Research Report: Independent directors and board diversity broaden skills and enhance governance

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Key points

  • Companies will soon be required to address and report on board diversity.
  • Companies are also strongly advised to structure boards and board committees with a preponderance of independent directors – that is, directors who do not hold management positions with the company or relationships that may interfere with the independent exercise of their judgement.
  • Independent directors are presumed to add value to a board in a variety of ways.
  • Overseas and Australian research suggests that companies with women directors enjoy substantial ‘bottom‐line’ and other performance advantages over companies with all‐male boards. In particular, the former group appear to enjoy governance advantages over the latter group.
  • However, for women to operate effectively as directors, it is generally necessary – but not sufficient – that there be a ‘critical mass’ of women on a board. The other vital requirements for effective board participation of women – indeed, minorities generally – is that they be included in the same social interaction as the majority, and that they be given comprehensive information.
  • The empirical evidence on the bottom‐line value of board independence and diversity more generally is more equivocal.
  • However, it appears that neither board diversity nor independence has any adverse effect on company performance. There is therefore no evidentiary basis for arguing against either diversity or independence on financial performance grounds, especially given the prevailing corporate and government climate favouring – and in some cases mandating – diversity and independence.
  • In any case, board diversity is likely to bring a range of longer term benefits to a company, ranging from better understanding of the market to a wider pool of job applicants.
  • The commitment of Australia’s larger companies to board diversity is indifferent. Women occupy at most 10 per cent of board positions in these companies. A substantial minority of directors are drawn from an extremely narrow gender, occupational and industry background.