You Need to Correct the Great Mismatch

There is a great mismatch between those who manage, govern, and advise businesses and the employees, customers, and networks of those organizations, and this mismatch hurts companies. In the case of Kashi, the processes that the leadership team supported for the rest of the organization hampered Kashi’s ability to innovate and stay in touch with its core market. Further, the values of the Kellogg board and executives were out of sync with the values of Kashi’s team and, more importantly, its customers. These types of conflicts, these misalignments, between the governors and the rest of us who work, buy, and invest, are only growing.

Every year Spencer Stuart develops the US Board Index report, which reviews the latest trends in board composition and practices in the S&P 500 companies. Here are some highlights from 2014:

• Some 19 percent of directors are women.
• Fourteen percent of directors are minorities (in the largest two hundred companies).
• Eight percent of directors are of non-US origin (in the largest two hundred companies).
• The average tenure of a director is 8.7 years.
• The median age of a director is sixty-three.²

In addition, our own research found that only 12 percent of directors have technical or digital expertise.

Now let’s take a look at the US population—the shoppers, workers, and communities that support these companies.

• Women make up 51 percent of the population and control more than 70 percent of consumer spending.³
• Minorities constitute 27 percent of the population.
• Thirteen percent of the population is foreign born, and in 2013, 33 percent of revenue for the S&P 500 was from foreign sales.⁴
• The median age in the United States is thirty-six, and only 13 percent of the population is age sixty-five or older.
• The PricewaterhouseCoopers 2014 US CEO survey found that 86 percent of CEOs believe technology will transform their businesses in the next five years.⁵

Can you spot the mismatch? Perhaps we should say “complete misalignment.” On every statistic, boards are not representative of the key stakeholder groups of the companies they advise. Demographically, boards are quite different from their current customers and their hoped-for future customers. Few boards have the digital technology savvy to support a technology transformation in their companies. Boards cannot hope to make informed decisions when their members are so far from the demographics they serve, and equally far from the technology needed to reach these demographic groups—particularly if the members aren’t able to adapt their own mental models.

We would never assert that there should be perfect alignment between the governors and the market. Directors, executives, and advisers do need a great deal of business experience and acumen—much more than the average customer or employee might attain. On the other hand, the most successful companies are the ones that look outward, understand their networks, and create mutually beneficial relationships with them. This is different from the often singularly internal, operational focus of the past few decades, and it requires board members who better represent and understand the firm’s networks.

Credit Suisse studied the impact of gender diversity on boards in 2014 and found that when boards had gender diversity, their firms enjoyed higher returns on equity, higher price/book valuations, and higher payout ratios than those led by less diverse boards.⁶ McKinsey studied board diversity in 2010 and saw similar results. Boards in the top quartile of diversity, in terms of gender and nationality, saw return on equity 53 percent higher, and earnings before interest and tax 14 percent higher, than boards in the bottom quartile.⁷

This should not surprise us. One of the key capabilities of network orchestration, and for simply thriving in any business model, is building deep intimacy with networks in order to gain their contributions, serve them as they want to be served (that usually involves a lot of digital technology), and create mutually beneficial relationships. This is difficult to do when the life experience of your board, executives, and advisers is vastly different from that of your key networks. And—not to be politically incorrect, but to name things as they are—the companies that solely employ, serve, and interact with retired white American males are few and far between.

It’s also important to address the technology gap directly. Even though business model disruption and digital technology capabilities are top concerns, 80 percent of boards have no digital representation, according to executive search firm Russell Reynolds.⁸ Research by the Conference Board and Stanford found that only about 10 percent of boards use social media to engage with stakeholders, and fewer than 8 percent of boards receive reports on their firms’ social media use.⁹ Given these numbers, it’s no surprise that only about a quarter of boards are supportive of, and involved in, digital business initiatives.¹⁰

Principle 9: From Governance to Representation

The ninth principle is to move your firm’s leadership team from governance to representation. Another way to look at it might be from oligarchy to democracy. On the left side of the network orchestrator spectrum are organizations whose executives, boards of directors, and other advisers are relatively homogenous. They usually have thirty or more years’ worth of work experience focused on the operations that happen within a company, but little experience reaching outward. None of them are digital or technology specialists, and most do not even use Facebook, LinkedIn, or Twitter.¹¹ These types of advisers are governors; they create strategy and policy from the top down, relying on their own experience. They do not have many shared experiences with the company’s workers, customers, or the broader community—their firms’ networks.

On the right side of the spectrum are organizations whose executives, boards, and other advisers bring a great diversity of perspective and represent the networks in and around the organization. The leadership team probably includes women, minorities, and foreign nationals. It will certainly include digital experts, ready to help design and support new digital strategies, and the makeup of the board may change more rapidly than that of others, with new directors being appointed closer to the rate of market change.

From left to right, the job of the board of directors is to guide the company’s policies and objectives, but we have found, as have many research organizations, that those on the right side do a better job of it. Heterogeneous and representative leaders are better able to understand, connect with, and tap in to the networks, and thereby the value, that exist around their organizations. Consider where you fall on the governance (1) to representation (10) spectrum.

Clearly, the goal is to have a diverse, representative, and digital-savvy board of directors and leadership team. If you don’t have a board of directors, just replace that term with “advisers.” Finding the right people, however, is a long-term goal. You need to start on that now, and there are other things you can do in the meantime.

GET THE MOST OUT OF WHAT YOU HAVE. If your board currently sits on the left side of the spectrum, you can’t change its demographics or work experience at once, but you can begin to shift the members’ mental models. Some boards are going to “digital boot camp” to learn about the do’s and don’ts, risks and rewards of digital technology. Others use reverse mentoring (as once mandated by Jack Welch) to get in touch with the priorities and preferences of those they represent.

BRING DIVERSITY AT A LOWER LEVEL. If you’re having trouble finding the right digital director for your board, set your gaze lower, at least for the short term: recruit a chief digital officer for the executive team. The technology know-how will benefit you at any level.

CHANGE THE BAR. One reason boards struggle with diversity is that a common requirement for membership is previous board experience. You can see how this would lock out underrepresented groups almost immediately. Years of work experience is another tricky requirement; someone who came of age in the digital era doesn’t have thirty years of leadership experience. This is not even remotely lowering the bar; instead, it is changing the bar to prioritize diversity of thought, experience, and capability.

SET SPECIFIC GOALS. Goals are motivating, and they also tell everyone else where you’re going. Adidas set hard targets to increase the number of women managers on the leadership team. By 2012, it had hit 30 percent. The goal for 2015 is 35 percent. This certainly would not have happened if the executive team had thought, “I hope we find more women to be managers next year.”¹²

Most boards appoint only one or two new members every year, so be sure that your appointments really count. Changing the culture and representation of your board is certainly possible.

How Macy’s Does It

You might expect Macy’s, as a 156-year-old retailer, to have a traditional, homogenous governing board. It doesn’t. Macy’s has one of the most diverse boards in the world.

On Macy’s board sit twelve directors. Half are women. (In contrast, fewer than 1 percent of Fortune 500 companies have gender parity on their boards.) Recent appointments include forty-six-year-old Annie Young-Scrivner, a Starbucks executive and president of Teavana, who had no previous board experience; and Sara Levinson, an entrepreneur who founded KANDU, which brings together kids and technology to create fun things. Additionally, two members of the Macy’s board are African American, one is Hispanic, and one is Asian American.

This has not happened through serendipity. CEO Terry Lundgren has made a concerted effort to recruit highly talented individuals who also bring a diverse perspective to the board. Macy’s board member Craig Weatherup puts it this way:

And how is Macy’s doing under the leadership of this diverse board? It is thriving. In 2014, Macy’s delivered stock returns that handily beat those of Walmart, Best Buy, and Amazon.com. Macy’s has moved much faster than many of its competitors to leverage digital technologies. It developed a strong omnichannel platform that includes real-time inventory; in-store pickup for online purchases; a mobile app that integrates payment, loyalty programs, and local store inventories; and lightning-fast delivery options. Macy’s has recently partnered with Li & Fung to explore retailing in China. L2, a research firm that delivers business intelligence related to digital technology, rates Macy’s as a “genius” in its Digital IQ Index.¹⁴

Start with What You’re Missing

As you begin the journey toward a leadership team that represents the interests, passions, and expectations of your networks, we encourage you to think about the networks themselves. This includes not only the ones your company currently relates to—your customers, employees, and investors—but also those that you want to build relationships with down the road. Some of the world’s most exciting companies—Google, Facebook, Apple—serve almost everyone in the world. That’s a lot of people to represent.

So think about the people in those networks, both who they are and what they value, and reflect on how well your current leaders understand and represent them. The biggest gaps are the best places to start. Now you have a new bar that board candidates, executives, and advisers need to meet. It may not be CEO experience, but instead something even more valuable to an organization looking to grow in the digital, networked world.