Making female board participation make sense (with dollars and cents)

Photo courtesy of Sam Churchill on Flickr

Photo courtesy of Sam Churchill on Flickr

Rob Swystun, Pristine Advisers

This blog has spoken before about how women can get a seat on a board, but this is the why more women should sit on company boards.

Now, you might expect something along the lines of blah blah blah equality, but that’s akin to talking in a foreign language for most bottom-line focused company execs. So, instead, let’s talk in their mother tongue: money.

According to data gathered by the Credit Suisse Research Institute in 2012 and reported in an editorial on Bloomberg View, the average return on equity was higher for six consecutive years for companies that had at least one female board member. (The data came from 2,360 companies worldwide.)

So, if companies that have at least one female board member seem to consistently outperform their female-less counterparts, why aren’t all companies scrambling to put ladies on their boards?

With those kind of numbers, you’d think that women would make up more than just 18% among the Standard & Poor’s 500 companies (according to the Spencer Stuart Board Index 2013), or 14% in Europe (according to EUbusiness.com). Over in Silicon Valley, 43% of the top 150 companies (by revenue) have exactly zero female directors.

How to get more women on board

Demographics

One possible solution to the issue of lack of ladies is just to give it time. Female graduation rates in most advanced economies are now higher than men’s, which means that more women should theoretically find their way into board rooms and into executive positions.

The problem with this possible solution is that it is maddeningly slow … oh, and it likely won’t work anyway. That’s because women will still likely be underrepresented by 2035.

Using Silicon Valley as an example again:

  • Just 20% of computer-science grads are women, down from 37% in 1985.
  • Only 27% of computer jobs in 2011 were held by women, down from 37% in 1990.

US Census Bureau numbers say that even though women make up approximately half the workforce, they’re not choosing careers in science, technology, engineering and math (STEM).

Looks like demographics alone aren’t going to help.

Government Regulation

Aside from the obvious outcries of “government meddling” that state-imposed quotas would conjure, they might do more harm than good.

We don’t need to speculate. We can just look at Norway, where there has been a quota in place since 2008 saying that at least 40% of board members in a public company need to be female. Things didn’t work out so well.

First off, half the companies on the Oslo Stock Exchange just straight up delisted to avoid the quota.

Secondly, the companies that complied were left scrambling to find board members who were both qualified and female to fill the quota. However, with high demand and low supply, many companies ended up ousting more qualified and senior male board members and replacing them with less qualified female board members.

Amy Dittmar, associate professor of finance at the University of Michigan’s Ross School of Business and her colleague Kenneth Ahern studied the results of the decision in 2011 and found that the value of Norwegian companies that complied with the quota dropped. When a board had a 10% increase in the number of women, the value of the company dropped. The bigger the change to the structure of the board, the bigger the fall in returns.

They attributed this to the aforementioned jettisoning of qualified board members in favor of less qualified members.

“The constraint imposed by the 40% women quota-led firms to recruit women board members that were younger and had different career experiences than the existing directors,” Dittmar explained. “It is reasonable to suggest that these changes led to decreases in firm value because new directors did not have the same monitoring or advising capabilities of the other directors before the imposed change. When firms were free to choose directors before the rule, they tended to choose women that were similar to men directors. This is consistent with the idea that the large demand and small supply for women directors after the adoption of the 40% quota forced firms to choose directors that they would not have chosen otherwise.”

It seems that companies just have to see for themselves how a board with female members can help their company. Not to say that having more female members will automatically rake in more profit, but research published in the journal PLOS One has shown that problem solving groups of mixed genders tend to think more critically and have better group dynamics than groups made up of just a single gender.

Also, when looking for female board members to join, companies may have to step outside their comfort zones and appoint people from other sectors, leading to further diversity of the board. With those dwindling female STEM graduates, they’ll be harder to come by in the future. So, companies that would normally appoint people with that kind of background might find themselves expanding their talent search to people with other backgrounds.

The answer may lie in non-mandated government pressure. The governments of Canada and the United Kingdom are trying to gently nudge companies toward more gender diversity through non-binding government action like Canada’s Advisory Council for Promoting Women on Boards, which recommends publicly-traded companies set both goals and timelines for increased female involvement. It also recommend they give progress updates about female board involvement in their financial reports and explain why they’re succeeding or lagging behind. However, no quotas have been or will be put in place there.

The aim in both Canada and the UK is to have 30% female representation on boards by 2015.

While equality is always a noble goal to strive for, attaining it might have to be done by a more circuitous route, in this case by talking dollars and cents. Talk in people’s language, make it easy for them to understand how it betters their lives (or the lives of their companies in this case), and they’re more likely to take up the cause.

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2 responses to “Making female board participation make sense (with dollars and cents)

  1. Pingback: Boardroom diversity a top item for companies in 2016 |·

  2. Pingback: Boardroom diversity a top item for companies in 2016 |·

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