Women on Boards and its rationale

Sections of this topic

    In the modern world, women are outperforming men in many stages of their career; especially at school level, university and during the early years of work. However, despite a considerable number of women entering the corporate world, the gender diversity of top companies at executive and board level is woeful.


    In 2010, women made up only 12.5% of the directorships of FTSE 100 companies in the UK (see Women on Boards, The Davies Report, February 2011) and in 2008 women held only 12% of the directorships in the S&P 1500 (see RiskMetrics Group, Inc., “Board Practices: Trends in Board Structure at S&P 1,500 Companies”).

    These low numbers are not through lack of initiatives from campaigners, governments and even the companies themselves. For example:

    • Norway has introduced a mandatory quota for their biggest companies;
    • following the Davies Report, there are new measures being introduced in the UK around diversity; the UK Corporate Governance Code is being amended to require companies to set out their diversity policy and the UK government is introducing new legislation requiring quoted companies to report on the number of women in senior executive roles; and
    • the SEC in the US has introduced a rule requiring corporations to disclose, inter alia, whether a nomination committee considers diversity in identifying nominees for director and, if so, how they consider diversity in this respect.

    These and other changes are beginning to increase the number of women in boardrooms around the world but the change is occurring at a slow rate. This rate of change does make it worthwhile re-considering the rationale for increasing gender diversity in boardrooms as the current approach does not seem to be achieving the results that are expected.

    Economic vs Social Rationale

    Historically, gender diversity advocates relied primarily on moral arguments to persuade companies to change their recruitment policy towards women. However, in recent years, the argument has shifted with advocates pointing to studies that show that the share prices of companies with more diverse boards outperform companies with less diverse boards. The feeling is that hard-nosed shareholders, and the directors who owe a fiduciary duty to these shareholders, will be more receptive to economic rather than social or moral arguments.

    This view has been readily adopted, not just by activists, but by the mainstream media and governments. Lord Davies in the UK said that “The business case for increasing the number of women on corporate boards is clear…… 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”. This is fairly representative of the argument being put forward at the moment.

    This argument has its limits though and, perhaps, could be contributing to the slow rate of change. In her excellent paper, ‘Revisiting Justifications for Board Diversity’, Lisa Fairfax reviews the various empirical studies around the financial performance of companies with more diverse boards. She reviewed numerous studies that did support the economic case for gender diversity, but there were also studies that found no link or even showed a negative link between gender diversity and the economic performance. These are often overlooked or dismissed in discussions around this subject but are equally important.

    Overall Ms Fairfax felt that “the empirical results provide at least some support for the proposition that board diversity may lead to increased firm value or improved corporate governance under certain conditions.” However, for me, the biggest question is over causation. Do the best performing companies naturally attract and support diverse boards or do diverse boards lead companies to perform better. This question has never been properly addressed in the empirical studies and it would be very difficult to do so.

    The lack of clear evidence means that that economic argument for board diversity is weak at best. This may be a slightly controversial statement to make but I think it is important to put it forward as the reliance on the economic argument may actually be hindering the cause of gender diversity.The doubts over the link between economic performance and gender diversity are probably shared by many shareholders and boards of listed companies. If this is the main argument being put forward in support of gender diversity, it is one that can be ignored by these groups with impunity. After all, if the main rationale is the economic benefit, then the shareholders are the only ones to suffer if they are wrong.

    On the other hand, many corporate governance developments over the years have not been supported by economic arguments and instead have won through by other means. For example, it is now an accepted position that strong independent directors are essential to good corporate governance. Yet there is relatively little empirical evidence of a positive effect on the value of a company from strong independent directors. It is assumed, but not proved.

    It is widely accepted, and a view I share, that improved diversity in the board room (both in terms of gender diversity and other forms of diversity) is a good thing. It is a good thing from the perspective of society and also for the health and state of our companies. As is the case with independent directors, I believe it makes companies better prepared to deal with long term risks (by discouraging tunnel vision) which are rarely reflected in the share price until they happen.

    I believe though that the focus on the business case for improving diversity may be harming this cause and advocates should present the wider argument rather than pushing the economic angle so much and hoping that the market will do the rest.

    Nick Lindsay is a director of Elemental CoSec a provider of company secretarial services and corporate governance advice in the UK. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking specific legal advice.