Guest Contribution by Sandeep Gopalan
Over 60% of college degree holders in the US are women. The same is true at the postgraduate level. Yet just 16.9% of board positions on companies listed in the Fortune 500 were held by women in 2013. The numbers look even more dismal for minority women: a mere 3.2% of board positions. The ten-year rate of growth in women’s representation in the US is a trivial five percent – lagging corresponding figures in Europe by over eight percent. Why this anomaly? Don’t women make good directors? Is law the answer? We examine these questions in a forthcoming article in the San Diego Law Review.
The evidence provides some support for the case for more women on the board. Research conducted by Catalyst shows that companies with more female board members have a 53% higher return on equity, 42% higher return on sales and 66% higher return on invested capital. An influential study by scholars Adams and Ferreira indicates that board diversity might add value for companies that do not have strong monitoring of management. Other studies have suggested a positive relationship between board diversity and more control over CEO pay by disrupting the selection of board members likely to support high pay.
Research also shows that women have a positive ‘influence on decision making and leadership styles,’ and play a role in ‘ensuring better boardroom behaviour.’ This strand of research focuses on attributes where women are said to have a comparative advantage over men – qualities like communicativeness, detail focus, risk-aversion and intensive monitoring – and matches them with the ideal qualities for a board member.
In addition to the business case for increasing the number of women in board positions, the low levels of representation suggest problems in terms of denial of opportunity and waste of talent. Therefore, a number of countries have implemented some form of gender quota for corporate boards in recent years, including Norway, Belgium, France, Iceland, India, Italy, Malaysia, Netherlands, Slovenia, and Spain. Unsurprisingly legal mandates have been more potent than voluntary initiatives. For instance, France has witnessed an increase in female board representation on its top 200 companies from 7.2% ten years ago to about 30% today thanks to a quota law passed in 2010. The corresponding data for Italy – which passed a quota law in 2011 – is even more incredible: rising from 1.8% in 2004 to almost 26% at present.
Unlike these countries, the US does not have a quota law. Rather, under the Securities and Exchange Commission’s “Proxy Disclosure Enhancements” rules, companies are required to disclose ‘whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominees for director.’ Crucially, the SEC does not mandate that companies consider diversity in appointments or that they have a policy, only that they disclose whether they do so or not. It is not surprising that progress has been very slow and the SEC’s disclosure provision appears to be largely superfluous. One study of Fortune 50 companies documented that sixty percent of companies were not in compliance with the SEC rules.
Should the US follow other countries and enact a quota law to achieve parity?
In our article entitled An Agency Theoretical Approach to Corporate Board Diversity, we argue against a quota and put forward a shareholder empowerment based model. Specifically, we employ agency theory and argue that congruent with the stated goals of corporate governance law to facilitate more effective monitoring of management by shareholders, the SEC diversity disclosure rules should make way for a law mandating a binding shareholder vote on diversity. This vote should be held annually and give shareholders an opportunity to vote on whether the company ought to consider diversity in board appointments, adopt a diversity policy, specify diversity targets, and enforce such targets by internal mechanisms such as links to executive pay. If board diversity is valuable to shareholders, such resolutions will be adopted and women’s representation will increase.
We believe that such a flexible approach is superior to a quota because it allows each company to adopt a solution best suited to its unique situation. Companies with a large percentage of women consumers or employees might have a higher proportion of women on the board than those without these features. Equally, women who are appointed pursuant to a shareholder vote are likely to feel more empowered to discharge their responsibilities in contrast to those appointed due to a legal quota. Putting the power in the hands of shareholders may be the best step toward shattering the glass ceiling.
Guest advice and opinions are not necessarily those of The Glass Hammer