by Cydney Posner
When the Chair of the SEC and the editors of Bloomberg both think it’s worth getting on their soapboxes to promote the same issue, maybe it’s time for public companies to pay attention. The issue? Women on Boards.
Earlier this month, the editors of Bloomberg published “Companies Can’t Afford Not to Have Women on Boards,” an editorial that advocated the importance of increasing the number of women directors, contending that the paucity of women on boards is “not only unfair but also uneconomical.” In the same vein, Mary Jo White, obviously a trailblazer herself, gave the keynote speech to the 2014 SAIS Global Conference on Women in the Boardroom, “Completing the Journey: Women as Directors of Public Companies.” In addition to identifying various markers of progress, as well as describing some of her own journey, her speech addressed reasons, in addition to fairness and equality, for having more women on boards and approaches to achieving that aim.
There is no getting around the current underrepresentation of women on boards. According to Bloomberg, “[a]mong the Standard & Poor’s 500 companies, women make up only 18 percent of directors; in Europe, the comparable figure is 14 percent. In Silicon Valley — home to some of the fastest-growing companies in the world and with a disproportionate effect on the U.S.’s economic future — it’s even worse:… almost all members of the elite S&P 100 have at least one female director. In Silicon Valley, 43 percent of the top 150 companies (by revenue) have not a single female director.” White provided similar data, observing that the U.S. “position internationally does not demonstrate leadership on this important issue either, where South Africa and a number of European countries have registered more success.” With regard to board leadership, the data is even more discouraging. She observed that, “[i]n 2012 and 2013, surveys found that just over three percent of the board chairs were women and less than 10 percent of the lead directors were women.”
But why is it important for companies to have women on boards? As Bloomberg argued, while “[e]quality is a worthy goal on its own terms, of course….for the corporate world, the better rationale for gender diversity is financial…. Companies with at least one female director had better returns for six straight years.” White agrees that there are many benefits, including financial benefits, when companies include more women on their boards:
“Increasingly, the evidence is that board diversity makes for stronger boards. Some research has highlighted key strengths that women bring to boards. For example, it has been found that women tend to better understand the perspectives of stakeholders, including consumers and employees. Another study shows that women tend to use cooperation, collaboration and consensus-building more frequently, and they are more likely to make consistently fair decisions considering competing interests.
“And, more broadly, there is increasing academic evidence indicating that bringing men and women together around the same conference table may enhance stock price and shareholder value. The Credit Suisse Research Institute, for example, reports that from 2005 to 2011 companies with women on the board had higher average returns on equity and higher net income growth. Another study published by Reuters found that globally, boards that include women tend to have better returns and to have less volatility compared to a benchmark index.
“Studies also show that the presence of at least three women directors changes boardroom dynamics and is associated with even greater positive impacts. For instance, one report found that between 2004 and 2008, Fortune 500 companies in the top quartile of average percentage of women directors outperformed companies in the bottom quartile by 26 percent based on the return on invested capital. Companies with three or more women board members outperformed companies with none by 60 percent. The powerful correlation drawn by these studies is one that boards should not overlook.” [citations omitted]
Similarly, Bloomberg agrees that “there’s a pile of research showing that boards and other leadership panels with 50 percent women think more critically, which may explain the better results. Group dynamics change for the better when both sexes are present. Diverse groups solve problems better than homogeneous ones do, possibly because the men and women monitor each other’s performance more closely.”
How to overcome the dearth of women on boards? Bloomberg first considers (and disposes of) the possibility that demographic changes will resolve the issue. it turns out that that may take quite some time. What about regulation? Voluntary and mandatory quotas have been imposed in some countries, most notably Norway, where a mandatory quota of 40% women was imposed. The result was that: “half of the companies on the Oslo Stock Exchange delisted to avoid the mandate.” Unfortunately, the data also showed that companies lost value after the quota became effective. (In addition, as noted in this NYT article from June of this year, an academic study of the Norway quota experience showed that it has “not led to an increase in the overall number of female executives, to a decrease in the gender pay gap, to a boom in the number of young women pursuing careers in business, or to more family-friendly workplace policies.”) Bloomberg contends that these disappointing results may be explained by the “same thing that explains the difference between a company that casts a wide net to voluntarily recruit (and nurture) qualified women, and one that adds women to its board simply to comply with a quota. The solution, unsatisfying as it sounds, is that companies have to realize for themselves what’s in their own best interest.”
Outside pressure through voluntary aspirational quotas may lead to better results. Bloomberg observes that Canada “is asking companies to commit to a goal of 30 percent women on boards by 2020. In the U.K., the 30 Percent Club, which favors gender diversity without resorting to quotas, is pushing for 30 percent by the end of 2015.” Remarking on possible effectiveness of the 30 percent goal in the U.K., White cites a 2014 study showing “the number of women on FTSE 100 boards had increased from 10.5% in 2010 to 20.7 percent. The Australian government reached a target of 40 percent women on government boards two years early in 2013. And more than 20 countries have adopted quotas for companies to require them to increase the representation of women on their boards.” Nevertheless, she was “not convinced that quotas are the answer,” although she applauded the effort.
More to the point, White believes that outside pressure should come from a variety of stakeholders. In her speech, she both encouraged “companies to work harder to identify qualified women to serve on boards” and championed organizations that seek to develop and position qualified women candidates for board seats. In addition, she observed that, while the SEC has adopted regulations that mandate disclosure regarding a company’s diversity policy (with diversity defined very broadly), stakeholders that are disappointed with the quality of that disclosure should speak up about it: “Shareholders and interested stakeholders have a responsibility to make it known that this is an issue that is important, that they want more information on what is being done to promote diversity, and, if not enough is being done, what actions they expect to be taken. There are a number of different avenues to make these views known – from direct engagement with public companies to shareholder proposals asking a company to establish more specific policies and commitments — and I encourage you to use all of them.”