Corporate Governance

Women on the Board and Market Failure (Part 1)

By J Robert Brown Jr.

The Economist is a superb magazine, written in an erudite fashion with flashed of dry wit.  But as the recent article on women in the boardroom illustrates, sometimes even very smart people can get things entirely wrong. 

As we have long noted on this Blog, women are terribly underrepresented in the boardroom.  Women consist of about 15% of the directors in public companies, a percentage that largely translates into one per board. More specifically, according to data developed by Doug Branson for his book, No Seat at the Table: How Corporate Governance and Law Keep Women Out of the Boardroom, in 2005, 59 companies in the Fortune 500 had no women directors and 183 had exactly one. 

One way to look at the percentage is to conclude that it is what the market has dictated.  But as has become increasingly clear, when it comes to members of the board of directors, there is no market.  Shareholders have no real say in the election of directors.  Nomination by the board is tantamount to election.  Thus, the absence of diversity is explained by board attitudes, not those of the market.  

Some countries have tried to address the gender imbalance through legislation.  Spain and Norway have passed laws requiring at least 40% of both genders on the board.  Effectively, this means that companies must find enough qualified women to reach this threshold.  As we have discussed on this Blog, companies in Norway appear to be doing nicely, notwithstanding the mandatory gender shift in the boardroom.  And, as the Economist reports, other countries (France, Italy and The Netherlands) are considering a similar step, as are, apparently, Belgium, Britain, Germany and Sweden considering legislation.  In other words, the approach is catching on. 

The trend puts a generally free market magazine like the Economist in a tough bind.  There is no reason to believe that more women on boards will be harmful (quite the reverse; the evidence is that boards with more women "coincide with superior corporate performance") and plenty of reasons to believe that more women on boards will be helpful (more diverse views, a different approach to issues, etc).  Yet laws mandating specified percentages of women go against the grain of those who rely on the market and eschew government intervention (a population that has fallen off given the most recent financial crisis).  

So how does the Economist support its inevitable objection to this type of legislation?  We'll discuss it in the next post.

Full post as published by The Race to the Bottom on March 24, 2010 (boomark / email).