Why Boards Need Women

Media coverage of the 2012 political season was rife with references to the “war on women” which, depending on the source, centered primarily on reproductive rights and, to a lesser degree, pay disparity. The ongoing rhetoric runs the gamut from serious treatment via Bloomberg Businessweek to regular lampooning by Jon Stewart on “The Daily Show.”

While some pundits say the war on women is a fiction fabricated as an election-year ploy to influence voters, others disagree. The recent rolling back of equal pay legislation in some states, including the repeal of Wisconsin’s Equal Pay Enforcement Act in 2012, which was passed to address significant wage gaps between men and women, are notable.

Critics say the repeal only fuels continued pay disparity, and such developments, combined with the lack of progress in equal pay for women since the passage of the Paycheck Fairness Act —which prohibits retaliation against employees who ask for salary information but does not require companies or employees to disclose it — is a concern.

Further, only 20 of the Fortune 500 companies are led by female CEOs, indicating that progress is slow in achieving gender balance in the executive suite and beyond. With this in mind, the Institute for Corporate Productivity (i4cp) took a follow-up look at the state of women in leadership, revisiting a topic examined in a 2008 paper, “Skirting the Glass Ceiling: Mandating Gender Diversity,” which covered mandated quotas for female representation on boards. The recent research examined a handful of European governments’ efforts to legislate gender parity in boards for publicly traded companies.

Norway’s 2003 legislation mandated that public companies address gender imbalance on their boards, requiring that women hold 40 percent of board seats by 2008. Companies that failed to comply faced sanctions ranging from fines to forced closure. At the time, 6 percent of director seats in Norway were held by women, the average percentage of board directorships held by women overall in Europe was 9.7 percent, and it was 15 percent in the U.S., according to Catalyst, a nonprofit research group dedicated to expanding opportunities for women in business.

In the U.S, women comprise about 47 percent of the workforce and 51 percent of the management, professional and related occupations. In Fortune 500 companies, 16.6 percent of directors are women, up from 16.1 percent in 2011; 14.3 percent of company executive officers are women, up slightly from 14.1 percent the previous year. The National Venture Capital Association reports that 11 percent of investing partners at venture firms are women.

The numbers are similar in the U.S. tech industry. Women accounted for 9 percent of the board seats held in Silicon Valley companies in 2011, according to corporate recruiting firm Spencer Stuart. Facebook came under fire in 2012 for lack of gender and ethnic diversity on its homogenous seven-member board made up entirely of white males. Critics pointed out that while 55 percent of Facebook users are female, the board failed to reflect this. One advocacy group posted a video on YouTube titled, “Do Women Have a Future at Facebook?” in protest. However, Facebook’s Chief Operating Officer Sheryl Sandberg is a vocal champion of women in the workplace, and now that the company has gone public, there is pressure to add at least one woman to the board.

The Business Case for Gender Diversity
The question is, why are women still lagging in C-suite representation? Catalyst President Ilene Lang said that for starters, while women are getting leadership training, they are not routinely selected for the type of high-profile assignments that would offer them the opportunity to make a mark and get noticed.

“Women and men get leadership training. They get sent to classes; they get coaching; they get sponsorship and mentorship. But at the end of the day, the jobs that the men get have three times the budget, twice the staff, much more international — even among women who say they’re ready for an international assignment, they want to have one — a much higher percentage of the men who say they’re available are tapped for them than women,” Lang said in an interview with the “Nightly Business Report.”

In addition to issues related to an organization’s leadership not reflecting its customer base, companies that don’t have female directors should be concerned because it affects the bottom line. Catalyst research found that companies with female directors perform better than those with boards that are entirely composed of male directors. Its 2011 study of Fortune 500 companies, “The Bottom Line: Corporate Performance and Women’s Representation on Boards,” found a connection between gender diversity and financial performance. In studying the companies from 2004 to 2008, Catalyst found that organizations with three or more female board members outperformed those with no female board members by 84 percent in return on sales and 60 percent in return on invested capital.

McKinsey & Co.’s report, “Women Matter,” also indicates that having more women in leadership is correlated with stronger financial returns; companies with the highest percentage of women in leadership roles show the best performance. In comparing the top quartile of companies in terms of share of women in executive committees against companies that have all-male executive committees, McKinsey found the former companies exceeded the latter by 41 percent in return on equity and by 56 percent in operating results. McKinsey attributes this performance gap to differences in how women exercise leadership.

The authors of a similar study published by Pepperdine University found that a correlation “between high-level female executives and business success has been consistent and revealing.” The study also found that the better companies were at promoting women, the better they ranked in terms of profitability. The authors surmise that a possible explanation for the women-profits correlation is that: “Firms exhibit higher profitability when their top executives make smart decisions. One of the smart decisions those executives have consistently made at successful Fortune 500 firms is to include women in the executive suite so that regardless of gender, the best brains are available to continue making smart and profitable decisions.”

Despite evidence about the benefits of women in leadership, progress remains slow. The Center for Women’s Business Research reports that women own about 40 percent of the private businesses in the U.S., yet Astia, an advocacy group for female-led small companies, reports that women make up less than 10 percent of venture-backed startups. In spite of evidence that female-led businesses fail less often, a study conducted by Carnegie Mellon University, “High Performance Entrepreneurs: Women in High-Tech” found that “Women-led high-tech startups generate higher revenues per dollar of invested capital and have lower failure rates than those led by men. Data clearly shows that high-tech, venture-backed companies founded by women do as well as those led by men despite often being capital-constrained. Portfolios that lack this diversity are likely to suffer over time.”

Progress in Europe
Recall, Norway’s 2003 legislation required public companies to address gender imbalance on their boards, with women holding 40 percent of the board seats by 2008. Five years later, Norway’s board representation for women rose from 6 percent to 44.2 percent.

In spite of the pushback that took place when the idea of mandating gender diversity first emerged in Europe, other countries see merit in forging ahead rather than waiting the additional century some experts say it may take for gender balance to occur naturally. France recently passed legislation requiring that boards of directors of native companies must have at least 20 percent of their membership composed of female directors by 2013 and 40 percent by 2017. Other nations that have mandated gender diversity include Spain — 40 percent women by 2015; and Iceland — 40 percent for each sex by 2013 — and legislation is in discussion in Belgium, Denmark, Finland, Italy, Poland, Sweden and the Netherlands; Germany and the U.K. have set target goals.

Beyond compliance with legislation, companies with more women in their senior leadership and on their boards of directors have better financial performance than those with fewer because diversity broadens perspective, adds depth of background and experience, enhances critical thinking and problem-solving capability and fuels innovation.

To help move things in the right direction, organizations have to expand the collective reasoning. Lang said conventional thinking is part of the issue, rather than a shortage of qualified women. Organizations also can embrace sponsorship, which differs from mentorship in that it entails senior executives championing high-potential employees, which can make a critical difference. “We are seeing that the minute a woman is endorsed by a powerful man, suddenly she’s visible. Suddenly she’s board qualified, suddenly she’s ready,” Lang said. “This is not a supply problem. But it is a conventional
thinking problem.”

Lorrie Lykins is i4cp’s managing editor and director of research services at i4cp. She can be reached at editor@diversity-executive.com.