Paul Hodgson: Affirmative action in the boardroom, a look at quotas

It is attention, not just quotas, that forces change

Norway’s much-vaunted quota system requiring 40% of boards to be made up of female directors has led to compliance with the requirements, but a large number of public companies changed their status to private to avoid the legislation after 2003, the year it was announced that a failure to comply would lead to companies being dissolved. According to a study from the Chicago Booth School of Business, of the 563 Norwegian companies that were public in 2003, only 346 remained public by 2005 and only 179 by 2008. What this tells us is that only 32% of Norwegian firms are complying with the quota requirements (the study does not say what level of compliance there is among private companies). Thus it would appear that affirmative action in the boardroom is successful at making public companies go private and little else.
Of course that is not the whole story. The application of quotas – while it inspired a somewhat misogynistic reaction among most Norwegian firms – has been a success among those firms that remained public. Of those firms, few have had difficulties meeting the quota. In addition, much of the initial criticism aimed at the introduction of quotas has not come true. It has not led to less diversity rather than more – with the same small group of what have been termed “golden skirts” being appointed to fill token positions on boards. According to the same study, Norway still has more “golden suits”—male directors are twice as likely to sit on more than one board. And Norwegian female board members are more likely to have a degree than male ones.
Furthermore, the effect of quotas in Norway did not prevent other countries from following suit. Gender quotas for boards have been imposed in Belgium, Iceland, Italy, the Netherlands, Israel, Germany and Spain (though with weak enforcement).The European Commission is considering imposing quotas across the EU. And Malaysia will impose a 30% quota for new appointments to boards by 2016, and Brazil a 40% target, though only for state-controlled firms. This last was how the Norwegian quota came about, since the privatisation of many firms at the end of the last millennium removed them from state control and state requirements, and numbers of women directors had begun to fall.

A recent study from Corporate Women Directors International (CWDI) said legal quotas had now been adopted in some form by 22 countries, with India and the United Arab Emirates also introducing limited quotas. The study also said that the inclusion of gender diversity provisions in corporate governance codes had also proved effective in getting more women on boards. CWDI said 24 countries have adopted such measures.
And quotas elsewhere have been very successful. Spain’s weak law was passed in 2007, with compliance required by 2015. According to figures compiled for me by GMI Ratings this month – early results from its forthcoming Women On Boards report – Spain has already more than doubled its quota of women directors in the last five years. In January 2011, France’s National Assembly passed a law requiring French boards to be 20% female by 2014 and 40% female within six years. But by 2014, the median percentage of women on boards in France was already 27%. In Italy a law was adopted in 2011 which required new slates of board nominees to be 20% female beginning with the first slate elected after 2012, and one-third female for each of a company’s subsequent two elections. By 2014, the median proportion for all the largest Italian companies rose from zero to 15%. Rarely mentioned, Israel was the first country to pass quota legislation.

A law passed in April 1999 required at least one woman on the board of publicly traded companies. By 2009, most companies will have been in compliance, but even so, according to GMI, the proportion grew in the last five years by two percentage points. In contrast, in Turkey, where there are no quotas, female board representation actually fell during the period.
In terms of direct comparisons, Switzerland’s target quotas have only just been introduced in 2014, and its rate of increase – from 8 to 11% up to that time – has been poor compared to Germany’s. Although real quotas were introduced in only November 2013 in Germany, the country saw a tripling of its median board female representation from 6% in 2009 to 17% in 2014.
Norway’s figure was 40% in 2009… and it is 40% today.
In contrast, little has been done in the US, China and Japan, which, CWDI said, had the lowest percentage increases in female board representation. According to GMI Ratings, the US has seen only a three percentage point rise in the proportion of women board members in five long years, from 2009 to 2014, from 10% to 13%. Quotas might go a long way to speeding that process up, and it does not seem likely that two-thirds of the Russell 3000 would go private to avoid legislation. But there is no sign whatsoever of any legislation in the near or distant future, just a lot of initiatives, private lobbying groups and studies.While President Obama made a direct reference to the sex pay differential during his State of the Union speech, he did not follow it up with any reference to the lack of women directors. However, it should be remembered that US boards are made up almost entirely of non-executive directors, with the only sitting executive being the CEO – most often a man. Thus quotas would affect only non-executives, not executives as it might in other countries.

The one shining exception to the rule of quotas is the UK. In 2009, GMI’s figures note that the UK’s median female board representation was zero. Today that figure is 17%, with no quotas, just a nasty letter from Vince Cable, the Secretary of State for Business, Innovation and Skills, if you have an all-male board.
Reluctant though I am to draw conclusions from a single example, it would seem to me that what this shows is that it is attention, not just quotas, that forces change. The threat of quotas in the UK has acted much like their application in France and Norway, because waving the idea of quotas over the heads of boards gives as much attention to the issue as actually imposing them.
Unfortunately, even attention is tough to generate in the US. For as long as the “no one’s going to tell me what to do” philosophy persists in the country there will be little real change there until either diversity becomes the subject of litigation, or the clear economic success of diverse boards over their less diverse counterparts is proven beyond all doubt.

Paul Hodgson is an independent governance analyst.