If women are the solution, what is the problem?

This piece is due to appear in the March issue of economia but I'm posting it here now to amplify recent Twitter posts on this topic.

(The recent publication from BIS "Inspirational Women in Business" doesn't really meet my call for women's stories. To me, they sound much like the sort of career stories men would tell.)

If women are the solution, what is the problem?

The debate about gender diversity on corporate boards is mostly about how to get more women on boards: there is very little discussion about why the number should be increased. But boards without female members have successfully run many companies for many years and company failure is rarely, if ever, ascribed to board gender balance. What problem is this intervention designed to address?

The argument for increasing the number of female directors is generally framed as “the business case”. According to “Women on Boards”, the 2011 review led by Lord Davies, the business case has four dimensions:

Improving performance

Accessing the widest talent pool

Being more responsive to the market

Achieving better corporate governance

While these are all important corporate objectives, it is not clear how increasing the number of women on boards should be such a central strategy in achieving them.

There is some evidence of an association between gender balanced boards and corporate performance.  However, as with most research seeking to connect board composition with company performance, the complexity of the potential relationships between measurable characteristics means that, although associations between different factors can be demonstrated, the direction of causation is far more challenging to identify.  Do increased numbers of women on boards lead to better performance or do better performing companies appoint more women to their boards?  

“Accessing the widest talent pool” is also a persuasive idea but should surely be an aspiration at all levels of an organisation. The Davies Review offers no evidence that such access improves boards in particular.

“Being more responsive to the market” assumes that companies with a predominantly female customer base will be more successful if the board reflects this. We would expect board members to have a comprehensive understanding of the company’s commercial environment but there is no evidence to show that the composition of the board should ideally be linked to customer demographics.

“Achieving better corporate governance” should be an aspiration for all boards but there is no evidence that gender balanced boards are better equipped to do this: there is, as yet, no demonstrable link between board composition and improved oversight.

Following the original Davies Review, BIS has published annual reports assessing progress in meeting its recommendations. The business case has not been revisited, although in the 2014 report it is summarised again with a little more detail:

Improve performance at Board and business levels through input and challenge from a range of perspectives;

Access and attract talent from the widest pool available;

Be more responsive to market by aligning with a diverse customer base, many of whom are women; and

Achieve better corporate governance, increase innovation and avoid the risks of ‘group think’.

No evidence is cited to support the assumptions that “challenge from a range of perspectives” improves performance or that appointing more women to boards can increase innovation or avoid groupthink. The continuing stream of published research on board gender diversity around the world is studiously ignored: the report lists “Research published in 2013/14 “ but does not include a single article from an academic journal. Somewhat surprisingly, these annual reports do not refer to the two studies conducted by the Credit Suisse Research Institute which have prompted significant media commentary. Their 2012 report ‘Gender diversity and corporate performance’, while not a peer-reviewed academic study, provides a very good overview of the academic literature in the area. Its authors are careful to emphasise that correlation does not prove causation. In 2014 they published a further report on women in senior management. Again, the researchers draw on a wide range of recently published research and again they begin the report with a warning about the limitations of the research:

While our statistical findings suggest that diversity does coincide with better corporate financial perfor­mance and higher stockmarket valuations, we acknowledge that we are not able to answer the cau­sality question and this is an important caveat to the observations below in the report. Do better companies hire more women, do women choose to work for more successful companies, or do women them­selves help improve companies’ performance? The most likely answer is a combination of the three.

The 2010 European Commission report “Gender balance in business leadership”

forms part of a review of gender equality across member states, looking particularly at gender balance in decision making at high levels of government as well as business. It discusses the economic and business cases for gender balance on boards: the economic case is argued on the basis that economic growth demands the use of all available resources, making it essential to secure increased employment of qualified women in the workplace at all levels, while the business case rests on arguments similar to those listed in the Davies Review. The report refers to a very small selection of academic studies, noting that these studies do not prove causality, but this caveat does not appear in the subsequent report published in 2012 “Women in economic decision-making in the EU” which formed the basis of a proposed Directive on improving board gender balance in listed companies (approved by the European Parliament in November 2013 but yet to become law).

If the business case for pursuing board gender diversity is weak and based on unsupported assertions, are there other stronger supporting arguments?

The 2010 European Commission report sets the requirements for increasing board gender diversity very clearly within a broader social justice and equality context. In the UK this seems to have been ignored. Perhaps it has been taken for granted. Perhaps those pursuing the board diversity agenda believe that those who have to be persuaded of its value – male board members – would respond more positively to a business case, rather than social justice arguments. Such arguments have been explored extensively by political scientists, since gender balanced representation has been a political issue for far longer than in the context of corporate boards.  Corporate law enshrines the view that boards represent shareholders but the board diversity debate has not been framed in that context.

Since the problem which board gender diversity is designed to address remains unclear, the effectiveness of pursuing this solution will be difficult to assess.

Success can be measured at a superficial level by counting the number of women appointed but this is cannot be the whole story. The Davies Review annual reports have not attempted to assess success against the business case dimensions. Maybe the increased numbers are still too small to have a positive effect: the frequently quoted mantra “One is a token, two is a presence, three is a voice” may still be an aspiration in many boardrooms.  But there is some evidence of outcomes.

The 2014 Credit Suisse Research Institute report on women in senior management noted an important change from their earlier observations:

Companies displaying greater board gender diver­sity display excess stock market returns adjusted for sector bias. Companies with more than one woman on the board have returned a compound 3.7% a year over those that have none since 2005. The excess return has moderated since our initial report. Over the last two and a half years, the excess return is a compound 2.0% a year.

The researchers offer no explanation for this, but it demonstrates that results of increasing board gender diversity may not be as clear cut as expected.  In Norway, the country which is often cited as a leader in advancing gender diverse boards because of its early introduction of quotas, researchers have demonstrated an association between the introduction of quotas and a loss of shareholder value in Norwegian companies. This has been cited by opponents of quotas as support for their position, but again causality cannot be confirmed: it is possible that this may be a short-term effect attributable to a sudden increase in the appointment of less experienced board members.

Evidence from previous interventions mandating board composition suggests that such a policy may not be effective. In the UK, the initial 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 to strengthen the monitoring function, particularly in regard to financial reporting. There was little evidence available at the time to show that such appointments made a difference.  Indeed, research in the US, where boards were already predominantly non-executive, had concluded that mandating specific aspects of board composition was ineffective, due to wide variations between companies and industries.

Although there was some early resistance to the idea that boards should be required to appoint independent non-executive directors, 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 non-executive directors. However, across the FTSE 350, the most common area of non-compliance with the Code relates to the number of independent non-executive directors 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 clearly demonstrates positive outcomes from increased board independence is sparse. Indeed, there is some evidence of negative effects: banks with more independent boards performed more poorly than others in the recent financial crisis.

We still have little insight into what goes on behind the boardroom door. The board gender diversity debate rests on the implicit assumption that male and female board members behave differently. The criteria for independent board appointments cannot guarantee independence of mind and behaviour in directors: is it likely that gender can be a reliable predictor of the desirable behavioural characteristics sought for effective boards?

There is a steady stream of published research studies on board gender diversity: a Google Scholar search pulls up more than 150 publications in the last year. It is not unusual for policy makers to pick and choose the evidence that supports pre-determined plans but there is a danger of unintended consequences when policy enters the realm of conventional wisdom and underlying assumptions are no longer questioned. The debate about gender diversity has raised awareness of issues which boards should certainly consider but imposing demands for boards to demonstrate diversity in their composition, with no real understanding of how this influences board dynamics, may prove ultimately to be counter-productive.

And what of the women now being appointed to boards? We need to hear their stories. The 2014 Davies Review annual report contains some quotes from board members on their experience of strategies for improving gender diversity - all but one from men.

Laura F Spira

Laura F. Spira is Emeritus Professor of Corporate Governance at Oxford Brookes University and Academic Adviser to ICAEW. Her book “The Cadbury Committee: a History” was published in 2013 by Oxford University Press.