, and Professor of Securities Market Law in CUNEF. He has been Chairman and member of the Board of Directors of Andbank Luxembourg. He has held various positions in Banco Inversis, S.A. (Secretary of the Board), Venture Finanzas, S.V, S.A. (Mirabaud), Bayerische Hypo und Vereinsbank AG Group, Banco Santander Group (Banco Banif) and Spanish Securities Market Commission (CNMV).  He has been Director of the Board of Directors of Bolsa de Valencia (Valencia Stock Exchange) from 2003 to 2008. Graduated in law from the Complutense University of Madrid (1984 – 1989). Master’s degree in Business Law from the IE Business School (1990). Practising lawyer since 1989 recognised by Madrid Bar Association. Member of the Academic Council of FIDE. Mediator by Centre for Effective Dispute Resolution (CEDR) in UK, and Certified member of Instituto de Consejeros-Administradores, (IC-A).