How Effective Are Quotas?

In 2010, Christine Lagarde, managing director of the International Monetary Fund, told the Financial Times, “When I was a lot younger, I was dead against quotas. I thought at the time that we should be accepted on our own merits and on everybody’s terms. But as I am getting older, I see that it’s moving on too slowly. So I support quotas.”

Quotas, also known as affirmative action or preferential treatment, have become dirty words in the U.S., and most women want nothing to do with them. According to a September study by executive recruiting firm Heidrick & Struggles, WomenCorporateDirectors (WCD) and Boris Groysberg of the Harvard Business School, 41 percent of women are in favor of quotas, compared with 13 percent of men — up significantly from last year’s data which showed 25 percent of females and 1 percent of males were supporters. The question is, are they necessary?

No country has achieved equality among women and men in business. Despite the fact that women have been in the workforce for decades, and comprise nearly half of the U.S. labor force according to the Bureau of Labor Statistics, they are still vastly underrepresented at the most senior levels of business worldwide.

According to nonprofit research organization Catalyst’s “2011 Census: Fortune 500 Women Executive Officers and Top Earners,” women account for slightly more than 14 percent of executive officers in the Fortune 500 and occupy 16.1 percent of board of directors seats. Further, one in 10 companies doesn’t have any women on its board and 27.4 percent of Fortune 500 companies have no female executive officers. That means 137 companies in this listing of the largest U.S. companies have all-male executive teams. The numbers are similar at the S&P 500. According to GovernanceMetrics International, a research organization that monitors corporate governance, the average board worldwide is 8.9 percent female.

A Balanced Boardroom
Evidence points to both positive and negative effects of women on boards. The Catalyst Census shows three or more women on a board can have significant impact: the company tends to experience better profitability — return on equity, return on sales and return on invested capital . According to the Financial Times and Journal of Business Ethics, the company will also have higher quality of earnings, higher share price relative to competitors, better decision making on difficult issues and a subsequent increase in the number of female senior executives. Among sitting directors, 56 percent of men and 90 percent of women believe women bring special qualities to a board, according to Heidrick & Struggles’ 2010 board of directors survey.

Critics cite other studies that find reduced stock price valuation of companies after women are appointed to boards. An oft-cited University of Michigan study by Kenneth R. Ahern and Amy K. Dittmar observed that two years after a quota law took effect, Norwegian firms experienced reduced market value in 2008, a year when the global recession negatively impacted many firms worldwide. The researchers attribute the drop in firm valuation to the relative inexperience and younger average age of the new female directors.

In a similar study, Frank Dobbin, a Harvard University sociology professor, found that firm stock prices dropped when women were added to the board, even though profits did not suffer. Dobbin postulates that small institutional investors, who controlled about half of the shares in the survey companies, exhibited unconscious gender bias in choosing to sell their holdings, relying on stereotypes equating leadership with men.

However, both studies focused primarily on forward-looking and subjective measures relating book value to future market value rather than actual firm performance.

Part of the dilemma is in how board members are picked: it’s whom you know. Sitting board members, predominantly white and male, often recommend candidates they know and get along with. Women tend not to be top of mind. Further, increased scrutiny of corporate governance practices has forced companies to look for board members who have specific skills and experience, such as CEO, CFO or running a large business unit. Female candidates often lack such experience.

Diversity executives can help shape the skills and experiences potential board candidates acquire and set them up for success. They can help engineer career moves that include profit and loss responsibility, turnaround situations, international assignments and lateral moves into different functions to increase a candidate’s skills. Diversity executives also can help candidates meet key individuals and join influential networks from which board candidates are often picked, recommend corporate governance and director education courses and otherwise work to nurture those skills boards seek in potential candidates.

On the corporate side, diversity leaders can work with senior management to develop a robust talent assessment and management program, part of which means developing metrics and goals that encourage managers to appoint women and minorities into stretch assignments. A secondary task should be to survey existing cultural assumptions and biases that hinder successful candidates from gaining the experience necessary for board appointments.

Are Quotas the Answer?
Despite, or perhaps because of long-standing biases, many stakeholders — male and female — who are investors, employees, managers, customers and government entities are demanding more balanced and diverse boards and senior management teams. Several countries across Europe including France and Spain, as well as Australia either have or are considering legislating mandatory proportions of women — quotas — for publicly listed corporate boards.

So far, Norway is still the only country that has a quota law with teeth in place. Since 2008, when the law was fully implemented, government-owned and publicly held companies must maintain 40 percent women on their boards or face dissolution. Privately held Norwegian companies need not comply with the quota law; the number of women on their boards has held steady at about 17 percent (Figure 1).

Other countries including Ireland, Denmark, Finland, Iceland and Spain have enacted quota laws that apply to public and government-owned companies, but have not enforced any punishment for noncompliance. The Netherlands, France, Belgium and Sweden are considering quotas. According to the Lord Davies report, an independent review into women on boards, the United Kingdom has asked its largest companies to “aim for a minimum of 25 percent female representation by 2015.” Germany has relied on voluntary quotas for the past 10 years, but the percentage of women on German corporate boards has remained low. According to a Jan. 12 Financial Times article, women make up 4 percent or so of directors on Germany’s Dax-30 management boards.

Norway’s experience with quotas has been instructive. Two researchers, David Matsa of the Kellogg School of Management and Amalia Miller of Northwestern University, compared data in February 2011 from private and publicly listed firms in Norway with similar listed and unlisted firms elsewhere in Scandinavia. They found that among Norwegian firms that suddenly experienced a 20 percent or greater increase in female board members, their operating profit dropped by about 4 percent. Matsa and Miller deduced this was entirely due to rising labor costs brought on by increased employment, or failure to follow the prevailing practice of laying people off during the 2008-2009 recession. They suggest that female board members bring different values and are reluctant to engage in short-term profitability boosts, preferring instead long-term social benefits, such as retaining workers, as opposed to men who are generally more interested in short-term profits.

Another study in 2010 of 201 Norwegian companies by Sabina Nielsen at Copenhagen Business School and Morten Huse at the Norwegian School of Management found adding women directors tends to increase board effectiveness and strategic control, and reduces the level of conflict within board meetings.

To Quota or Not to Quota
Patricia Luzier, acting chief administrative officer of HVHC and member of two boards, CitiTrends and Dale Carnegie, said it’s only a matter of time until more women acquire the skills the boards are looking for, such as finance and international experience.

“The number of women who have met the experience, level of position and age requirements is just now coming [to a critical mass]. Do I see it improving? Yes, because there are more women in the candidate pool. But during the last five years the No. 1 skill boards were looking for was finance — bar none. So the pool has been smaller.”

Luzier said she does not believe in quotas, but she does believe in using a comprehensive and thoughtful process to objectively identify what qualifications a board needs, such as a skills and experience matrix. “What are the skills you have? What are the skills you need? And where are the holes? Boards should go through that process when they’re going to expand or replace [members], as opposed to what has happened over the years, which has been the good old boys’ club.”

Sandra Peterson, CEO of Bayer CropScience, has a similar view. She said she dislikes quotas and believes the same results can be achieved without them.

“You have to have measurable metrics, and you have to measure and hold people accountable for tracking against those metrics. I believe in having goals, such as, for example, 50 percent of the slate of candidates need to be diverse. And by X date, every X level and above we should have X percentage of women leaders. You need to do it by multiple levels. Otherwise the problem you run into is when people say, ‘We should have X number of women in management,’ what ends up happening is that they’re all managers. But there are almost no VPs and there are no senior VPs or heads of business. You need to do it by levels, and you need to track it and manage against it.”

Peterson said the same focus on metrics and hiring the best person for the job applies to boardroom diversity goals.

Many people in the U.S. argue that quotas are just not effective. Sheila Marko, a management consultant specializing in human resources and organizational effectiveness, said she has seen quotas fail.

“Whatever the diversity goal — gender, ethnic — when we reach down into the organization to make the quota, the key issue revolves around the infrastructure. If the organization is not set up to support the infrastructure, to support the development and the education of these individuals, then you’re setting them up for failure and you’re not doing them a favor. You’re hurting them in the long run.”

A Question of Speed and Culture
Norway has shown that quotas do work in breaking the glass ceiling. But any time glass is broken, someone could get hurt. The decision to install a quota system is really a question of how fast a company or country wants to see progress. It also hinges on the receptiveness of a culture to adopt and support quotas. One could chalk up the difference between the U.S. and Europe as being a result of their divergent approaches to social engineering. The U.S. has a controversial legacy of affirmative action related to boosting the number of minority groups in education, business, law and other arenas. In contrast, many European countries have a history of implementing laws that favor social cohesion and equality, such as the 35-hour workweek and strict rules regarding layoffs.

According to Mari Teigen, research director at the Institute for Social Research in Oslo, the Norwegian boardroom quota law came about due to a number of circumstances. The country always has prided itself on maintaining minimum levels of equality — at least 40 percent of each gender — in most spheres of society, and the lack of such equality in business was viewed as a cultural embarrassment. Despite the opposition of most business groups in 2003 when it was enacted, the quota law enjoyed wide political support. According to Teigen, without penalties for non-compliance, the quota law would not have worked.

Norway developed four databases where women — and in one database, men — could register and upload their CV to be considered for board service. One employer-maintained database came with board-oriented educational requirements for the female applicants, whereas male applicants were not required to have such training.

How fast does a society want to reach equality? It depends. Norway has forcibly raised the level of awareness of senior women in the country. Many capable women who might have had difficulty getting noticed for corporate boards prior to the quota law now serve on multiple Norwegian boards — they’re derogatorily known as the “golden skirts.”

The U.S. and the U.K. have taken a slow, merit-based path to gaining equality. The Lord Davies report, released in February 2011, states “at the current rate of change, it will take over 70 years to achieve gender-balanced boardrooms in the U.K.” That may be too slow for many.

When searching for solutions, it’s important to examine other barriers at the root of this issue such as gender discrimination, stereotypes and assumptions. To establish women board members and senior executives as equals with their male counterparts, companies must actively work to overcome biases, myths and shared beliefs that hinder women’s progress not only in corporate hierarchy, but also in gaining experience in crucial areas of business. This can help move the needle, but must be supported by aggressive talent management and diversity strategies. Quotas can only take us so far — the rest is up to society.

Sasha Galbraith is a partner at Jay Galbraith Management Consultants, an international consulting firm. She can be reached at editor@diversity-executive.com.