The governance elephant: Cronyism, diversity and accountability at stake
By: Ernesto O. Cordero, PhD, MICD
Member
Institute of Corporate Directors
A FREQUENTLY discussed issue in corporate governance that remains unaddressed is board appointments. Even though the election of the board heads and members is responsible for driving a firm to success or failure, the mechanics of their election and their selection processes are often devoid of any transparency, diversity and accountability. These appointments are placed in this context by cronyism, power politics and tokenism, leading to a low exploration of alternative and diverse ideas. In addressing the issues of transparency, diversity and accountability in elections, these reforms are critical for the firm's success and restoration of the public's faith in corporations.
Cronyism and board entrenchment: an obstacle
The appointment of boards of directors is plagued by cronyism. The members of boards of directors continue to be selected on a patronage basis and for political grounds instead of being competent or well-qualified. It also jeopardizes the independence of boards by undermining their ability to supervise and make decisions from a neutral standpoint. The range of consequences due to cronyism is extensive, as it leads to a company being inefficiently managed and, at the same time, protects the firms from being able to create new value for their stakeholders (Mallin, 2018).
Adding to the problem is the issue of "board entrenchment," wherein long-serving board members consolidate power over time, creating an insular and self-serving governance culture. These entrenched directors, often deeply embedded in the company's corporate culture, may prioritize executive interests over broader stakeholder concerns, from employees and customers to the communities affected by the company's operations. As Adams and Ferreira (2007) highlight, this concentration of power creates a governance dilemma where the primary purpose of corporate oversight — ensuring accountability and transparency is significantly compromised.
Periodic evaluations and term limits for board members are critical to addressing board entrenchment. Regularly refreshing board composition can bring new perspectives and ideas, reducing the risks of stagnation and groupthink. Yet, such measures remain uncommon in many companies, where resistance to change is deeply entrenched.
Diversity: A missed opportunity
Diversity in corporate boards is another pressing issue that remains under-addressed. Despite growing awareness of the benefits of diverse perspectives, many boards still lack meaningful representation of women, racial minorities and professionals from varied backgrounds. This lack of diversity perpetuates homogeneity in decision-making, which can lead to groupthink and blind spots in strategic planning. As Terjesen, Sealy and Singh (2009) emphasize, diverse boards are more likely to generate innovative solutions, enhance decision-making and improve overall governance.
The push for diversity is not merely a matter of fairness but a business imperative. Studies have consistently shown that companies with diverse boards outperform their peers, particularly in risk management, financial performance and stakeholder engagement. A more inclusive boardroom fosters a richer exchange of ideas, leading to more balanced and well-rounded decisions. However, without deliberate efforts to recruit and retain diverse talent, these benefits remain out of reach for many organizations.
The problem with 'celebrity directors'
Another controversial aspect of corporate board appointments is the rise of "celebrity directors." These individuals, chosen for their fame or public image rather than their qualifications, often lack the knowledge and expertise to navigate complex corporate challenges. While such appointments may temporarily boost a company's profile, they can undermine board effectiveness and credibility in the long run. Corporate boards should prioritize competence and experience over visibility, ensuring that every member contributes to informed and responsible decision-making.
The path forward: Targeted reforms
A series of targeted reforms is urgently needed to address the issues plaguing corporate board appointments. First and foremost, transparency in the nomination process must be prioritized. Companies should publicly disclose the criteria and procedures used to select board members, providing stakeholders with greater confidence in the integrity of the process. Organizations can reduce cronyism and enhance trust among investors and the broader public by demystifying board appointments.
Diversity quotas or targets represent another crucial step toward reform. While controversial, these measures have proven effective in improving representation in countries where they have been implemented. For instance, Norway's mandate for 40 percent female representation on boards has significantly increased gender diversity and inspired similar initiatives worldwide. Quotas may not be a permanent solution, but they are necessary to address entrenched biases and systemic barriers.
Independence is equally critical in improving board effectiveness. Mandating term limits and periodic evaluations for board members can help prevent entrenchment and encourage fresh perspectives. These measures ensure that boards remain dynamic and responsive to evolving business challenges, fostering a culture of accountability and continuous improvement.
Cultivating a governance culture
While structural reforms are essential, they must be accompanied by a cultural shift in how corporate boards view their roles and responsibilities. Board members must embrace fiduciary duties to shareholders and all stakeholders, including employees, customers and society. This broader perspective aligns with the growing emphasis on environmental, social and governance (ESG) principles, reshaping the corporate landscape.
Training and development programs for board members can play a vital role in this cultural shift. Companies can build competent and forward-thinking boards by equipping directors with the knowledge and skills to navigate complex governance challenges. Programs focusing on ESG, digital transformation, and stakeholder engagement are particularly valuable in preparing boards for the future.
A call to action
The issues surrounding corporate board appointments are too significant to ignore. Cronyism, lack of diversity and entrenched power dynamics undermine the foundations of effective corporate governance, putting companies and their stakeholders at risk. Addressing these challenges requires bold and decisive action, from implementing structural reforms to fostering a culture of accountability and inclusion.
As businesses face increasing scrutiny from regulators, investors, and the public, the time for change is now. By prioritizing transparency, diversity, and independence, corporate boards can become more effective stewards of their organizations, driving innovation, ethical decision-making, and sustainable growth. The elephant in the boardroom can no longer be ignored; it is time to confront it head-on and create a governance framework that genuinely serves the interests of all stakeholders.
Ernesto O. Cordero, PhD in business administration, Hon. D. Litt. post-doctorate research scholar, Saint Paul University-Ottawa/ University of Ottawa, Ontario, Canada.
Disclaimer:
On January 16, 2025, “The governance elephant: Cronyism, diversity and accountability at stake” was published. It was authored by Dr. Ernesto O. Cordero, a member of the Institute of Corporate Directors.
You can read the original article through this link:
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