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Diversity and Risk Governance are Intertwined - By Lutfey Siddiqi

It is no coincidence that both Singapore and the U.K. issued new codes of corporate governance this year. Reinforcing systems of good governance is all the more urgent on a backdrop of de-globalization, technology disruption, and a deficit of trust in institutions.

In attracting global capital, companies have the opportunity to compete on environmental, social, and governance (ESG) standards. Adherence to these standards and a focus on sustainability also represent sound risk management. Conversely, failure of corporations to include long-term multi-stakeholder considerations can rapidly erode trust in the system. Arguments about nationalized versus privatized public services for example, are in essence, debates about the design of governance.

At its core, corporate governance today rests on two pillars: risk governance and change governance.

The nature of risk - either due to the geo-politics of trade war or tech-driven changes in models of production - makes it difficult to extrapolate from past performance. Nokia and Blackberry had more than half the share of their respective markets as recently as ten years ago. The fact that Amazon is now worth more than Walmart suggests that a FinTech venture starting life today could be larger than Citibank in fifteen years’ time.

For companies and industries, it is a world of structural uncertainty around steady-states, not just the risk of deviation from well-understood norms. As a result, risk preparedness requires systems and processes that can cater to a wider range of possible scenarios with the possibility of jumps between extreme scenarios. In the face of a larger set of material unknown-unknowns, it also requires a more complete interrogation of possible blind-spots in a company’s strategic plan. Furthermore, the uneven pace with which elements of industry disruption can play out often requires companies to entertain old and new business models at the same time. A balance must be struck between the avoidance of resource wastage and retention of strategic optionality.

Underpinning both risk governance and change governance must be a professional culture of diversity. Diversity needs to be explicitly valued and proactively designed for.

In their recent book titled "Meltdown: Why Our Systems Fail and What We Can Do About It", Chris Clearfield and András Tilcsik remind us about the failed blood-testing company, Theranos and the composition of its board. Valued at over US$8 billion as recently as 2015, the company collapsed when it transpired that the underlying medical technology did not even remotely perform as advertised. Some of the Board Members were former Secretaries of State Henry Kissinger and George Shultz, former Secretary of Defense Bill Perry, retired General James Mattis and retired Admiral Gary Roughead amongst others - all highly accomplished individuals.

There are several observations to be made about this Board. Firstly, with the exception of the Chief Executive, this was an all-male board. There was no gender or racial diversity. Secondly, the average age was 76 years. Unfortunately, lack of age diversity is quite common amongst boards which can be inconsistent with the forces of new-age disruption that many companies face. Thirdly, Theranos’ Board showed an apparent lack of diversity in expertise. Most were military officers, senators and former cabinet ministers: none with any obvious medical or technology experience.

It is important to highlight that the optimum amount of domain expertise is not a 100%. Clearfield and Tilcsik point out a study of U.S. community banks which shows that the banks that failed had more bankers on their Board of Directors! Banks whose Directors came from a wider range of backgrounds such as doctors and military officers were apparently saved by their diversity in expertise.

This underscores the dual role of diversity. Firstly, diverse backgrounds and cognitive styles can help unearth issues that might be lost in homogenous group-think. Secondly, the presence of non-experts has the effect of slowing things down and bringing up challenges to consensus amongst insiders. While this might at times feel unnatural, uncomfortable, or unnecessary, deliberately designed diversity is invaluable from the perspective of risk governance.

Diversity is an explicit requirement of governance codes around the world. Singapore’s MAS requires that banks have an explicit policy around diversity and periodic reporting on how they are performing against that policy. In U.K. the “30% club” was launched a few years ago. It is a voluntary statement of intent to have women make up at least 30% of the top listed companies.

As of June 2018, FTSE 100 companies already have 29% female Directors against 12.5% in 2011. The proportion is lower in Singapore although it has been rising in recent years. According to the Diversity Action Committee, amongst the largest 100 listed companies in Singapore, women accounted for 14.7% of the Directorships as at end of June 2018 against 12.2% a year earlier.

Gender inclusion is a necessary condition for diversity. With real intent and deliberate action (for example, by simply avoiding all-male panels in professional conferences), we can collectively move the needle. This is not just the right thing to do, it is a stepping stone towards better governance.

Lutfey Siddiqi is RMI's Adjunct Professor. He is also a member of the Industry Advisory Council, Centre for Governance, Institutions and Organisations at the NUS Business School. This article appeared on Today Online on 7 November 2018.