Almost every
day there are reports in the media about progress in increasing the number of
women on corporate boards. The accepted wisdom now seems to be that every board
should include at least one female director, ideally more: “one is a token, two
is a presence, three is a voice” is the catchy mantra which has been coined. The
only debatable issue mentioned is how this can best be achieved: voluntarily or
by mandatory quotas.
Evidence
cited for or against the use of quotas draws on a very limited range of
academic research, most of which describes the experience of countries where
quotas have been introduced. These countries vary significantly politically,
culturally and economically: their reasons for quota introduction vary
similarly. Such differences are rarely recognised within the discussion. Perhaps
surprisingly, no reference is ever made to research undertaken in the political
sphere: gender equality in elected office has been a concern for far longer
than in business, and political scientists are careful in their analyses to
distinguish between political, social and economic arguments.
Such
distinctions have not been obvious in the discussions about board gender
diversity in the UK, which seems to rest on the assertion that the “business
case” for gender diversity has been proven, ignoring any other basis for
argument. Although there is some
evidence that suggests a correlation between gender diverse boards and effective
performance, this is not proof of causality. Isolating specific features of
board composition from other factors influencing corporate performance is an
ongoing challenge for corporate governance scholars and most research is inevitably
equivocal in its conclusions. However, policy makers tend to cite work that
appears to support their position, conveniently ignoring the caveats which it often
contains.
But let us
take a step back and consider a more fundamental question: should board
composition ever be mandated? In the UK, the first pressure to influence board
composition came in 1992 in the Cadbury Committee’s proposal that boards should
appoint specified numbers of independent non-executive directors (NEDs). This
was seen as a way to strengthen the monitoring function of boards, particularly
in regard to financial reporting, but there was little evidence available at
the time to show that NEDs were effective monitors.[1]
Indeed, research in the US, where boards were already predominantly
non-executive, had questioned this possibility and concluded that, while a
mixed board structure was generally appropriate, mandating specific aspects of
board composition was not, due to wide variations between companies and
industries.
Initially,
there was considerable resistance to the idea that boards should be required to
appoint independent NEDs but, over the last two decades, it has become widely
accepted. The 2013 Grant Thornton corporate governance survey of UK companies reports
that 96% of FTSE 100 companies comply with the UK Corporate Governance Code requirement
for at least half the board, excluding the chair, to be independent NEDs. However,
across the FTSE 350 the most common area of non-compliance with the Code relates
to the number of independent NEDs on the board. Non-compliance is more prevalent
among smaller companies which suggests that smaller companies, with smaller
boards, may have problems in complying with any form of mandated board
composition.
The effects
of this significant change in board composition are not easy to judge but research
that demonstrates clearly positive outcomes from increased board independence
is sparse. Indeed, there is evidence of negative effects: banks with more
independent boards performed more poorly than others in the recent financial
crisis. However, one consequence is clear: boards have become smaller since
Cadbury and the proportion of independent directors has increased to the point
where in many cases the only executive board members may be the CEO and CFO. The
impact of this shift on the ability of NEDs to undertake their role has not
been assessed but the pool of people with executive experience at main board
level, from whom NEDs can be drawn, is inevitably reduced. This must be an
impediment to diversity.
It is
unfortunate that diversity has become synonymous with gender in media
discussions of this issue. Even where other forms of diversity are mentioned,
they are confined to measurable features: one NED vividly described the range as
“skirts, skin tones, wheelchairs and walking sticks”. More fundamental ideas of
diversity of skills, experience and background have been neglected. Just as independence of connection has clearly
not guaranteed independence of mind and behaviour in directors, so identifiable
outward markers of diversity cannot be reliable predictors of the desirable
behavioural characteristics sought for effective boards.
It is
instructive to turn to the somewhat neglected Tyson Report on the
Recruitment and Development of
Non-Executive Directors,
which followed the Higgs Review of the Role
and Effectiveness of Non-Executive Directors in 2003.
The Tyson working party emphasised
a much broader view of diversity, linking closely to the qualities needed by an
effective NED, as identified by Higgs, and, in its recommendations, anticipated
some of the practical problems of tapping into a wider pool of suitable
directors.
The debate
about gender diversity has raised awareness of issues which boards should
certainly consider. But should we not trust boards to configure themselves in a
way that best supports the specific strategy and objectives of their businesses?
The concept of “comply or explain” embodies such trust and flexibility and
implies engagement in a conversation with shareholders to determine the most
appropriate board composition, focusing on diversity of skills and expertise.
The corporate
governance role of the board is to direct and control. It is right that boards
should be accountable to shareholders to explain how that direction and control
is achieved. But imposing demands for boards to demonstrate independence and
diversity in their composition with no real understanding of how this
influences board dynamics may be prove ultimately to be counter-productive.
[1] A detailed account of the influences
on the Cadbury Committee in this regard may be found in The Cadbury Committee: a History by
Laura F Spira and Judy Slinn (Oxford University Press, 2013)
