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Women on Boards: What Investors Should Know

September 5, 2013

Many studies have documented the benefits of boardroom gender diversity for corporate performance. For example, studies have shown that gender-diverse boards spend more money on auditing when the complexity of the business warrants it, and that male directors have better attendance records at boards that also include women.

Further, a recent study by Credit Suisse found that companies with gender-diverse boards in the MSCI All Country World Index strongly outperformed those with all-male boards in 2005-2011, after controlling for industry and size. What causes these effects? Scholars suggest one important factor is that the interpersonal dynamics characteristic of diverse groups, including mixed-gender groups, make them superior at complex problem-solving. Diverse teams agree less readily, avoiding “groupthink” and examining more aspects of a problem. Members of majority groups also tend to be more diligent around people they view as “different.”

Despite the wealth of research on the topic, however, many public companies’ nominating committees don’t seem to be getting the message. A GMI Ratings study of gender diversity on boards in 45 nations conducted this past March shows strides being made in Europe, where many countries either have, or are considering, legal mandates for female board representation. In the rest of the world, however – where voluntary approaches to the issue predominate – progress is extremely slow.

In a survey of companies including the Russell 3000, the MSCI World, and many other major market indices, women hold 11% of all board seats. This marks an increase of one-half of a percentage point since December 2011 and only 1.7 percentage points since 2009. Europe accounts for most of the change: excluding Europe, female representation on boards has risen only eight-tenths of one percentage point since 2009. Indeed, over half the new female directors since 2009 have joined European boards.

Norway, Sweden and Finland lead the world in their percentage of female directors, with 36.1%, 27.0%, and 26.8%, respectively. France, which recently adopted a board diversity mandate, now ranks fourth, with 18.3%. Italy has seen a sharp increase in female directors following recent legislation, and Germany and the Netherlands have also been adding substantial numbers of women to their boards. In the UK, the proportion of female directors has risen by 4 percentage points since 2009, possibly in reaction to the threat of EU-level regulation, and is now 12.6%. Moreover, GMI research into the effects of gender diversity laws in both France and Italy has validated the oft-heard claim that plenty of qualified women are out there, but simply aren’t being tapped. The women recently added to boards in these countries tend to have strong resumes in business, law, or academia, but were often joining public boards for the first time.

Across the Atlantic, however (where any mention of diversity quotas is taboo), the proportion of female directors in the S&P 1500 has risen by fewer than 5 percentage points since 2001, and is now at 14%. Meanwhile, Canadian progress on gender diversity among directors is virtually stalled: the proportion of female directors is 13.1%, unchanged from 2011 and up less than 1 percentage point since 2009. At least gender diversity is still better in North America than in Japan, which ranks worst among the industrialized world, with only 1.1% female directors.

In addition to regional variations, GMI’s research has identified industry-related variations in board diversity. For example, in the U.S., consumer products companies tend to have much more gender-diverse boards than those in the energy or technology sectors. Indeed, as of last summer a majority of energy companies in the Russell 3000 – 61% – had all-male boards, as did almost half of that index’s IT firms (49%). Meanwhile, only a quarter of Russell 3000 companies in the Consumer Discretionary sector, and 28% of Consumer Staples companies, lacked any women on their boards.

Several years ago, concerns over the slow pace of board diversification led CalPERS and CalSTRS to commission GMI Ratings to create the Diverse Director Datasource (3D for short), a database for self-nominating candidates that is intended to assist companies in locating well-qualified women and members of minority groups. The database is now in use by a number of firms, and we hope to see new appointments result from it over the next few years.

Over the past few proxy seasons, meanwhile, many prominent shareholder advocates have been pressing companies – often successfully – to ensure that nominating committees consider women and minorities as part of any director search. Part of the problem, however, is that there are simply not enough searches going on, because board turnover is so low. A study GMI conducted in May of this year found that over one-quarter of the directors in each of the S&P 500, Russell 1000, and Russell 3000 were men with over ten years’ tenure. These figures suggest that term limits could be one way to accelerate the diversification of boards. For example, if fewer than half of the long-tenured men in the S&P 500 retired tomorrow and were replaced by women, that index would reach the often-cited goal of 30% female directors overnight. Shortening directors’ terms might have other governance benefits as well, since long-serving directors often form relationships with management and each other that may compromise their ability to exercise independent oversight. Investors concerned with good governance, therefore, may soon be engaging companies on the interconnected issues of independence, tenure, and diversity.

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