Is Self Regulation Effective for Achieving Gender Balance?

By Melissa J. Anderson (New York City)

Public interest in the topic of women in leadership has increased significantly in the past year in Europe – thanks, in part, to the UK’s Lord Davies report published in February, as well as EU Justice Commissioner Viviane Reding’s Women on Boards challenge issued in March.

Reding urged publicly listed companies to make a commitment to increase the representation of women on corporate boards to 30% by 2015 and 40% by 2020. She said, “For the next 12 months, I want to give self-regulation a last chance. I would like companies to be creative so that regulators do not have to become creative.”

The deadline for companies in the EU to set self-regulatory gender initiatives is International Women’s Day next year (March 8, 2012). As the deadline rapidly approaches with few companies making real progress, some countries (such as the UK and Germany) have stepped up their efforts to encourage boardroom gender diversity progress.

Public interest may be driving momentum when it comes to government intervention on the issue of boardroom gender diversity. But without real consequences for a failure to make progress, are these new rules anything more than a masquerade?

One Step Closer to Gender Quotas in the UK

According to a Grant Thornton review published in December of last year, companies in the UK largely ignored the issue leadership gender diversity until very recently. The report showed that 72% of FTSE 350 companies disregarded the issue of gender diversity in their annual reports, failing to disclose any information on their boardroom gender composition.

But that is about to change.

The Financial Reporting Council has mandated that public companies in the UK will have to report annually on their boardroom diversity policy, as well as set goals for improving boardroom gender balance. Additionally, board diversity will be a factor in when evaluating board effectiveness – beginning with financial years that start on or after October 1, 2012.

Baroness Hogg, chairman of the FRC, explained that the new regulation is a means for British companies to avoid the gender quotas that some countries across Europe have implemented. She said:

“We believe this gives a further opportunity to show that Britain’s ‘comply or explain’, Code-based approach can deliver a flexible and rapid response and is therefore preferable to detailed legal regulation, and we urge companies to demonstrate this as quickly as possible.”

The new rules come after last month’s Cranfield School of Management report that showed the self-regulatory approach was not really working. According the Cranfield report, the percentage of women on boards in the UK has only grown from 12.5 percent to 14.2 percent since February. Additionally, only 22.5 percent of new appointments have gone to women – less than the 33 percent of new appointments that Davies suggested to achieve the 25 percent target by 2015.

The move toward diversity reporting shows that the FRC believes the self-regulatory approach isn’t working, or at least isn’t working fast enough. Time will tell whether reporting on gender diversity targets will compel companies to make more significant progress and avoid a quota-system.

“Flexi-Quotas” Agreed by German Companies

Last Monday, Germany’s top 30 companies published individual gender targets for the next five years. For example, Allianz, Commerzbank, and Deutsche Telekom promised to reach the 30 percent mark by 2015. Adidas said it plans to increase the percentage of women to between 32 and 35 percent by 2015. BMW plans to double its percentage of women to between 15 and 17 percent by 2020.

Germany has been wrangling with the idea of gender quotas in recent months, and in March, the country’s family affairs minister Kristina Schroeder said she supported a “flexi-quota.” She told the Guardian, “Quotas are always a supporting crutch, but sometimes they are necessary, and that’s why I’m suggesting a flexible quota, which the companies agree among themselves, because that’s the way they take much more responsibility for the issue.”

The move by the DAX 30 to set individual, voluntary targets plays into the flexi-quota idea. In many ways it makes sense – different companies are in different places on the diversity journey.

But Labor Minister Ursula von der Leyen is taking a harder line. She said the efforts will fall short of the progress that is needed to impact board governance. She said, “The fact is that in the year 2011, we have 15 percent women represented on supervisory boards, and 3.7 percent in the executive boards.”

She continued, “That is not acceptable for an economy that competes on the global workplace such as Germany. We’ve got to improve.”