An Effective Board Is More Like A Mosaic Than A Canvas
Malcolm Forbes defined Diversity as “the art of thinking independently together.”
It wasn’t too many years ago, however, that the financial market industry was less than diverse. Its participants mainly comprised decision makers who were typically white, male, generally middle and upper-class, with many of whom went to the same type of school. Indeed, this didn’t just apply to finance, as it was the prevailing consensus across many sectors, from advertising to the civil service to transport. Homogeneity abounded, not least on boards and decision-making bodies. The prevalent mood reflected what Sheen Levine calls “the siren call of sameness.”
Alanis Morissette touched on a similar sentiment when she sang Ironic: “It’s like 10,000 spoons, when all you need is a knife.”
Things have changed, thankfully, first because attitudes have changed in recognition that a work structure based on diversity is a much fairer concept. That argument alone is a powerful one. But equally powerful is the fact that evidence shows that adding diversity into a decision-making process typically improves it – and in a complex, dynamic world, results matter.
Diversity of course does not just refer to social diversity such as gender, ethnicity, age, or sexual orientation. Cognitive diversity includes differences in education, experience and expertise, as well as training, motivation and personality. Anyone who has read James Surowiecki’s The Wisdom of Crowds (2004) will find evidence that groups generally make better decisions than individuals, and that diverse groups offer a better chance of an even better outcome than homogeneous ones. Put simply, our collective wisdom exceeds the sum of its parts. Why? It allows us better to challenge and contest ideas rather than settle for a lazy consensus. In contrast, homogeneous groups have an inability to consider alternatives.
This concept is hardly new. Aristotle, writing over 2,300 years ago noted that “For each individual among the many has a share of excellence and practical wisdom, and when they meet together, just as they become in a manner one person, who has many feet, and hands, and senses, so too with regard to their character and thought. “For this reason, he noted that “some understand one part, and some another, and among them they understand the whole.”
Scott Page in his recent book, The Diversity Bonus: How Great Teams Pay Off In The Knowledge Economy (2017) brings us more up to date: “The fact is that diverse groups are just more intellectually challenging. There are more ideas thrown out there when you’re with people who are trained differently, come from different identity groups, and have different experiences.” This is particularly important once problems become complex — as they are in today’s knowledge economy and investment markets — because “you need lots of eyeballs and lots of perspectives.” People possess a cognitive toolbox. If the range of tools is important, a diverse team will enjoy more cognitive skills than a homogenous team.
This is consistent with previous studies by McKinsey which showed that companies with top quartile diversity (defined as women and foreign nationals) on their executive boards generated returns on equity that were significantly higher, on average, than the companies in the bottom diversity quartile. A later study by Credit Suisse showed evidence that large-cap companies with at least one woman on the board outperformed their peer group with no women on the-board. Also of relevance was a legal study published in the Journal of Personality and Social Psychology which showed that a more diverse jury deliberated longer and in more depth than a homogeneous one.
Increasing cognitive and other diversity on a board does not automatically guarantee a correct decision, of course, but if the construct of a board is more like a mosaic than a single-coloured canvas, this should enhance the decision-making process – and relatedly, raise the probability of a better outcome.
Author: Paul Craven, Paul Craven Partners Ltd, a specialist in behavioural economics