Should Quotas Exist in the Boardroom?

The percentage of women on boards of S&P 1500 companies barely budged from 12.1 percent in 2009 to 12.6 percent today, according to a survey released in March 2012 by GMI Ratings, a corporate governance adviser to big investors. The U.S. is 11th among industrialized nations, trailing countries such as Norway (36 percent), Sweden (26 percent), and France (17 percent), GMI found. “This is just moving at a glacial pace in the U.S.,” says Paul Hodgson, chief research analyst at GMI, which is trying to boost the number of female board members.

There’s nearly as wide a gender gap when it comes to diagnosing the roots of the problem. A solid 45 percent of male directors say the reason that the number of women around the table has barely budged is a lack of qualified candidates. Only 18 percent of female board members agree, according to a survey released last month by recruiter Heidrick & Struggles, Harvard University, and the WomenCorporateDirectors organization (WCD survey).

Frustration over the slow gains pushed 51 percent of the women directors in the WCD survey to say they support mandates such as the gender quotas and corporate governance codes that have been approved in at least 10 European nations, including France, Norway, and Spain. Other directors, including Anne Mulcahy, the former Xerox chief executive officer and a director at Johnson & Johnson, Target, and Washington Post, argue that term limits are needed for directors to free up space for women. Last year among Fortune 500 companies, only 336 board seats changed hands out of 5,300 positions. It is true that with term limits the pool would inevitably be more diverse.

Only 25 percent of male directors support quotas to change the disparity, according to the 2012 WCD survey. The survey’s authors say many women blame the fact that, in business, “traditional networks tend to be male-oriented.” Rather than a talent issue, “it’s more the system,” explains Catherine Allen, who sits on three boards and the governance committees. “For those boards that have a token woman or no women on the board, they may look only within their own friends. Part of it is being a little more creative.”

It’s a different story where women hold the reins. The 15 S&P 500 companies led by female CEOs last year had about 33 percent women directors vs. the 16 percent average for companies in the group led by male CEOs.

Norway led European nations in 2003 in legislating that at least 40 percent of corporate board seats be filled by women. Spain followed in 2007 with a law requiring 40 percent female representation on large company boards by 2015, Iceland’s 40 percent quota kicks in next year, and France will impose the same minimum for big companies by 2017.

Yet some researchers say Norway’s experience casts doubt on the efficacy of such mandates. “The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performances, consistent with less capable boards,” found a 2011 study by researchers at the University of Southern California’s Marshall School of Business and the University of Michigan’s Stephen M. Ross School of Business.

To me, the time period has been too short since the new rules went into effect and the global economic slowdown may be influencing the results to draw any conclusions about female board-member efficiency.

On many boards, creating an inclusive culture for the organization has not been a point of focus while  the increased importance of diversity to organizational success is compelling boards to make it part of their strategic focus. Unfortunately, many boards lack awareness of best practices in this area and are uncertain about how to integrate diversity and inclusiveness initiatives into their organization’s long-term strategy.

Not surprisingly, twice as many women than men (51% v. 25%) agree that quotas are an effective tool for increasing diversity in the boardroom.

I see the problem as one of the failure of traditionally-dominated male boards to train future board members to serve effectively. An effective board member needs more than experience, and experience can be used as a barrier to entry for women. Board members today need to be trained in laws and regulations that create compliance obligations by management and boards of directors.

Just in the last ten years two game-changing pieces of legislation has altered the landscape for corporations. The Sarbanes-Oxley Act that was passed in 2002 established new obligations for board members and oversight responsibilities were ratcheted up several steps, along with the possibility of more lawsuits against board members for failing to carry out their fiduciary obligations. The Dodd-Frank Financial Reform Act that was passed in 2010 created a myriad of new regulations board members need to know about as well as whistle-blowing obligations of internal accountants and auditors.

If good workers can be trained then good board members can be trained. It doesn’t matter what is their race, nationality, or gender. If they possess the skills needed for the job, experience should not be a barrier to enter. If they are leadership material, experience should not be a barrier. If they can create a culture of compliance and ethics, experience should not be a barrier. Some may say you gain these abilities through experience. Yes, experience helps, but what helps more is the sensitivity to reporting obligations and establishing an ethical tone at the top that creates a culture of compliance and ethical behavior that draws talented individuals to the organization.

Blog posted by Steven Mintz, aka Ethics Sage, on December 18, 2012