John Wolfgang is a young lawyer with an appreciation for writing and entrepreneurship.
Ensuring the Future Progression of Board Diversification
Recent evidence suggests that board diversification is becoming a consideration in large companies. Although women are steadily receiving better representation on boards the increase is still a long way off parity in the US. The figures for ethnic minorities (EM) representation are even more startling. This section will examine methods that could be used in order to increase the diversification at a more accelerated rate.
The introduction of legislation providing for minimum quotas for women and EM on boards is often cited as the major solution to the issue at hand. These quotas would require a minimum percentage of board members to be from each of the aforementioned groups.
In 2003 Norway became the first country in the world to introduce a minimum quota, of 40%, for women on boards of publically owned and publically traded companies. Unfortunately, the voluntary nature towards the compliance of this law was unsuccessful and it therefore became compulsory in 2006. The effect of this legislation on increasing the percentage of women on boards has been unquestionable. The European Commission in 2012 report that women accounted for 42% of all board members in Norway’s largest public companies. The swift increase in female board participation is undoubtedly a result of the strict non-compliance penalties that accompany the provision. If a company fails to comply with this law the result will be that the company may be dissolved.
As mentioned before, this system has increased the number of females on boards. However, future provisions for mandatory quotas should not be so restrictive to only focus on the area of gender. Governments that are considering implementing legislation should focus on diversity for EM as well as women. As a result, quotas for each group would have to be at a lower percentage than that introduced in Norway.
Problems With This System
There are two issues that this paper will consider when analysing this system of progression: tokenism and qualification.
There have been arguments made that state the quantity of women on boards in Norway means that they have moved past this idea of tokenism. However, this is not necessarily true. Although current publically traded companies are abiding by this rule this statistic does not take into account the number of companies that would have previously been publically traded but chose to revert back to private companies before the date of compliance of the act. It is also worth mentioning that in the 10 years since the legislation in Norway became compulsory the percentage of women as board members has only marginally stayed above the requirement. It could be suggested that this is a sign of their tokenism and not the actual desire of companies to appoint a gender diverse board.
The second issue examines whether the boards are recruiting the top talent regardless of gender or whether they have to make the most of what is available to them. The evidence provided by Ahern and Dittmar would suggest the latter. In 2001 of the female board members at Norway’s top companies 73.62% had previous CEO experience. This figure was reduced to 55.55% by 2008. Similarly in 2006, before the law was compulsory, 27.88% had achieved an MBA while this statistic was just 21.63% in 2009.
Alternative Approaches to Legislative Reform
The introduction of guidelines and expectations of publically traded companies through ‘soft law’ may be a more efficient manner of increasing the justified participation of women on boards. Under this system companies would not legally be required to meet specific quotas. However, political and commercial pressure would strongly encourage the appointment of more ethnic and gender diverse boards.
This system has been enacted by many countries; among them are the UK and Sweden. The UK has introduced this through The UK Corporate Governance Code. This report states that:
“The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board.”
Similarly the Swedish corporate governance code states:
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“The board members elected by the shareholders’ meeting are collectively to exhibit diversity…The company is to strive for gender balance on the board.”
The sentiments of these soft law instruments are very similar. However, the impact that they have had are differing. In Sweden women make up approximately 27% of all board members. This is a significantly higher percentage than the approximately 13% in the UK.
It is acknowledged that these guidelines have had a positive impact on board diversity however it has been suggested that wider policies in terms of childcare and maternity protection have been the reason for the discrepancy between the successes of the guidelines in their respective countries.
Alternative Legislative Approaches and Policies
Women Enabling Childcare Policies
This article is suggesting that increasing childcare policies could have a significant impact on the number of justified women on boards in countries such as the US and UK where non-mandatory quotas have been less successful in achieving parity in the boardroom.
In a country that is seen to be a leader and innovator to the world the US’ maternity, paternity and childcare policies leave an awful lot to be desired. It has been expressed that of all the OECD countries the US has one of the least bountiful legislations regarding the aforementioned categories. As a consequence of this the current participation rate of women on all publically traded US boards is approximately 14%. Currently the US law for maternity protection is governed by the Family and Medical Leave Act (“FMLA”). This act provides for 12 weeks leave to new mothers to be taken within 12 months. The act also provides that employers may refuse to reinstate a person that has taken leave under this provision for a number of reasons including the “substantial and grievous economic injury” that they may cause to the firm.
The impressive non-mandatory position of women on Swedish boards is mentioned in the above section. The current legislation in Sweden dictates that new parents shall receive pay for a combined total of 480 days per child up until the age of 4 and if this is not achieved up to 96 remaining days can be taken up until the child is 12.
This is an area that the US and UK need to address if they are to compete with countries such as Sweden in the future on terms on gender equality.
Tax Incentive Schemes
The above section comprehensively explains the benefits derived from childcare policies; however, these policies only increase the gender aspect of board diversity. The second area of diversity this paper has focused on is EM diversity.
In order to increase gender diversity on boards without hard law quotas it could be suggested that incentivising tax breaks awarded to companies that were engaged in actively meeting soft law quotas would lead to a much needed increase in EM directors. This law may be bittersweet and lead to a feeling of tokenism on boards by EM. However, there is no doubt that the numbers of adequate EM people are not accurately represented on the largest boards and this may be a solution to address this issue and eventually alter the suggested mind-set of OWM.
This article has shown that although gender and ethnic diversity on large publically traded companies has not yet reached parity, significant progress has been made. This is especially true for women on boards more so than EM.
The increasing quality of educational attained by both EM and women over the last 40 years has be a notable factor in the increase of board diversity. The upward percentage of EMs graduating nowadays compared to 1976 should act as an incentive for boards to diversify in this area just as it has for women in years previous.
The benefits of a diverse board are strong. The implications for not diversifying are unquestionable. The methods mentioned in this article alongside the recognised benefits should act as a catalyst for companies to focus on hiring the best candidate for a board position not just the best candidate within a certain demography.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2018 John Wolfgang