The evidence is clear: firms do better with women on board

EasyJet boss Carolyn McCall is one of few women at the top of UK business. Steve Parsons/PA

In the UK, women make up just just 17.3% of FTSE 100 companies’ board members. This puts the UK 5th in the world behind Norway, Sweden, Finland and France.

Things are certainly improving: 44% of new appointments to FTSE 100 boards go to women. However, we are still some way off the target of 25% by 2015 recommended in a recent UK government report. It also falls far short of where the country’s boardrooms should be – an equal split between men and women in directorship roles.

The question of how to remedy this yawning gap has occupied a lot of time and effort. The first big question is whether it is indeed necessary for companies to patch up the gender divide. There is a now a large body of evidence that how firm performance is affected by the presence of more women on boards. There are frequent reports by consultancies and companies that detail miraculous results achieved by firms which appoint more women to the board. For instance, the catering firm Sodexo launched a press release this summer claiming that companies where women make up over one third of the board have 42% higher profit and 53% higher returns to shareholders.

Although these numbers sound excellent, there are mixed reports on how improved gender balance on boards actually affects corporate performance. One interesting recent study points out that companies with more women on the board tend to do better on the basis of objective measures, such as return on assets and return on equity. However, they tend to do worse on more subjective metrics, such as stock-based measures of performance.

The reason for this is that market analysts and investors often take fright at women being appointed to a board. This is because women are perceived as poorly performing –- even though the evidence points in the opposite direction. However, another piece of research finds that this market aversion to female board members is not seen in all contexts; it seems the market is quite prepared to reward firms for appointing women directors in consumer-facing industries like retail, or in the media. In sectors where the company is far removed from final consumers, such as logistics or resources, more female-averse sexist attitudes can still be found.

Other recent research has pointed out that boards which include more women tend to have better working processes. For instance, one US-based study found that women are more likely to attend board meetings than their male counterparts. What’s more, their mere presence on the board actually shames the men into also turning up more. In addition, boards with more women are often reported to be nicer places. They tend to develop their members more and suffer less internal conflict.

Get on board?

The many benefits of having more women on boards have led policymakers throughout the world to ask how numbers could be increased. Companies themselves are often reluctant to do this, typically citing a lack of appropriate or experienced candidates. This, of course, is a myth, as women appointed to boards are often likely to be better qualified than their male counterparts in many important aspects (education, titles, community links), though worse on some other factors (notably, previous experience in executive roles – a catch-22 situation).

To address corporate foot-dragging over this issue, some countries have adopted policies which mandate the number of women on corporate boards. The first mover was Norway, which now requires boards to be at least 40% female. Other countries including Italy, France, Spain, Belgium, Iceland and that bastion of women’s liberation Dubai have followed this initiative. This week, news appeared that the famously masculine boardrooms of Germany may be forced to implement a 30% Frauenquote.

These moves towards quota systems have led some to ask whether the UK should implement a similar approach. This question is likely to be met with significant degrees of resistance from parts of the business community. They will inevitably point out that the UK economy is more liberal than most European economies, and argue that forcing companies to do something is not appropriate. Instead, they will claim, companies will be able to self-regulate their way towards a level of board equality appropriate to their business. They might also point out that the UK has done reasonably well without a quota – 5th in the world for boardroom diversity isn’t bad, after all.

Nordic evidence

All these arguments are to be expected, but what exactly does the evidence tell us about quotas in the most advanced case – Norway? The one major piece of negative evidence for quotas comes from two economists who pointed out that introduction of the quota led to younger, less experienced directors being appointed to corporate boards. In addition, they found that the quota led to declines in some market-based measures of corporate performance.

However, other research has shown that the increasing number of women on boards has led to no difference in overall corporate performance on the basis of more “objective” measures such as return on assets. In addition, the increased number of women on Norwegian boards has also been linked with an increase in innovation.

While the quota may have had little effect on the objective performance of Norway’s companies, it has certainly helped to build a far greater population of women business leaders in the the country. The quota made it more likely that women will be appointed as CEOs. In addition, women business leaders were able to build stronger networks with other directors –- an important characteristic that headhunters usually look for in board members. The potential downside of all this is the formation of a small elite of women who sit on multiple boards.

If the UK is serious about creating equality at the highest levels of our companies, then a quota could be an excellent step forward. However, it is important we are realistic about the barriers that might be faced to implementing this policy.

A paper published last month gives some clues about what these barriers might be. A study of the 10 countries across the world which have adopted quotas identifies some common features: they tend to have high female workforce participation rates, well developed welfare states, and left-leaning political parties in power.

The UK only has one and a half of these. Women may have to wait a while longer to get on board.

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