Women on Corporate Boards
Shareowners around the world have been calling on companies to increase gender diversity in corporate boardrooms. Despite the increasing number of studies that show that companies with female directors perform better, there is still a very long way to go before gender parity is reached among corporate directors. This article presents some of the most recent research on the topic and highlights legislative efforts in the United States.
Current Research Findings
Over the past several years, numerous studies have examined links between gender diversity in the boardroom and financial performance. Most recently, MSCI followed a number of U.S. companies over a five-year period (2011-2016) that began the period with three or more female directors. In the five years tracked, the companies with female directors saw median gains in Return on Equity (ROE) of 10% and Earnings Per Share (EPS) of 37%, compared to median changes of -1% in ROE and -8% in EPS of companies with no female directors. The differences in numbers could be attributed to more diversity within the group of directors, which often results in better decision-making overall.1 In 2014, Credit Suisse created a proprietary database from its global company research coverage, including more than 3,000 companies across 40 countries and all major sectors. Credit Suisse found that companies with at least one woman on the board had an average ROE of 12.2%, compared to 10.1% for companies with no female directors. Additionally, the price-to-book value was 2.4 times for those companies with women on their boards compared to 1.8 times for boards with no women.2
Other studies have focused on the less quantitative features of corporate performance. For example, a 2012 study shows that companies with more women on their boards are more likely to “create a sustainable future” by instituting strong governance structures with a high level of transparency and implementing programs and policies that avoid corrupt business dealings.3 Importantly, one study found that female directors have significantly improved board governance, risk management and the board’s willingness to “hold CEOs accountable,” and that “CEO turnover is more sensitive to stock return performance in firms with relatively more women on boards.”4
Efforts to Increase Gender Diversity in the United States
Despite these research findings and pressure from regulators and the media, progress has been slow in the United States. Fewer than 20% of the board seats of S&P 1500 companies are held by women. In fact, a study recently found that just 17.8% of the board seats held by directors serving on S&P 1500 boards in 2016 were filled by women, compared to 11.9% in 2008.5 In December 2015, a report by the U.S. Government Accountability Office found that, assuming women join boards in equal proportion to men, this number will likely not reach 50% – gender parity – before the year 2054.6
So what is being done to encourage U.S. companies to increase the number of women on their boards? While other countries have implemented, or are contemplating, quotas to address the issue of gender diversity in the corporate boardroom, the United States has been reluctant to do so. At the federal level, a bill introduced last year in the House of Representatives called on the Securities and Exchange Commission to, among other things, “establish a Gender Diversity Advisory Group to study and make recommendations on strategies to increase gender diversity among the members of the board of directors of issuers.”7
In addition, a few U.S. states have taken on the issue by passing resolutions calling on companies in their states to set the standard for board diversity. The first state to act was California, whose legislature passed a resolution (CA SCR-62) in 2013, calling for the boards of publicly traded companies in the state to have:
- at least one female director if the board has fewer than five total directors;
- at least two female directors if the board has five to eight total directors; or
- at least three female directors if the board has nine or more total directors.8
Of course, CA SCR-62 was only a resolution, so companies in the state faced no legal ramifications if they did not fulfill the resolution’s goal by the end of the proposed three-year period; however, it did set a precedent that other states have been following. In 2015, the House of Representatives in Illinois passed HR 0439 and the Senate of the Commonwealth of Massachusetts passed S1007, both of which are resolutions that closely mirror the California resolution.
Unfortunately, only about 20% of the companies in the Russell 3000 index with headquarters in California met the goals established by CA SCR-62. While the boards of companies based in Illinois and Massachusetts have until 2018 to meet the gender diversity goals outlined in their respective state’s resolutions, it is likely that many will not do so.
Nevertheless, the increasingly public efforts of institutional investors and diversity advocacy groups are sure to have a positive impact. As more and more companies reap the financial and nonfinancial benefits of having a diverse board, others will surely follow.
2 https://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=8128F3C0-99BC-22E6-838E2A5B1E4366DF; see also http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=5A7755E1-EFDD-1973-A0B5C54AFF3FB0AE