How Board Diversity & Innovation Increase a Company's Value

GUEST: Margaret Whelan, CEO of Whelan Advisory, serves on the boards of the Housing Innovation Alliance, Mattamy Homes, and John Burns Real Estate Consulting. HOSTS: Dottie Schindlinger, VP of Thought Leadership, Diligent, and Meghan Day, Director of Directors' Experience, Diligent

IN THIS EPISODE:

Rethinking a firm's value: Balancing innovation with core business investment, the importance of creative thinking, and which measurements matter most
Board Innovation: Board makeup and practices affect firm innovation
Whelan's Suggestions: For the future of boards in America

HIGHLIGHTS:

Rethinking a firm's value

1) Boards & management must balance innovation with core business investment

<''All companies must have a growth mindset, but growth in and of itself is not a strategy.'' - Margaret Whelan>

Growth is crucial, but alone, growth is not a strategy. All companies must have a growth mindset, but the core business must also be considered. Wise boards and management should consider the risks and opportunities associated with growth and, particularly, new ventures. Traditionally, public companies are focused on quarterly growth objectives. If 90-day objectives are the only considerations, then long-term high-growth opportunities may go unrealized. Startups, for example, may be a great investment, but, initially, they have little to show in terms of growth. In fact, startups could be a drag on the profitability of the parent for several years before their potential is recognized. So, the key issue becomes balancing investment and innovation, which requires risk, but not risking so much that the core business suffers.

2) Value creation requires creative thinking

Board directors have two key responsibilities when thinking about the long-term value of a firm: One, keeping their eyes open to the future, especially in an age of digital disruption, and, two, ensuring the CEO (and management team) is not in a stifling box already. There are endless real-time examples industries being disrupted because the leadership assumed their core business model would remain unchallenged:

The hotel industry was disrupted by Airbnb
Uber upended the cabs and taxis industry
Amazon continues to threaten traditional retail

All these examples prove that, many times, executives within a company may be in a box already, just waiting to be disrupted. Whelan said the answer to combating this in-the-box thinking is by promoting a culture of diversity and innovation.

<''Value creation is never taking anything for granted - it's always trying to anticipate what's around the corner. A good director is doing this all the time.'' - Margaret Whelan>

3) An ROI-only approach is no longer the proper measure of value

When we asked Whelan how boards and companies are considering value, she gave us two high-level thoughts:

Stats that are geared only towards investors, such as return on capital and margins - now carry less weight in terms of value than they have traditionally
Measurements that are increasing in importance are ESG issues, socially monitored issues, and the attraction and retention of talent

Board innovation is at the core of a company's performance

The makeup and practices of the board affect firm innovation

A firm's innovation (or lack thereof) starts within the board itself. First, the board must consider:

Do we have the right people with the right skill sets in technology, cybersecurity, digital transformation, change leadership, etc.?
Instead of only thinking about what we are doing well, what could we be doing better?

To point number two, boards of public companies, in particular, make the mistake of relying heavily on what their publicly traded peers are doing. They often look at their public competitors with the same business models, and whose results are recorded the same way - every 90 days. But, what could be more threatening to your industry, or more rife with opportunity, is that which firms outside your category are doing.

What is a foreign competitor doing to innovate within your industry?
What is a company outside of your industry breaking into that could threaten or disrupt your core business?

For instance: Amazon, traditionally a retail threat, is now breaking into the housing industry - which is Whelan's area of expertise. By staying up-to-date on their movements, she can handle threats and borrow ideas from their approach.

<''To be more innovative as a board means you need to change the DNA of boards.'' - Margaret Whelan>

Suggestions for the future of boards in America

For Whelan, the difficulty on boards has not been around being a woman, even though she's in an industry that has traditionally been even slower than the others to increase female board membership. She said the greatest difficulty has been around generational differences - she is an X-genner under 50. As per usual, most of her board counterparts are male and over 60, meaning they simply think differently about technology, disruption, and innovation. Whelan said that one of the most significant elements that affects a board's innovation is refreshment. Here, Whelan borrowed from her international experience: She noted how the UK encourages refreshment by enforcing a law that stipulates board members are no longer considered independent once they've been on the same board for over 10 years. This lack of indecency means they can no longer vote on certain items, such as compensation. To borrow from this concept, Whelan believes a drastic change in board refreshment would be helpful - she suggested balancing the wisdom of more senior members with a few seats that rotate frequently, where members may serve for only 1 or 2 terms before moving on.

Episode Resources:

We reference the below reports in this podcast episode. EY & Corporate Board Member joint report:

48% of board directors said either ''no,'' or ''not sure'' when asked if their board has the appropriate resources to move the company forward in this new era of digital disruption
When asked ''How attuned is your board and management team to the potential disruption of your organization and industry?''
- 46% said ''very attuned''
- 52% said ''somewhat''
- 2% ''not at all''

ISS report on 2019 U.S. Board Diversity Trends: