Issue 6 - December 2011
The Diversity Advantage
How regulation and competition are bringing more women into the boardroom
In many countries, the proportion of women on company boards is increasing for two reasons. First, companies that have a greater proportion of women on their boards outperform those that do not. 
Second, an increasing number of countries are mandating greater gender diversification on company boards. However, in many countries where diversification is not mandated — including the United Kingdom, where I sit on several boards — progress is glacial despite the proven advantages. I believe that firms in these countries need to decide if they want to take advantage of having a more diverse board or whether they want to forgo such benefits until diversification is mandated.
The Push and the Pull
Today, European corporations find themselves at a crossroads. Governments and commissions are pushing organizations to diversify the gender composition of their boards by adding more female directors. This regulatory push has created some momentum toward diversification.
Corporations in Europe and elsewhere also have access to studies showing that companies with gender diversity on their boards typically outperform their competitors in terms of profitability and good-governance performance. This knowledge constitutes a pull that adds to the diversification movement.
And yet, despite the combined force of these powerful push and pull motivators, gender diversification still is moving far too slowly in many countries. Consider the situation in the United Kingdom. The annual Cranfield University Female FTSE Board Report for 2010 noted an incremental increase of just three additional women on FTSE 100 Index boards over the prior year, a change it called “barely perceptible.”
The Nordic Way
Thus far, authorities in the United Kingdom have chosen persuasion over regulation in their efforts to encourage board diversity, but regulators and political leaders in other parts of Europe have not trodden so lightly.
Norway led the pack with its 2002 mandate stating that at least 40% of the seats on public boards be held by women. State-owned enterprises had four years to comply, while other companies were given until 2008. The mandate has been met. Today, women constitute just over 40% of Norwegian board directors, according to 2010 data from Corporate Women Directors International (CWDI). Norway is the clear frontrunner when it comes to gender diversification at the board level, but other Scandinavian countries also have made impressive strides in this direction. The same CWDI report shows that Sweden (21.9%) and
Finland (16.8%) both are ahead of the United Kingdom in terms of female representation on corporate boards.
These changes are only the tip of the iceberg. Several other European nations, including Spain and France, have passed laws that mandate 40% female board composition for large, public companies within the next four to six years. Additional countries, such as Iceland, Denmark and Ireland, have also passed quotas, with the Netherlands and Italy considering doing the same.
Is the United Kingdom also headed toward a quota system? For now it appears that U.K. regulators prefer to rely on more gentle pressure. As a case in point, the Consultation Document: Gender Diversity on Boards was introduced in May by the Financial Reporting Council (FRC). For the first time, the FRC included a principle recognizing the value of diversity in the corporate boardroom.
The principle states that “the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.”
Outside observers might view such pronouncements skeptically since they do not have the force of actual law, but the United Kingdom has a strongly ingrained corporate culture of “Comply or Explain.” The FRC notes that both U.K. companies and their shareholders have broadly accepted the notion that corporations should comply with FRC codes or explain transparently and convincingly how the alternate path they have chosen constitutes good governance.
More Women, Better Governance
Of course, the assertion that having more women on a board really does represent good governance lies at the crux of the push for greater female board representation. Policy-makers certainly believe that having more women on a board is good for a company’s bottom line. “The business case for increasing the number of women on corporate boards is clear,” wrote Lord Davies in his Women on Boards report, commissioned by the British government and published this past February. “When women are so under-represented on corporate boards, companies are missing out, as they are unable to draw from the widest range of possible talent. Evidence suggests that companies with a strong female representation at board and top management level perform better than those without and that gender-diverse boards have a positive impact on performance.”