By Julia Chong

Mention the word ‘diversity’ and the first thing that comes to mind is likely gender, ethnicity, or age; but have you heard about cognitive diversity?

Many corporates and boards are actively broadening the gender, ethnicity, and age spectra of their recruits, teams, and committees. Getting more women of merit into positions of leadership, ensuring ethnically diverse representation on boards, actively recruiting from a range of experiences and backgrounds – these measures come under the ambit of demographic diversity, which is the differences in age, gender, ethnicity, and race. Yet, no matter how hotly these goals are pursued, it addresses only part of the diversity equation.

Buck the Trend

What’s missing is an equal emphasis on cognitive diversity, described by Janine Schindler, a Forbes Councils Member and master certified coach, as “the inclusion of people who have different ways of thinking, different viewpoints, and different skill sets in a team or business group”.

Her thought leadership piece, The Benefits of Cognitive Diversity, bemoans that there is significant resistance to diversity of thought; people and organisations tend to hold back and seek comfort in the same. “Perhaps,” she explains, “they want to hire an exact replica of Ted from accounting because he was so good at his job. Or, there are managers who feel comfortable hiring people who graduated from their own alma mater. There are even those who attain a new position with a new employer and then proceed to hire their former colleagues from a previous employer, one at a time, until the old team is all back together.”

“There is no doubt that people feel comfortable surrounding themselves with others who have business styles similar to their own. Unfortunately, when you get more of the same, what you end up with is…more of the same.”

Prof Katherine Klein, Vice-dean of Wharton Social Impact Initiative at Wharton Business School iterates similar views but from the perspective of quantifiable research. In her Knowledge@Wharton article, Does Gender Diversity on Boards Really Boost Company Performance?, she bucks conventional wisdom and writes that academic research points to how gender diversity alone in the corporate boardroom isn’t enough to improve corporate performance.

“If male and female board members are fairly similar in their values, experience, and knowledge, the addition of women to an all-male board may not increase the board’s cognitive variety as one might expect at first blush.”

She runs through the gamut of academic research which prove that gender diversity in isolation isn’t as significant enough to enhance performance if it is not pursued as rigorously as other types of diversity.

What’s crucial, states Prof Klein, is that corporate boards go beyond ‘check box’ requirements to fulfilling diversity requirements and navigate the other elemental dynamic, namely cognitive diversity. Other research also corroborate that it is the secret sauce to elevate innovation, culture, and performance of teams. We recommend reading Teams Solve Problems Faster When They’re More Cognitively Diverse by Alison Reynolds and David Lewis, published in Harvard Business Review, as a quick primer to its far-reaching impact in organisations.

Different at the Top

Corporations can strive for more diverse thought by changing the tone at the top.

A thought-provoking piece by Jared Landaw, Chief Operating Officer and General Counsel at activist investment firm Barington Capital Group LP, on Maximising the Benefits of Board Diversity: Lessons Learned from Activist Investing, is publicly available on the Harvard Law School Forum on Corporate Governance website.

This brief but informative paper details the firm’s experiences and observations as an investor in eight underperforming companies where an employee of Barington was added to the board. Interviews with directors who had served on these boards helped ascertain whether their role helped improve cognitive diversity and, if so, to what extent had cognitive diversity impacted board performance.

Landaw expounds why cognitive diversity is much needed: “We believe that public companies benefit the most by recruiting demographically diverse directors who also help improve cognitive diversity in the boardroom. As opposed to demographic diversity –which focuses on differences in people’s demographic characteristics – cognitive diversity pertains to differences in people’s knowledge, views, and perspectives, as well as in how they approach problems and perceive, process, and interpret information.

“As a frequent investor in underperforming companies with board composition concerns, we have found that improving cognitive diversity in the boardroom can meaningfully enhance the performance of a board. Among other things, enhancing cognitive diversity can expand a board’s knowledge base, improve decision-making, and help a board more effectively mentor and monitor management.

“Overall, we believe that a cognitively and demographically diverse board is best equipped to perform its obligations and help a company compete, innovate and respond to disruption in today’s challenging international markets.”

Whether or not a company is currently underperforming, the Barington chief emphasises how a lack of cognitive diversity at the board level institutionalises weak corporate governance which is “a serious detriment to a company and its ability to remain competitive”. We provide a summary below:

  • Many of these companies have a board comprised of a homogeneous group of directors. This should not be surprising, given that demographic diversity is typically poor on public company boards, particularly the boards of small-capitalised companies.
  • The absence of directors with the backgrounds, skills, and experiences that are needed in a boardroom may be a concern that is not just limited to the boards of underperforming companies subject to shareholder activism. A global survey of over 2,300 directors and senior executives found that only 36% of the participants were satisfied that their boards comprised of directors who had the right combination of skills, backgrounds, experiences, and perspectives to probe management’s strategic assumptions and navigate the fast-paced global environment.
  • A board with weak corporate governance may be comprised of long-tenured directors or directors with business or personal ties with the CEO. It may also suffer from board pathologies such as groupthink or low-effort norms. Each of these can negatively impact board oversight and performance by decreasing the independence of members of the board and the likelihood that they will express diverse views or challenge management proposals.

Prepare for the Ugly Duckling

It’s not an easy task. C-suites should bear in mind that the pursuit of greater cognitive diversity in the corporate world is less of a Cinderella tale and more The Ugly Duckling: at first unattractive and awkward, over time, the benefits of nurturing diverse ways of thinking and doing will eventually help organisations blossom into their full swan-like potential. 

This is how we reap the full benefits of diversity in organisations. After all, demographic and cognitive diversity are but two sides of the same coin…and it takes two sides to make a full penny.

Doing With Meaning

Approaching diversity concerns solely as a ‘check box’ exercise is a disservice to both the company and its shareholders. Companies eager to up their game and rise above minimum standards can take these steps as recommended by activist investor firm Barington. The end goal of such an intense exercise is not just to recruit directors who look different, but to recruit directors who bring different insights, views, and perspectives and help improve the effectiveness of the board.

#1 Select demographically diverse director candidates who have strong business backgrounds.

More than half of the directors interviewed raised this point unprompted. As one director stated, “A director must have the business background and experience to ask intelligent questions and hold management accountable. Then if the director adds diversity of race, gender, or age to the board, it is a plus. Without such experience, it is less likely that a new director will add significant value.”

#2 Select new directors with professional backgrounds, skills, and experiences in areas that are needed on a board.

The addition of individuals who have different professional training and experiences from other directors will inevitably help improve cognitive diversity in the boardroom. It should also improve the ability of the board as a whole to meet the company’s strategic and operating needs and to provide the management team with guidance on the wide variety of issues that the company will inevitably face.

To assist a board in assessing its needs, we recommend that it create a matrix identifying the backgrounds, skills, and experiences that are believed to be needed in the boardroom and the extent to which such needs are being met by the current members of the board. For internal purposes, we recommend that a board assess the ability of its members to meet each identified need on a scale of zero to five. This should provide the board with a more accurate assessment of its strengths and weaknesses than the more commonly used ‘check mark’ approach, which tends to imply that each identified need that receives a check mark is adequately met by the current composition of the board.

Boards can magnify the contributions that new, demographically diverse directors make by having them replace their least productive members. To determine which members of a board are no longer making a meaningful contribution in the boardroom, we recommend that boards conduct an annual assessment of the performance of each of their directors. The results of a director survey conducted by PwC in 2019 found 49% of the respondents stated that they believed that at least one director on their board should be replaced. Boards may find it beneficial to utilise an outside consultant to assist with the assessment process.

#3 Identify candidates who not only improve demographic diversity in the boardroom, but who can also introduce new views and perspectives and different approaches to problem solving.

This is not necessarily an easy undertaking given that cognitive differences cannot be identified as easily as demographic differences. Thus, a careful review of a candidate’s background and life experiences, as well as in-depth discussions with the candidate and the candidate’s references, are inevitably required. To help a nominating committee identify demographically diverse director candidates who are cognitively diverse from others on the board, we recommend that it seek new talent pools and venture beyond using board member networks and recruitment practices that were utilised to find the board’s incumbent directors. Such an approach should also help ensure that the candidates lack social and business ties to members of the board and the senior management team.

#4 Emphasise the importance of participation during the onboarding process.

Among other things, we suggest that new directors be told that the board not only welcomes directors sharing their thoughts and perspectives when they differ from others in the boardroom, it is counting on them to do so. In our opinion, the view that new directors should primarily be observers on a board while they learn the ‘lay of the land’ is outdated. We also recommend that directors be encouraged to ask questions regarding matters they do not understand or that do not seem clear to them. Often, others in the boardroom will benefit from the inquiry. While it is labour intensive, diligent director recruiting and onboarding can help ensure that demographically diverse directors selected by a board will also improve cognitive diversity and board performance.

Julia Chong is a Singapore-based researcher with Akasaa, a boutique content development firm with presence in Malaysia, Singapore, and the UK.