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.

Thoughts on boards

Sir Win Bischoff, the FRC chair, has an article here today. Sad to see the same old platitudes trotted out with the same old phrases - "tone at the top", "constructive challenge". Time for a new language and a new conversation.

Here's the big question: can a legal and regulatory framework developed around 19th century corporate structures provide the corporate accountability needed for the 21st century? Shouldn't we stop tinkering at the margins with audit and with boards and have a constructive debate about the role of the corporation now that owners are so different and now that so many different groups are affected globally by corporate activities?

Why not encourage boards to get on with directing and controlling their companies as they see fit, developing strategies and structuring themselves in a way that best serves their objectives, using any consequent departures from the Code as the basis for a proper conversation with those who have an interest in what they are doing? Make the conversation open and ongoing.

And let's open up the investment intermediary chain, so that all the intermediary accountabilities are transparent and governance structures can be seen. Pensioners need to know a great deal more about how their investments are managed.

Waffling on about corporate culture isn't going to change anything!

University governance: some thoughts

In this week's THE there is an article (you may have to register to read it) about the goings on at Plymouth and the broader implications for university governance. One section jumped out at me (the reaction of the cat sleeping on my desk suggests that I may actually have gasped in horror when I read it):

"[The author asks:]  Who holds a university board to account? “The board holds itself to account,” says Montagu. The CUC’s existing guidelines say that boards “should conduct an effectiveness review of their own operation and governance not less than every five years”, he adds."

Montagu is Sir Nick Montagu, chair of the Committee of University Chairs and chair of governors at Queen Mary University of London (much furniture...). Sir Nick had a distinguished career in the civil service and ended up running the Inland Revenue. Since retiring, Wikipedia tells me that he has  "been associated with a number of commercial activities, mainly in the pensions and insurance field" You might expect that this background would equip him with a better understanding of accountability issues, if not of corporate governance.

Most universities don't (yet) have shareholders. They didn't used to have customers either, although student fees have certainly changed the perspective of those paying. Those delivering the services provided may be reluctant to admit this explicitly but the emphasis on National Student Survey scores rather gives the game away. And, when the consumer association Which? reports on students' views of what they are getting, it seems fairly clear that UK universities are now pretty much a service industry, engaged in competition for students in a global marketplace. So who should be holding the governors to account?

Accountability in public and third sector organisations is not clear cut but their approach has been hugely influenced by developments in the corporate sector. Codes have proliferated, providing legitimation but they are established and revised with little consideration for assessing their effectiveness:

"The CUC is developing a new code for governing bodies. Montagu says that while there was a need to update the existing code drawn up in 2004, this is not a response to any cases of governance fractures or to the emerging market. Although following the code is voluntary, the “underlying assumption” is “comply or explain”, he says. The revised code is expected to be published by mid December and will have the “support” of Hefce, although Montagu stresses that it is not the funding council’s code."

The adoption of the voluntary code approach in the corporate sector was an attempt to avoid the imposition of legislation. The article suggests that the university sector would do well to reform its governance for the same reason: it appears that legislation may be introduced in Scotland. But such a reform would need to address the very fundamental issue of accountability.

My own experience of university governance has been instructive.  After I published my research into audit committees, I was asked to join the university audit committee. I agreed very reluctantly.  I was the only woman and the only academic on the committee. As an employee, I felt uncomfortable about my informal co-option. My role was unclear since I was not an elected representative of any group and the committee could have drawn on my expertise without me being a committee member (as indeed a later chair of the committee did, by taking me to lunch occasionally). At the time, I was researching into the relationship between risk management and internal audit but whenever I raised the issue of risk I was told that the university was fully insured, internal audit was outsourced and no discussion was needed. There were occasions when I felt that the committee had exceeded its remit but my concerns were dismissed. The dynamics of the committee were odd and it took me a long time to work out the hidden relationships.  Evaluation? The audit committee reviewed itself in a general discussion over a very good Xmas lunch in the university restaurant. 

It was not a happy experience: I resigned after a couple of years and no one asked why. I believe that things changed significantly under the subsequent chairman.

Not long after this I was invited to speak at a HEFCE event for chairs of governors and audit committees, on the role of the audit committee. After the plenary session, the attendees were put into groups and asked to discuss what audit committees should do in various scenarios - fictional, but I was told based in part on real events. I sat in on several of these and the discussions revealed some really different perspectives. But for me the most interesting part was the question I was repeatedly asked : how can I get my vice chancellor to tell me what's going on on the academic side?

The traditional model of university governance (beautifully glimpsed in F. M. Cornford's Microcosmographia Academica) had academics at centre stage. Different management structures have changed that. But aren't boards of governors accountable to them, too?

"Too Big to Jail"

Lawrence Summers' review in the FT of Brandon Garrett's book "Too Big to Jail" caught my eye this weekend. Summers makes the important observation that the work of legal scholars is often "prescriptive but without a strong empirical foundation". This has been true of much of the literature I've read by US authors, less so of those from the UK, but it is changing. I remember being delighted to find a paper by US legal scholars on board gender diversity which was based on interviews with those involved, very unusual within that stream of literature.

I have yet to read the book but Summers uses the Arthur Andersen/ Enron example to illustrate the inadequacies of punishment of corporate fraud. The impact on those employed by AA and completely unconnected with the Enron relationship was huge and unfair (see here, here and here ) and punishment of the individuals whose dereliction could be proved might have paralleled that suffered by the Enron executives but I am not sure that this is a good example and oddly Summers does not mention that the firm's conviction was later overturned.

Summers suggests that a different structural approach to accountability might improve policy in this area. He uses the dreaded term "nexus of contracts" which, to me, conjures up agency theory and all that is wrong with that approach but, language aside, he may have a good idea. I have been impressed by the paper by Kelli Alces which proposes that boards of directors are no longer fit for purpose. It is surely time for a substantial review of the fundamentals of corporate accountability and our consequential legislative arrangements.

The comments on Summers' review largely focus on whether he should be given a platform in the FT at all, given his controversial past. More importantly, in my view, it should be recognised that he writes from a  US perspective. He acknowledges this, somewhat tangentially, in the penultimate paragraph but we should always remember that the US legislative and regulatory structure is predicated on very different historical and economic assumptions to that of the UK, and policy making in approaches to corporate crime should reflect this.

Jelly beans and qualitative research

I do like Tim Harford's work and I especially like this.

Much research into corporate governance has been heavily influenced by finance researchers, juggling the many variables that might link corporate governance characteristics to corporate performance, without finding any convincing relationships.

But, since most corporate governance policy steadfastly ignores independent research findings, maybe this doesn't matter.

Encouragement for qualitative research approaches could make a difference. It's very challenging to do. Access to those involved in corporate governance can be difficult to secure and collecting data through interviewing is fraught with pitfalls. Funding applications may be judged by people with little experience of qualitative methods. Condensing a plethora of rich insights into a standard sized journal article is not easy. But this type of approach can usefully highlight the huge variety of practice and experience hidden behind the boardroom door and perhaps cause policy makers to think a little more deeply about the potential consequences of regulation.

The jelly bean researchers could have asked why people eat jelly beans in the first place...

No more codes, please!

ICAEW have published the fifth of their discussion papers on corporate governance, calling for the establishment of an overarching "framework code", to embrace the group-specific codes that have sprung up in recent years. The paper raises several questions.

1. What is the proposed "framework code" for?

It is not clear exactly what problem the "framework code" is designed to address and the idea adds further confusion by blurring the boundaries of corporate governance to include "everyone involved in corporate governance". The Takeover Code which is cited in the paper works well because it is directed at managing a very specific area of activity where the potential problems are clearly understood. The well-established Panel structure permits comprehensive representation of clearly defined groups of stakeholders.

2. Where would such a "framework code" sit?

The paper suggests that it would encompass a very wide range of stakeholders. Basic principles need to sit within a structure of agreed ownership: the FRC currently "owns" the UK Corporate Governance Code but it would be difficult to justify the same organisation taking responsibility for a "parent" code which would sit above this.

3. What does "framework" mean?

The OECD Principles are also cited in the paper: how would a "framework code" differ from these? The use of the word "framework" resonates worryingly with the conceptual framework for financial reporting, a never-ending project which can hardly be described as a success. (See here, here, here and here for some thoughts on this.)

Proposals for change can only be successful if they are based on a careful assessment of the current situation and a good understanding of how this has developed, to ensure that such proposals address real problems and recognise the potential consequences of change.  Although the Cadbury Code focused very specifically on the financial aspects of corporate governance and on the role of the board of directors, it was very much of its time and the world has moved on. The consequences of its implementation have not been properly assessed, either from the perspective of regulatory impact or from that of corporate boards themselves.  From a regulatory perspective, the UK Corporate Governance Code is now unwieldy because every review has added further detail about implementation, rather than reconsidering the assumptions which underpin the principles. Within companies, the emphasis on independence and the role of NEDs has led de facto to a two tier board system which has yet to be acknowledged from a regulatory perspective. Does the unitary board which brings together NEDs and executive directors still exist in any major plc? How does a main board peopled by NEDs interact with an executive board or executive committee?

There is an urgent need to reassess the current corporate landscape and the assumptions on which the underlying principles of UK corporate governance arrangements have been built. Our legislative framework evolved under very different economic and social conditions. Is this legislation still fit for purpose? The proliferation of codes suggests that it is not.

As well as a fundamental overhaul of legislation at national level, there is scope for change at organisational level. Some interesting ideas have been offered by academics. A US legal scholar has argued that the board of directors could be scrapped in favour of quite different corporate governance arrangements which better reflect the interests of those involved. The analysis put forward by Colin Mayer in his excellent book "Firm Commitment" makes a good starting point for some radical thinking.

The ICAEW papers on corporate governance may be effective if they prompt a wider debate but that debate needs to be grounded in a clear identification of the scope and boundaries of the problems faced, a rigorous assessment of the capacity of current legislative and regulatory arrangements to deal with those problems and a careful consideration of the potential for unintended consequences.

Thinking, but not very originally

On Tuesday evening I went to the Hardman lecture at ICAEW. I wangled an invitation to this prestigious event because I wanted to hear Jolyon Maugham (see my post on 30 September). I was not disappointed: he speaks as well as he writes and his talk was full of excellent metaphors (I do enjoy a good metaphor, as well as having a professional interest in them: see also here) Having followed his blog, I understood much of what he said, even the initialisms. And it was those that set me thinking.

Initialisms act as shibboleths in terms of identifying groups and deterring outsiders. On this occasion, I was definitely an outsider. It is unusual these days for me to be in a large gathering of people where I only know one or two. I once horrified a rather shy acquaintance by saying that my idea of heaven was a roomful of people I'd never met before - all those wonderfully interesting possibilities! I get less excited about the prospect these days as my hearing is not as good as it used to be and conversations are more difficult, especially in this splendid room where many ICAEW receptions take place and where the acoustics make it necessary to stand very close to ones interlocutors.

But I was intrigued by the tribe I had fallen among and talked to a lot of people. For all of them, tax figured largely in their lives, but in different ways. There were tax practitioners of various sorts - accountants, consultants, barristers - and there were civil servants and policy makers. And there were a few academics. In conversation with my neighbour at dinner we noted a lack of diversity of both race and gender, although I thought that there were more women present than at similar events I have attended.

And on the bus home I realised that I had observed another form of homogeneity, beyond the pale faces and suits and ties: almost everyone I had spoken to had studied at Oxford or Cambridge. I hadn't asked any specific questions about their educational background but I had asked how they had ended up in their tax related jobs, and their accounts of their careers had begun with graduation.

So the movers and shakers in the tax world are an elite group and a rather good example of an epistemic community, a notion I have been thinking about for some time in the context of internal auditors and risk management. I made a mental note to return to that thought and went back to the book I was reading.

Today I turned to Jolyon's blog - another very interesting piece, about the influence of the Big Four on tax policy - and there in the comments I found that Martin Hearson had beaten me to it, and articulated the epistemic community idea far better than I could have done. This is not the first occasion that I have had a thought and found that someone at LSE had beaten me to it but it's usually been Mike Power who I've been trailing after :)

The book I was reading was "The Circle" by Dave Eggers, a dystopian vision in which a company with similarities to Google is effectively taking over the world. The characters were rather wooden and the plot unsurprising but the scenario described was quite compelling and it was a good read for the bus journey from Oxford to London and back again. (But the pedant in me was roused on reaching the penultimate page, when the word "prone" was used to describe the position of someone in a coma in a hospital bed. I rather think such a person would be lying on their back...)

Eggers doesn't mention any tax issues but in the world he envisages, -where everyone is constantly under surveillance by everyone else, knowledge has to be shared and privacy is a crime - there could be no tax avoidance. A lot of people would be out of work..