Note: This article first appeared as a guest post on the International Directors’ Network blog.
A recent Bloomberg article found the following as they analysed the past and present professional affiliations of more than 600 directors and executives of the world’s 20 largest banks: Only few individuals had experience in renewable or sustainable industries. Far more had ties to polluting industries: At least 73 individuals even have at one time or another held a position with one or more of the biggest corporate emitters of greenhouse gases, including 16 connected to oil or refining companies.
More specifically: Of the four (4) banks where the boards directors offered some expertise in renewables or sustainability, every single one had significant links to ‘greener’ companies – notably in electric & utilities. The opposite held true for the remaining 16 of the 20 analysed boards.
In more succinct words: the study found that board expertise and prior affiliation of board directors correlated very well with the extent of investments into ‘emitting’ or ‘renewable’ energy companies.
Ironically, it is precisely the directors’ prior track record and experience, one of the very reasons why they got (s)elected onto the board, that could jeopardise their board’s forward decisions. Because – as the Bloomberg study showed – there are very, very few directors or even senior executives, with sufficient experience and track record in either renewables or sustainability. No matter their industry background.
To that point: there are even much fewer, if any, board directors in circulation that have a track record on how to marry the prosperity of a (their) company with business models that go above and beyond the traditional ‘growth model’, to just name one example. Hence, there is a tendency in relying on their past winning strategies to tackle the challenges in the wait for us to experience – globally as well as within individual businesses. This is like taking to the skies of the 21st century with technology from the era prior to the industrial revolution.
Track record bias: what is it, and why does it matter?
Track record bias is the unintentional bias directors introduce onto the board precisely through the very genuine, authentic and well-earned achievements of their prior career experiences.
Example: The former country manager of a large Aluminium firm with an excellent reputation for engagement with indigenous peoples and H&S joins the board of a major synthetic polymers company.
- Pros: The new board director is very familiar with extractive industries, their environmental profile, the challenges around labour conditions and the global nature of such a low-margin business.
- Cons: It may be tough for this new board director to consider viable alternative technologies based on renewable and/or recycled materials of origins, and the respective differences in client relationships, partnership models and global sales and logistics approaches.
Track record bias is something every director brings to the table once joining a board. In itself it is neither negative nor positive. In fact, consciously managed (key word: board thought diversity) it can be add tremendous value by directing the board’s discussions into new, and so far unfamiliar terrain and in this way contribute to the resiliency efforts underway.
However, the unsurprisingly the opposite it true if a board is not put together with clear priority given to thought diversity, as can be seen in the results of the Bloomberg research mentioned above.
And there is a somewhat simplistic reason for those results: Most board directors are or have been reasonably successful CEOs and CFOs, or else high-flying executives, of large(r) companies. Often in industries that are traditionally considered ‘adjacent’ to the company on whose board they are sitting.
Successful they may have been. But until very, very recently their role would not have required them to understand e.g. the implications of the Paris Climate Agreement, the SDGs, or the scientific consensus around climate adaptation. For most, such insights were allocated to the job descriptions of their sustainability speciality staff, or possibly the communications team, who in turn would have been required to pitch the traditional business case for any initiatives they saw necessary.
Board Diversity and Complementarity: The Origin of ESG1 success and capability
In other words: not only do today’s board members by and large have very little practical experience when it comes to renewables, sustainability, or economic models that do not rely on pure and simple GDP growth. But they also have often built track records in industries that since decades are shown (and known) to be among the largest emitters, and thereby at the root of the current climatic challenges.
Therefore, unless such board directors are aware and accepting of the baggage they bring to a board table, and are willing question the modus operandi of their industries of origin, their industry track record will only lead to more of the ‘old same’. And in this way merely perpetuate and replicate the issues found in precisely those emitting industries.
Once more: this is not to diminish such directors genuine track record acquired through hard work.
It is though to point out that their track record on its own is incomplete. Their board is in needs of a complementary skill and knowledge set for proactive decision taking in the decades to come.
And as of today, such true complementarity on boards is not the norm as of yet: Deep ESG/Sustainability skills and knowledge is as of yet few and far between among board directors’ track record.
1 ESG / Sustainability is one area where board diversity is of utmost relevance because the world we shortly will be living in will be unrecognisably different from the one we live in now. This is not to say that other subjects – digitalisation for example – do not require it. They do. The difference is fundamental however: ESG / Sustainability requires a fundamental different economic modus operandi made possible by new, so far unknown business models. Digitalisation in contrast will certainly result in new business models, but may not necessarily affect the fundaments of the economic system as such.
