Establishing quotas within the boardroom is at the forefront of conversations surrounding improvements to board diversity.
While there have been a number studies linking enhancement of boardroom diversity with greater boardroom performance, there has been no agreed approach to achieve a diverse boardroom.
Different countries have adopted varying approaches. Europe continues to pursue regulatory change and introduce mandated board quotas whilst other countries, including Australia, have used principles or recommendations to elicit voluntary change.
• There is growing pressure from interest groups to introduce mandated board quotas, to improve diversity.
• Quotas increase diversity, but do not necessarily address the drivers of board performance.
• ASX Corporate Governance principles require listed entities to disclose diversity policies within annual reports.
• Board performance is a function of skills, experience and values that are aligned with organisational strategy and needs.
• A combination of appropriate board diversity and the existence of relevant skills and behavioural characteristics of directors can provide the best enhancement to board performance.
Does the increased presence of women or other groups influence board performance? In boardrooms across Europe, the US and Australia, directors, regulators and key stakeholders have long debated the introduction of mandated boards via quotas.
Diversity can be defined in many ways to include gender, race or cultural background. In Australia, the Commonwealth Government released its much anticipated white paper “Australia in the Asian Century”, leading to calls from chairpersons and directors against ‘Asian Board’ quotas.
Contemporary research suggests that boards with more diverse gender representations outperform firms dominated by male-only boards. Enhanced return on equity amongst more diverse boards are just some of the long argued benefits towards greater boardroom diversity.
Supporters for regulatory change point to low representation numbers amongst females at board level. As of 2010, women represented only 13% of the directors of listed Australian companies.
This contrasts with the female participation rate, which comprises nearly half of the overall labour force. Overseas, the numbers are similar.
Only 16.1% of board seats of US Fortune 500 companies are occupied by women, with this figure even lower in the UK where 15% of seats are occupied by women.
The European Union (EU) is trying to introduce legislation to ensure gender equalisation within the boardrooms of European organisations. This initiative, led by European Union Justice Commissioner Viviane Reding, would oblige company boards to allocate 40% of their seats to women by 2020 or face EU fines.
Recommendation 9 of the Finnish Corporate Governance Code for Listed Companies states that both genders shall be represented on an organisation’s board. This recommendation came into force in 2010. If a company does not comply with the recommendation, it must account for and explain its divergence from the Code.
There is no legislation that mandates fixed percentages of female representation on boards of listed entities. However, the Securities and Exchange Commission (SEC) has a rule that requires companies to disclose whether and how a nominating committee considers diversity.
Since 2001, the Australian Stock Exchange (ASX) requires its member companies to set and report targets for gender diversity at the board and senior executive levels. Included in these targets is the provision to develop strategies for increasing the pool of female candidates, to improve diversity amongst listed entities.
The ASX Corporate Governance Council’s Corporate Governance (ASXGC) Principles and Recommendations, encourage entities to establish diversity policies for their boards, set measurable objectives for achieving their diversity goals and disclose the involvement of women in its workforce and board.
There is growing pressure by regulators and other stakeholders for Australia to consider gender or cultural-based quotas.
The reasons against quotas include.
• Quotas mean tokenism. Quotas help increase the minimum number of female seats in the boardroom but only as a token gesture.
• Qualification into a boardroom must be determined by meritocratic means and quotas would only exacerbate the problem of a gender divide. Instead, both male and female directors must be considered as equals, without regard to one’s gender, age, racial or cultural background.
• Quotas target the symptom but not the cause. Organisations with inherent biases will continue to suffer from the same cultural problems, regardless of quotas. Such organisations will seek the same biases, education, and experiences in the selection of mandated directors.
• Quotas encourage mediocrity and de-emphasise skills. Employment by way of a quota leads to a reduction in skilled directors as the emphasis on gender, race or culture forces organisations to consider a lower pool of qualified candidates. Instead, the key considerations should be the skills and value alignment required of a director that are necessary to add value to the organisation.
• Quotas only prescribe minimum standards. Cultural change within an organisation cannot be achieved through prescriptive regulatory measures.
• Regulation serves only to create minimum standards or floors and does not acknowledge the pertinent issue of matching skills with the strategy of the organisation, which is crucial in improving board performance.
If a board is genuinely performance oriented, it should shift its focus from simply who is on the board to why they occupy seats; by focusing on the specific skill sets and individual characteristics that align with the organisation’s strategy.
Voluntarily diversifying its composition to mirror the demographics, perceptions and profiles of society can provide a catalyst for enhanced diversity of thought and leadership within the boardroom.
However, this does not necessarily address the crucial issue pertinent to shareholders- what drives better performance?
Stronger board performance can be achieved through a combination of appropriate diversity and the relevant skills and characteristics of the directors in question.