Corporate Governance

Gender Diversity on the Board: The US Falls Further Behind (And Why We Need Shareholder Access) (Part 4)

By J Robert Brown Jr.

What are some of the observations made in the report on gender diversity sponsored by the British Government?  First, its good for business.

• This business case [of more women] is backed by a growing body of evidence. Research has shown that strong stock market growth among European companies is most likely to occur where there is a higher proportion of women in senior management teams. Companies with more women on their boards were found to outperform their rivals with a 42% higher return in sales, 66% higher return on invested capital and 53% higher return on equity.

Moreover, it increases the diversity of views on the board.  In other words, it combats problems associated with "mirror image" boards.  As the report noted:

• Boards are often criticised for having similar board members, with similar backgrounds, education and networks. Such homogeneity among directors is more likely to produce ‘group-think'. Women bring different perspectives and voices to the table, to the debate and to the decisions. Studies, stemming from Solomon Asch's original work on conformity to majority opinion, have shown that three women are required to change boardroom dynamics, allowing them to become more vocal and their voices to be heard. Further studies have shown that the environment for women in senior roles improves once about a third of leaders at that level are female, and that a' critical mass' of 30% or more women at board level or in senior management produces the best financial results.

Women can improve the quality and independence of the board.

• There is a body of research which demonstrates how the appointment of female directors can improve a company's performance. Female directors enhance board independence. Better decision-making is assumed to occur as a result of directors having a range of experiences and backgrounds. Women take their non-executive director roles more seriously, preparing more conscientiously for meetings. Women ask the awkward questions more often, decisions are less likely to be nodded through and so are likely to be better.

Then there's the notion that boards are excluding half of the most capable and talented people who could serve on the board.

• Around the world, women have become the new majority in the highly qualified talent pool. In Europe and the USA, women account for approximately six out of every ten university graduates and in the UK women represent almost half of the labour force. These are trends that British business cannot ignore. The failure of any business or economy to maximise the talents of all its people will result in below-par performance. Tapping into the under-utilised pool of female talent at board level is vital if British companies are to remain competitive and respond to rapidly changing expectations and market demands. British corporate competitiveness is at stake.

And finally, greater representation of women can positively effect the decision making process.

• A Canadian study entitled ‘Not just the right thing, but the bright thing', looking at public, not-for-profit and private boards, found that boards with three or more women on them showed very different governance behaviours to those with all-male boards. The more gender-balanced boards were more likely to identify criteria for measuring strategy, monitor its implementation, follow conflict of interest guidelines and adhere to a code of conduct. They were more likely to ensure better communication and focus on additional non-financial performance measures, such as employee and customer satisfaction, diversity and corporate social responsibility. They were also more likely to have new director induction programmes and closer monitoring of board accountability and authority.

So what will Britain do?  It is in the cluster of countries that are more likely to defer to the market so the government is not proposing that companies should be compelled to include additional women.  We will note the study's recommendations in the next post.

Full post as published by The Race to the Bottom on March 08, 2011 (boomark / email).