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The Diversity Advantage


How regulation and competition are bringing more women into the boardroom


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n 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.

For the first time, the FRC included a principle recognizing the value of diversity in the corporate boardroom.

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.

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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.”

In making these claims, Davies cited a 2010 McKinsey & Company report called Women Matter that shows companies with the most women on their executive boards outperformed their sector competitors with all-male boards by sizable margins. Looking at data from 2007 to 2009, McKinsey found that the most gender-diverse boards surpassed their competitors by 41% in terms of average return on equity while achieving 56% higher EBIT margins.

imageThe McKinsey study is not an outlier. Other research findings support the notion that women can make a strong, positive contribution in leadership positions. In 2001, a researcher from Pepperdine University in California analyzed 19 years of data (1980 to 1998) and concluded that the 25 Fortune 500 firms with the best record of promoting women to the executive suite were 18% to 69% more profitable than the median Fortune 500 firms in their industries (Adler, Roy D. “Women in the Executive Suite Correlate to High Profits” [European Project on Equal Pay]).

How can we explain the performance gaps in favor of companies with greater gender diversity on the board? Perhaps diversity has some inherent benefits at the board level. Naturally there are many criteria that make someone a good board candidate. Intelligence, accomplishments, capabilities, skills, credentials — these all go into the assessment of a board candidate, but we should not ignore the attributes a candidate brings to the boardroom by virtue of his or her background and personal experience.

When you have 10 men in a room who all have similar backgrounds, experiences and formative influences, their viewpoints and opinions often will be less varied than when people from a range of backgrounds with different experiences and ways of thinking are thrown into the mix.

A case in point: One of the U.K. boards on which I serve has an Italian director, a French director, two American women, a German director and a British chairman. As we look at vital strategic issues, we all come at the problem from slightly different ways, which frequently provokes a healthy and productive debate.

Having women on the board is in some ways a proxy for saying that we want people with different experiences on the board. It is an indisputable fact that most women in the United Kingdom who have achieved corporate success have done so by taking a path somewhat different from that of their male counterparts.

When the Financial Services Authority (FSA) conducts its ARROW governance reviews, it checks diligently to make sure there is an appropriate amount of challenge occurring at that board level. If we look at the big governance failures from the last decade — for example, the Royal Bank of Scotland — we see governance nightmares and homogenous boards dominated by the CEO. Board diversity might have led to more challenge and risk evaluation.

Having a diverse board prone to lively and spirited debate is not an ironclad guarantee against fraud and mismanagement, but it certainly can help from a risk-management standpoint. The Conference Board of Canada recognized this fact nine years ago with a report drawing a link between female board membership and good-governance credentials. The report found that boards with higher female representation tended to pay more attention to audits and risk oversight. Boards with three or more women turned out to be far more likely (94%) to insist on conflict-of-interest guidelines than all-male boards (58%). And nearly three-quarters of boards with two or more women directors conducted formal board performance evaluations, compared with less than half of their all-male counterparts.

Quotas: Necessary or Not?

At the moment, a majority of both political and business leaders in the United Kingdom seem to favor the current approach of using recommendations and exhortations to build the momentum toward greater female participation on executive boards. The Davies report urged FTSE 100 companies to strive for
at least 25% female board member representation by 2015.

But is this goal realistic? Even Davies had to acknowledge that 18% of the FTSE 100 companies and nearly half of the FTSE 250 companies do not have a single woman in the boardroom. Given the apparently glacial pace of progress toward diversification of FTSE 100 boards, can top U.K. companies possibly double the number of female board members in just five years? Would not hard quotas such as those employed in Norway be a more reliable way of achieving the desired goal of more equitable, diverse and effective boards?

I believe the current path is the right one and that quotas are not necessary. Even without quotas, the Fortune 500 companies in the United States have achieved a higher rate of female board member representation (15.2%) than many of their European counterparts (CDWI 2010 Report: Accelerating Board Diversity).

British business leaders already have shown their capacity and willingness to rise to the occasion and take the necessary bold actions. For example, Sir Win Bischoff of Lloyds Banking Group and Sir Roger Carr of Centrica have led the creation of the 30% Club, a group of chairmen from some of the leading British corporations who have promised to use cross-company mentoring programs, industry forums and political debate to keep the topic of board diversification front and center.

Given the pace of diversification, can U.K. companies double the number of female board members in five years?

As the name of the group boldly proclaims, the 30% Club hopes to surpass the 25% standard set by the Davies report and rally FTSE 100 businesses to achieve 30% female representation on executive boards.

There are indications that this approach is starting to gain traction. A recent article in The Independent newspaper noted that just the threat of quotas implied in the Davies report had caused a major jump in the number of women hired as nonexecutive directors to FTSE 100 companies (“Boards Double Number of Women Members,” The Independent, May 29, 2011). The paper found that 23% of all new nonexecutive board appointments in the previous six months had been filled by women, a staggering increase from 2010, when less than 10% of such appointments went to female candidates.

If companies don’t take a change in attitude and hire more women at the top, quotas will be introduced.

The article also notes that French companies are on a similar path, with a 38% rise in the number of nonexecutive board appointments between 2008 and 2010. Surely that trend will only accelerate, since France passed a bill in January that calls for 40% female board membership by 2016 for listed companies, companies that have more than 500 employees or companies with a turnover of more than €500 million.

Take the Carrot or Get the Stick

Guidelines may be preferable to quotas, but if businesses in the United Kingdom and the rest of Europe do not move in the direction of diversifying their boards, these countries soon may find themselves facing them. Lord Davies has said, “I won’t be recommending quotas to the government, as the best solution is one of natural evolution. But if companies don’t take a radical change in attitude and hire more women at the top, then we will have to introduce quotas.”

This sentiment was amplified by EU Justice Commissioner Viviane Reding. In March, Reding challenged publicly listed European companies to sign a pledge representing their commitment to increasing the percentage of women leaders on their boards to 30% by 2015 and 40% by 2020.

Reding warned companies that her committee would be evaluating their progress toward the inclusion of women in executive decision making. “If this has happened by March 2012, I will congratulate the European business world,” she said. “If it has not happened, you can count on my regulatory creativity.”

Whether by carrot or by stick, it seems as though Europe is destined to move toward gender parity on corporate boards. The question for U.K. firms is whether they want to reap the advantages of being in the vanguard of this movement. I believe they should join the wave now rather than get caught later in an ugly
undertow of mandates and quotas.

Published December 2011

© Copyright 2011. The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.

About The Author


Noel Harwerth
Director of Harry winston, RSA Insurance, Logica, London Metals Exchange

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