GES Brief: Solutions 3/2012
Board Diversity and Corporate Governance
Solution Proposals from the Session at the Global Economic Symposium (GES) 2011 Prepared in collaboration with the Global Summit of Women and the Corporate Women Directors International
GES Brief: Solutions / Board Diversity and Corporate Governance
Content The Challenge
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Solution Proposals 4 Background 7 CWDI Report: Accelerating Board Diversity
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Speakers 9
Disclaimer The proposals summarized in this document are meant to provide insights for action to promote global cooperation in addressing major global problems. These insights have received sizable agreement from the GES panelists, participants and the wider GES community, but they do not reflect the views of any particular panelist, participant or community member. Nor do they reflect the views of any organization to which these individuals belong.
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GES Brief: Solutions / Board Diversity and Corporate Governance
The Challenge The global financial crisis has led to demands for greater transparency in corporate practices. But less attention has been paid to whom the players should be in this new environment. Corporate boards across the world generally have a predominance of male directors. Research shows a lack of diversity in terms of gender, race/ethnicity and international expertise at a time when “global” defines the business climate. How can corporate boards become more reflective of stakeholders that have become more diverse in terms of consumers, workers, communities and shareholders? Is it desirable to change boards’ composition? If such changes are to proceed, by what methods should they be implemented? There are a variety of possibilities, including legislated mandates or quotas for women directors; Corporate Governance Commissions and Stock Exchange requirements on board diversity; and institutional shareholders pushing to nominate and create their own databases of diverse directors. Which of these possibilities, if any, are worth putting into practice and where? How are these measures expected to affect companies’ profitability? How could board diversity be accelerated without legislative mandates? Which measures can be expected to result in more women in senior management? If such changes are made, what impact, if any, will they have on corporate governance?
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GES Brief: Solutions / Board Diversity and Corporate Governance
Solution Proposals GESolution 1 Research and publications on the “business case” should be widely articulated by corporate leaders and advocates of board diversity so that it becomes a more familiar context for women’s inclusion on corporate boards. The premise behind gender diversity on boards is based on market realities: women’s clout as consumers; their labor force participation as almost half the world’s workers; and the dynamic growth of female entrepreneurship. A growing body of cross-country evidence also points to a correlation between the presence of more women in senior management and board positions and improved financial performance, whether measured by return on assets, return on equity, increased share value or enhanced financial oversight. This is the “business case” for gender diversity on boards. McKinsey’s recent report, “Women Matter III,” which surveyed nearly 2,000 C-suite executives in several countries, found that 65% understood and supported the “business case” for women’s inclusion but only 29% actually acted on it. Gender diversity is still seen as a soft issue and not a key part of a company’s business strategy. This finding indicates the value of having industry leaders whose companies already have a critical mass of women directors speak to their peers about their own rationale for having such high percentages of women directors. Business magazines as well as popular media should also be outlets for reinforcing women’s market impact and the growth of companies that understand this connection. Repetition of a message can often create or promote reality—and it is still needed to make the case for women’s inclusion in business leadership roles.
GESolution 2 Use quota laws and enforce full implementation of these laws. Encourage greater transparency on voluntary targets and disclosure through security regulators in those countries where hard quotas are not accepted. Quotas work as Norway has shown in reaching its 40% mandate for women directors in all listed companies. France went from 7.2% in 2004 to 20.1% in 2011 largely on the strength of a quota law that only passed in 2010. And Spain went from 1.9% to 9.2% over the same period, also because of a quota law enacted in 2007. But not all quota laws are the same. Some have punitive measures for noncompliance, as in Norway, but many do not. To reach the stipulated percentage of women directors of 30–40%, there needs to be oversight, assistance to companies searching for qualified female directors, training on corporate governance for newly appointed directors and strict adherence to deadlines.
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GES Brief: Solutions / Board Diversity and Corporate Governance As Norway’s minister has pointed out, there also has to be political will on the part of any government to enforce these mandates. Quota-based countries in Europe have a unique opportunity to change the face of corporate leadership in the next decade. There seems to be a particular aversion to quota systems in the US, but much more acceptance of them as an enabling and necessary mechanism in many other countries. Acceptance of board diversity quotas and targets in countries other than the US and visible successes may very well put indirect pressure on US corporations—especially those doing business globally—to set and achieve voluntary targets. This could be made even more effective (whether voluntarily or by quotas) by requiring more uniform disclosure.
GESolution 3 The networks and registries of accomplished women need to be merged and made known to the network of corporate decision-makers. The often repeated argument that companies cannot find qualified women to fill board seats is always rejected by women business leaders who are long-time members or leaders of professional or business associations. But the reality is that these databases are not known to many search companies let alone executives looking to nominate future directors. There are now many groups in different parts of the world with registries of women who are “boardready” and their numbers are mushrooming. But there is clearly a disconnect between the world of these women achievers and current corporate leadership.
GESolution 4 Establish male “champions of change”—corporate CEOs who can be the public voice for gender diversity on boards and in senior management, and who can even sponsor and mentor women for board placement. Professional search firms conduct much of the recruitment for boards of directors. While they are always willing to provide diverse candidates when requested, they may find it easier to rely on the “old boys’ network” and assume that their clients are not interested in diversity. Furthermore, most director searches start with the specifications of “a recently retired or currently active CEO. This default criterion limits women candidates because there are few women CEOs. But there is ample anecdotal evidence that boards of public companies are highly receptive and willing to look at female candidates. Champions of Change, a strategy developed by Australia’s Human Rights Commission, merits replication, especially in economies like the US or Canada, which are unlikely to introduce mandated quotas for women directors. A small cadre of recognized CEOs, current and former, can create a
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GES Brief: Solutions / Board Diversity and Corporate Governance bridge to their peers in other companies, connecting the community of women business leaders with corporate decision-makers. Australia went a step further and asked these male “champions” to go beyond rhetoric and to promote women into senior management and board level positions in their own organization and across the business community through mentorship and active advocacy on their behalf. The male champions contribute to major research in this area every year and also act as strong public advocates for women’s leadership in the Australian business community. The strategy has been so effective that more male CEOs now wish to be part of this council and the percentage of women directors has gone up in Australia.
GESolution 5 Codes of good corporate governance should include gender diversity as a key component. Since companies look to corporate governance codes to benchmark their own performance, the inclusion of gender diversity language in listing requirements for stock exchanges will reinforce the concept of a diverse board that reflects markets, new skill sets and sources for innovation. There are many countries where no such language exists or where diversity is included but without any reference to gender. Finland credits the strongly worded gender diversity component in its governance code for the increase in the percentage of women directors even without a quota in place. Australia’s stringent listing requirements regarding gender diversity have already yielded surprising commitments from companies with targets of 30–40% women in their senior staff or boards.
GESolution 6 Executive search firms need to broaden their pool of candidates for board nominations and include women in any list of recommendations they give to clients. They should publicize this as an advantage of the services they offer. There is a lack of visibility of qualified and interested women for boards. This makes both professional and self-directed searches for diverse candidates for boards more time-consuming and expensive. It is unrealistic to expect professional search firms to provide such a registry as it is a valuable asset to their practices. But other groups, such as the company director’s professional organizations, the “champions of change” and/or other women’s advocacy groups could take on this task. Search firms are no more connected to women’s leadership networks than corporate leaders. Heidrick’s commitment to having a woman or two on any list they send to clients must go a step further and educate nominations committees on the readiness of their women candidates to assume board directorships. Especially in countries with quotas, search firms stand to profit if they are resourceful in connecting with the databases on women leaders that already exist. –6–
GES Brief: Solutions / Board Diversity and Corporate Governance
Background Women represent approximately 50% of the world’s population, but they are woefully underrepresented on corporate boards in most countries. This has remained stubbornly true even though the numbers and percentages of women graduating with college degrees and entering the professional workforce have increased steadily and significantly over recent decades. Solutions based on quotas have succeeded in raising the numbers in Scandinavia and some other European countries, but they have run into stiff opposition in the US, the world’s largest economy. How can companies around the world, especially those in developed economies, be encouraged to change things? The conventional answer is a tightened regulatory framework that provides greater accountability and transparency in financial transactions—“new rules but the same old players.” Advocates of board diversity posit another answer: changed corporate leadership that is more inclusive to bring in new voices, perspectives and ideas. One hindrance to the advancement of women on boards is the lack of role models and female mentors as directors and CEOs. Even where there are women role models, they may be reluctant to help other women advance because of their own experiences without help and/or philosophical beliefs against favoritism or affirmative action. There are simply not enough women for them to be the only advocates. There is evidence in some countries and sectors that male role models can be equally effective in mentoring women and they are open to the task. According to the CDWI 2011 report, the four countries representing the Americas in the Fortune Global 200 listing—the US, Mexico, Brazil, and Venezuela—surpassed Europe and Asia-Pacific for the highest regional percentage at 20.8% of women board members, though the US accounts for 59 of the 66 largest companies in the region. Europe’s 78 companies from 13 countries averaged 15.3% women board directors. The region currently holding down the overall average for the Fortune Global 200 is Asia whose 56 companies from eight countries have an average percentage of women board directors at just 5%. Despite quotas and progressive policies to promote corporate diversity in many countries patriarchy and cultural stereotypes are still impeding women’s progress in the workplace, particularly senior and decision-making levels. The gender gap emanating from centuries of exclusion and gender inequalities is not only disadvantaging women, but compromising competitiveness of their countries. Closing the gender gap may provide a basis for a prosperous and competitive society. While gaps are closing between women and men’s health and education, economic participation gaps are lagging behind. The development of a Women Economic Empowerment Index could address the specific impediments to participation, develop indices for tracking and set sector targets linked to pay equity and competitiveness. It would move beyond current national and global instruments and frameworks. It however should build on existing work and frameworks, for example of the formations like the Corporate Women Directors International.
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GES Brief: Solutions / Board Diversity and Corporate Governance
CWDI Report: Accelerating Board Diversity The recommendations posited in this publication are based on research conducted by Corporate Women Directors International (CWDI), the research arm of the Global Summit of Women, on “Accelerating Board Diversity” released at the World Bank on October 2011. The CWDI report consolidated for the first time existing data on women directors in 51 countries from 26 different sources which included stock exchanges, management consulting firms, investment funds, academia, business associations and nonprofit groups. The result provided a first-ever global snapshot of where women stand on the boards of leading companies across the globe. What the ‘snapshot’ revealed was not surprising—the low percentage of women as board directors for the majority of the countries covered in the study. Was anything being done to address gender diversity on corporate boards? Indeed there was plenty. The CWDI Report on “Accelerating Board Diversity” also brought together for the first time initiatives by governments, corporate governance commissions, researchers and advocates in different parts of the world to increase the number of women directors. These strategies may echo each other at times, but have been developed separately in various countries. The report chronicles Europe’s groundbreaking leadership in the use of legislative mandates or quotas in requiring a certain percentage of board seats to be allocated for women. Led by Norway’s success in implementing this initiative, the report covered other countries’ replication of quotas, both in terms of listed as well as state-owned companies. A private sector strategy to include gender diversity language in different countries’ corporate governance codes is also analyzed in the CWDI report. Lastly, the ‘business case’ strategy based on research conducted from countries as diverse as the U.S., Turkey and Vietnam provided global evidence from varied sources of a strong correlation between board diversity and better financial performance of any company. For more information on the CWDI Report on “Accelerating Board Diversity” or to order a copy, please visit www.globewomen.org or contact CWDI at cwdi@globewomen.com.
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GES Brief: Solutions / Board Diversity and Corporate Governance
Speakers
Elizabeth Broderick
Federal Sex Discrimination Commissioner, Australian Human Rights Commission
Richard Evans
CEO (retd.), Alcan Inc and Rio Tinto Alcan
Barbara Krumsiek
President, CEO and Chair, Calvert Investment, Inc.; Director and Chair, Acacia Life Insurance Company
Vuyokazi Felicity Mahlati
Chairperson of the Board, South African Post Office
Irene Natividad President, Global Summit of Women
Jane Shaw Chairperson of the Board of Directors, Intel Corporation
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Kiel Institute
for the World Economy
in cooperation with
GES Brief: Solutions 3/2012 Kiel Institute for the World Economy Hindenburgufer 66, D-24105 Kiel Phone: +49(431)8814-1 Telefax: +49(431)85853 www.ifw-kiel.de www.global-economic-symposium.org info@global-economic-symposium.org Design and Layout: www.christian-ulrich.de, Kerstin Stark, Birgit Wolfrath Editors Alessio J.G. Brown and Dennis J. Snower, in cooperation with Irene Natividad Pictures Cover
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© 2012 by the Kiel Institute for the World Economy All rights reserved. Reproductions and quotations may be made if the correct attribution to this publication is made (GES Brief: Solutions 3/2012, edited by Alessio J.G. Brown and Dennis J. Snower, in cooperation with Irene Natividad, Kiel, Germany; Kiel Institute for the World Economy).