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by Lisa Johnson, Managing Director
California has become the first U.S. state to mandate quotas for female representation on company boards. A new law requires any publicly traded company headquartered in the state to have at least one woman on its board by the end of 2019 and, depending on a board’s number of directors, up to three women by the end of 2021.
If the law withstands pending legal challenges, other U.S. states, such as Illinois, Colorado, and Pennsylvania, that already have non-binding diversity resolutions, are expected to pass similar mandates.
The question is, is this kind of mandate helpful? Not just for women, but for the boards and the organizations who have to comply with them?
Globally, board diversity mandates are not new. Norway was the first country to enforce a board gender quota in 2008, when it required 40 percent female representation. Ten years later, women hold 42 percent of board seats in Norway.
Other countries followed. Iceland, France, and Spain also mandate 40 percent targets. Belgium, Italy, Germany, and the Netherlands adopted lesser quotas. Together, these countries have some the world’s highest shares of female directors.
In each of these countries, research shows men and women strongly resisted mandatory quotas at the outset, believing they would lead to selection purely on gender and the appointment of underqualified directors. Even so, more countries are adopting gender diversity quotas and goals. Today, Austria, Iceland, India, Italy, Malaysia, Sweden, the UK, and others have also set either mandatory quotas or voluntary goals for female representation on boards.
Diversity Makes Good Business Sense
We embrace and promote the need for diversity of skill and experience in business. A beverage company knows it can’t develop and manufacture a new line of functional drinks without relying on product scientists, marketing professionals, quality control experts, and other experts.
The same logic applies to other forms of diversity. The most successful boards I’ve served on included a diverse group of people with respect to business expertise and gender, race, ethnicity, age, and education. People who are unlike one another naturally bring unique proficiencies and understanding to the mission of the organization.
Board diversity appears to be good for the bottom line. One study of 2,360 companies globally over six years showed that those with one or more women on the board delivered higher average returns on equity, lower net debt to equity, and better average growth (Credit Suisse Research Institute).
Investors note the correlation between board diversity and improved performance and are urging companies to improve female representation. Many of these investors, looking for companies capable of attracting young talent, also believe leadership diversity resonates with younger generations of consumers and investors.
Should Diversity Be Mandated?
Many executives, men and women, have legitimate concerns over mandates:
Will highly qualified women want to serve on boards mandated to have a female director?
Will companies be forced to select unqualified candidates to avoid penalties?
Will enforced change upset board dynamics, and lower the performance of well-functioning boards?
Why focus on gender over other forms of diversity?
If quotas for other diversity categories come next, how will boards meet quotas, expertise needs, director independence and other requirements?
Concerns like these help explain why voluntary progress is slow. Even though board diversity makes sense and appears beneficial for shareholders, women remain underrepresented at the top of corporations globally, especially in countries with no quotas. McKinsey & Company data shows 78 percent of UK companies’ senior leadership teams do not reflect the demographic makeup of the country’s labor force and population. The number for Brazil is 91 percent. In the US, it’s 97 percent. If the new California bill is not enacted, studies say it could take as long as 40 years to achieve gender parity on boards in the state.
Benefits of Mandates
An important benefit of mandates is that they compel companies and shareholders to focus on board composition and sharpen recruitment processes. Instead of relying on networking, companies must take a more professional and formal approach to board selection. For this reason, the answer to our original question is, “Diversity mandates can make a positive difference.”
One study found that when board diversity mandates were introduced in Norway, “the entire recruitment process of boards was sharpened. The requirements were clarified, the election committee’s responsibility was acknowledged. And the focus on the composition of the boards in general was improved.” (study by The Paul Merage School of Business, University of California, Irvine).
Best Practices for Board Selection and Composition
As a best practice, the gender diversity of a board should mirror the composition of its employees and/or customers. A diversified board with the variety of perspectives that come from people with different age, experience, and background, as well as ethnicity, race, and gender promotes new ideas regarding leadership, problem solving, and organization dynamics.
The push for board diversity is now part of the permanent landscape. At Kincannon & Reed, we see more and more organizations seeking qualified women for their boards and C-level leadership teams. Boards can and should focus on composition and recruitment in the absence of quotas, and they’re doing so to a greater extent than ever before. A lack of diversity is reason enough for boards to reassess their structure.
Meaningful change in board composition, dynamics, and culture takes time and commitment. With or without mandates, appreciating the benefits of diversity, and setting some real goals for achieving it, is the only way to ensure it exists at the board level, within leadership teams, and throughout our organizations.