HONEST SELF-REFLECTION can be difficult. Boards struggle with evaluating themselves as much as do individuals. But a board cannot function effectively unless it has the right people on it If board composition is not on point, then the company may be unable to implement its strategic goals or respond adequately in a crisis or other significant challenge.
Nothing is more important to a company than the people who sit on the board and, ultimately, control the strategic vision and direction of the company. Building the right board requires an honest understanding of the strengths and weaknesses of the existing directors, how well they work together, and their ability to formulate the company's strategy and lead the company to implement its strategic goals. Good governance means that companies must move away from electing directors solely because of their reputation or relationships with management, and, instead, focus on seating directors with the right mix of skills and experiences to achieve competitive success.
The SEC has sought to focus attention on board composition by requiring expanded disclosure of why individual directors are qualified to serve on the board through an explanation of their specific experiences, qualifications, attributes or skills. Additionally, the rules require the board to explain whether diversity is a factor it considers in identifying board candidates. The SEC does not define diversity, which permits companies to focus on diversity concepts such as race, gender and national origin, or to view diversity more expansively to include differences of viewpoint, professional experience, education, skill, and other individual qualities and attributes.
The SEC's focus on diversity is a part of its effort to shine a spotlight on how boards are functioning. These disclosure requirements are aligned with recent research that concludes that boards provide better guidance if their members have a diversity of backgrounds, skills, and experiences. While a board made up of "good old boys" may share common goals and values, and be able to come to consensus more easily, studies have shown that teams with functional diversity--members with varying perspectives or expertise--generally perform better than homogenous teams and the decisions made by these diverse teams may ultimately be better for the company.
As functional diversity is quite difficult to observe, boards are instead criticized for their more...