Is boardroom diversity improving an organisation’s governance performance?

Diverse boardroom meeting

We are beginning to see increasing focus in the media regarding the presence of women in corporate boards due to the recent studies that have shown the positive impact it is having on a board’s effectiveness.

As it is now one of the most passionately debated issues in corporate governance, we wanted to step away from our usual blog posts to delve more into the issue.

Why has diversity become such a talking point?

The topic of corporate diversity arises from the fact there is a shockingly low, even if increasing, number of female directors on boards around the world. While it is well understood that gender discrimination is illegal, in the corporate world it is still a prominent problem that women continue to encounter invisible barriers when trying to gain boardroom position.

Examining the ‘glass ceiling’

Females in the corporate world commonly refer to this issue as hitting the ‘glass ceiling’ which is a metaphor initially raised by the Wall Street Journal in 1986 when they ran a report referring to the ‘invisible barrier that prevents women from reaching top positions in business’.

The ‘glass ceiling’ metaphor stemmed from the historic perception of the roles that women held in society. In a bygone age, women were perceived to have lower ambitions than men and poor self-confidence which meant ultimately they possessed poor leadership skills. This meant that they were confronted with the so called ‘glass ceiling’ that prevented them from reaching the visible, but unattainable, higher levels of corporate business.

30 years on from Wall Street Journal’s report, and we are still seeing similar reports every week on how it is the most frequently referenced discriminatory barrier that women face in the corporate sector.

Making the case for women on boards

The growing business case for greater representation of females in the boardroom is now primarily based on the growing principle that women can enhance a board and its governance, which ultimately can be reflected in improved financial performance.

According to a new study by the Peterson Institute, that looked at 22,000 publicly traded companies across 91 countries, having women in the ‘highest corporate offices’ correlated with increased profitability. Stephen Howe, chairman of Ernst & Young, said in a press release after the study was published:

“The research demonstrates that while increasing the number of women directors and CEOs is important, growing the percentage of female leaders in the C-suite would likely benefit the bottom line even more.”

The research found that companies with at least 30 percent of women in their senior c-suite management positions were around 15 percent more profitable than companies without women in top executive roles.

These studies don’t intend to show that that an individual woman will outperform an individual man in leadership roles. It serves to just that women will complement the existing male boardrooms with a more diverse range of skills— and that companies with male dominated boards won’t benefit from those skills.

The UK is appearing to take action.

The UK does not currently have a minimum legal quota for females in boardroom positions, but the Government did commission former Standard Chartered chief executive Lord Davies in 2011 to examine “the obstacles that prevent more women from reaching senior positions in business”.

At the end of 2015 Lord Davies reported that, after five years, his target of increasing the representation of women in director roles in the FTSE100 to 25% had been achieved.

In 2011, 12.5% of FTSE 100 directors were female which shows the great progress made in a short period of time. Lord Davies has now set his target to 33% by 2020.

Are corporate efforts all just a PR initiative?

The improvements in diversity made by the Lord Davies initiative should be highlighted and celebrated but is important to see what lies beneath those figures paraded in media headlines. Over 90% of the new female directors that were appointed at the FTSE 100 companies since 2011, have actually been non-executive roles. Non-executives are important roles in governance, but it is still different to being on the executive board contributing to the company’s day to day strategic direction.

This means that there is a danger that corporate companies may be recruiting female directors as a token gesture aimed at boosting their corporate reputation, rather than a genuine desire to improve their boardroom performance.

Paying close attention to Norway

Since 2008, Norway has had a compulsory quota for females to represent 40% of boardroom positions at publicly traded companies.

In 2015 Aaron A. Dhir released the book ‘Challenging Boardroom Homogeneity’ which investigated how the quota has been received in Norway. According to the study conducted for the book, the heterogeneity developed by the quotas has given Norway’s boardrooms a publically accepted boost to their overall corporate governance.

The director’s interviewed by Aaron, believed that one of the outcomes of introduction of women to their boardroom is that it appears to of improved their ability to ‘thoroughly deliberate and evaluate risks’.

How the Dutch are tackling the diversity issue

In the Netherlands, companies that have no female on their boards are being publicly named and shamed online on a website called “Deze mannen kunnen geen vrouw krijgen” – which translates as “these men can’t get a woman”

The website was setup to list corporate companies in the Netherlands that have at least five directors but no women. The 18 companies listed, which are displayed alongside the names and pictures of their all male senior leadership team, include Accell (owner of bicycle brand Raleigh) and the football club Ajax.

The website states that if companies want to be removed from the website, they must appoint a female director as soon as possible and email the website creator.

Naming and shaming should not be the way to tackle diversity issues as it will only lead to organisations giving females ‘token’ boardroom seats. An increase in female representation should be down to the consideration that companies shouldn’t run the risk of suffering inferior performance as they fail to make use of the intellectual and social capital that women offer.

We like to keep up with all issues regarding governance. Make sure to follow us on Twitter @BoardPacks for our daily updates.