An alternative view of diversity

Written by: Dave Waller Posted: 05/11/2018

BL59 diversity illoDiversity on funds boards goes beyond gender and ethnicity – having the right mix of people with a complete range of skills can mean the difference between success and failure

In 2007, Norwegian paper manufacturer Norske Skog had a market cap of $2.5bn. Then its finances went through the shredder – newspaper circulation collapsed and book lovers were lured by the convenience of the e-reader. 

Five years later, the company’s market cap was down to $0.5bn. Investors brought in Charlotte Valeur (pictured), CEO of the Global Governance Group, as nominee director, to help turn the company around. She says she was struck by what she found. “The board had been made up of seven engineers. ‘Oh god,’ I thought. ‘How do they do accounts?’.”

That’s not to cast aspersions on engineers’ numerical nous – it’s just that boards need people who live and breathe these disciplines. The board had made other critical omissions, such as having no one with the banking expertise needed to understand the urgency the company faced as the paper market became increasingly screwed.

The company soon went bust, the board having slid slowly but inexorably towards a disaster it couldn’t see. “They were incredibly intelligent,” says Valeur. “But the vision wasn’t there.” 

The arguments for diversity are, by now, incredibly well understood. So much so, says Valeur, that people are bored of talking about it. “It’s eternally dull,” she says. 

Indeed, there’s no shortage of studies showing that leadership groups with a more diverse composition tend to be more innovative, make better decisions, manage risk better and generally perform better. When PwC surveyed directors in February 2017, for example, 91 per cent said diversity enhanced board effectiveness, while 84 per cent said diversity led to enhanced company performance.

Valeur, who was recently appointed as Chair of the Institute of Directors, remains convinced that the board of Norske Skog could have saved the company if it had had the foresight to switch to producing other paper products – take toilet roll, which remains a soft, strong and very, very long-term prospect. 

BL59_CharlotteValeurFor Valeur, the lesson was clear: boards need diversity, not only in terms of the areas that tend to dominate the discussion – gender and ethnicity – but in technical experience and expertise too. 

“All boards should have legal, banking and accountancy skills, because every decision will have one of those elements in it,” she explains. “So when you have to deal with a convoluted legal document, you have a set of eyes at the table that have been trained in it and enjoy it – in accounts, people who can just pick out a number and see it’s wrong; and those on the banking side who understand capital structures and have the risk training. Those different mindsets make a big difference. If you’re all looking at a situation with the same eyes, you can’t see the opportunity or the risk until it kills you.”

The bigger picture

Valeur’s view is shared by Helen Gale, a Partner at Deloitte, who says she’s often asked to comment on diversity because she’s “one of so few females in this position”. But she too is keen to move the conversation away from gender. 

“For me, diversity is about the individuals themselves and what they bring,” she says. “A strong board will have individuals with different points of view, who are able to challenge each other, listen to each other and take on board different perspectives. It’s that ability to challenge and the ability to listen. 

“You could have a board that’s technically diverse, that ticks all the boxes, but if the dynamics aren’t right – there’s an overbearing chairman and no one happy to question them – that’s not effective either.”

And what applies to paper counts just as much in funds. Fund managers are investing in a wide range of assets that are vulnerable to the same global shifts and trends as anything else. Guernsey’s Code of Corporate Governance, section 1.3, states that boards should collectively comprise an appropriate balance of skills and experience, so the board as a whole is able to execute its duties effectively. 

Hence, board members should challenge themselves to ask if they bring the technical skills and diversity of thought that the board needs. 

Mel Torode, Operations Director at Estera in Guernsey, points out that Estera’s directors serve not only on fund boards, but on boards in the private equity, CLO, insurance and shipping spaces. “They can bring experiences from other industries to the table when discussing things like best practice, board efficiencies and how to deal with new regulation,” she says.

And these days, with investors and regulators increasingly interested in areas such as ethics and social good, boards need to have a grasp of new and alternative ways of thinking.
 
“There’s an obligation for boards to look annually at whether they have the right coverage,” says Wayne Atkinson, Group Partner at Collas Crill. “For a lot of funds, that assessment may be a one-hit deal – you set the strategy and it’s done. For others, it could be moving. A certain area, like impact investing, becomes more popular and you need to tweak both your investment strategy and your expertise to make sure you have the people who can do the job. 

“You want those people who are going to ask the highly informed questions that others won’t be able to ask. And you also need someone to be the lone voice in the room saying: ‘Sorry, explain to me why this is appropriate’.”

Breaking new ground

Another example, says Atkinson, is fintech. “If a tech investment goes horribly wrong, the lawyers in the courtroom will ask why you’d thought you were able to make that investment decision,” he says. 

“If you’re able to turn around and say you have two 20-something MIT grads on your board telling you the tech is brilliant, that will give you a level of support. But it will also make it more likely you’ll dodge the bullet and not wind up in that situation in the first place.”

Sara Johns, a Partner at Ogier, advises boards and directors on the need to take a broader view of diversity. She says there’s still work to do. Many boards haven’t yet realised the importance of bringing on non-executive directors who understand both the technology and the regulation that surrounds it. 

She points to the Jersey Financial Services Commission’s recent clarifications on initial coin offerings as an example of how different jurisdictions have vastly different approaches to regulating emerging cryptocurrencies. Like spotting drastic shifts in paper consumption, this takes awareness and foresight. 

“You need to understand the regulator’s position ahead of time,” Johns says. “That takes knowledge and the passion and an interest in it, so you can say: ‘We may be fine in Cayman now, but the regulation is headed in this direction, with these implications in the future’. You have to be very aware, and very ready to understand what’s coming down the pipeline.”

As such, Johns is struck by how, even now, it remains unusual for anyone under 30 to serve as a non-executive director. But while in traditional sectors such as finance you need the experience that comes with age, when it comes to these emerging, fast-moving investments, the most critical knowledge often sits in minds that may be 30-40 years younger than your typical finance board member. 

So, as well as balancing gender and ethnicity, and bringing in people with banking, accounting and legal expertise, we may soon see the boardroom door opening to younger people too. If, that is, the incumbents possess enough vision to recognise the need.  

“Anyone saying diversity is just box-ticking does so because they’re a box-ticker,” says Charlotte Valeur. “I’ve started asking boards to give me the rationale for not having it. They all go silent. One guy got angry with me and said I made him feel like an idiot. That wasn’t my rationale – it was to make people think about why they do things the way they do. If you’re blind in certain areas, you’ll get killed. You won’t survive.”

Case study: Diversity in action 

Charlotte Valeur, who chairs Blackstone/GSO Loan Financing, actively seeks diversity on her fund boards, in order to protect the company and ensure that it’s governed properly. Valeur highlights one fund board that focused its investment strategy on Asia. 
   “We specifically wanted to ensure the board had the input of Asian board members who knew the markets from the inside, and who knew the area in terms of culture and ways of doing business,” she says. “In addition, we sought those with relevant industry skills.” 
   But, Valeur says, she always tries to avoid having more than two board members with the same skills or professional backgrounds. Boards should compile a skills matrix, which would also highlight areas that are lacking. Handled properly, diversity should happen seamlessly. 
   “You could have years of discussions as to why you’re doing it, and it’s absolutely draining,” says Valeur. “That never enters my head. I’m just there to lead a company in the right way.”

 


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