The US, UK, Belgium, France, Germany, Italy, Spain, the Netherlands, Australia, New Zealand, Norway and Sweden either have or are mid-way through changing laws on the books to promote greater gender and ethnic diversity on boards of directors since the financial crisis.
Diversifying corporate boards has been described as the number one issue in corporate governance. The movement is so broad that it is coined in New Zealand as the global governance “tsunami.” Governments are now very serious about who is sitting in boardrooms and ensuring that boards are no longer asleep at the switch.
Where is Canada in addressing board diversity? The 2005 corporate governance guidelines – which are now out of date: there is only one sentence on risk management for example – do not address boardroom diversity. Political leadership, with the exception of Quebec, has been absent.
Why is boardroom diversity so important? Because it leads to better decisions, which are what boards do. Women and directors from different cultural and ethnic backgrounds are less socially embedded than a homogenous group – a “closed shop” as it was described in the UK last week – and are more apt to challenge, monitor and control management the academic evidence reveals. The UK Prime Minister has said that increasing women on boards would help to drive down an astonishing 49% increase in directors’ pay. Institutional shareholders are now talking about voting “no” to nominating committee directors whose boards lack female representation.
Boards will not diversify on their own. There is entrenched self-interest to maintain the status quo. The status quo is to accord primacy to fellow CEOs (who are almost always male). Yet there appears to be scant evidence that CEOs make for more effective directors. Indeed the evidence appears to be the opposite. Second, long-serving directors (who are also largely male) do not stand down and a board is a fixed size, thus blocking renewal and diversification. In the UK, another change after the financial crisis is that any FTSE director serving beyond 9 years is presumed to no longer be independent. Canada has a significant number of male directors who exceed this limit and in some cases have served 15-25 years on a board. In addition, shareholders do not have “proxy access” (yet), meaning that the board and management largely selects itself, rather than being selected by shareholders. In short, the deck is stacked against diversification.
The figures bear this out. Depending on the survey, women have been stagnant at 9-14% for the last 10+ years. The figures for minority directors are much worse, at 3-4% (and these figures are generous). This is a global talent and competitiveness issue for companies and countries.
What is needed to prompt greater boardroom diversity? Political attention and leadership. A Canadian case in point: Quebec Premiere John Charest announced in 2007 that all Quebec boards of directors are to achieve gender parity by December 2011 (this month) – meaning equal number of men and women; and that the boards of Quebec companies are to much match the cultural make up of Quebec, reflecting the various components of Quebec society. And all director appointments are to be based on skills and experience profiles.
Governments prompt diversity in four ways.
1. The first way is to do nothing and hope for the best, which is where Canada (but not Quebec) currently lands.
2. The second way – exemplified by the US – is to mandate that all listed companies must disclose diversity plans for boards and senior management, but without defining diversity. The advantage of this is disclosure of a plan. The disadvantage is that lawyers define diversity downward to include diversity of “perspective” or “background,” whereby a non-diverse board could actually claim to be “diverse,” thereby obviating the intent to achieve gender and ethnic diversity.
3. The third way – exemplified by Australia – is for the regulator to define diversity and require progress disclosure by companies in setting and achieving their own objectives based on the definition. Australia defines diversity for example as “gender, age, ethnicity and cultural background.” The figures for these groups have been steadily increasing ever since.
4. The fourth approach – exemplified by Quebec and Norway – is full-fledged quotas – 40% women in Norway and 50% women plus cultural matching in Quebec. This obviously is the biggest stick a government can wield, and there are advantages clearly in the certainty of achieving imposed targets, without gaming definitions or feet dragging.
The best, most flexible approach is a variant of # 3, which is to define diversity – as a guideline or principle – and then hold companies responsible for achieving their own objectives and practices, through a comply or explain approach.
What is not acceptable is to do nothing, especially when the rest of the world is passing Canada by. The right directors can make or break a board. It’s time not only for companies – but also for governments – and in particular the Prime Minister, Stephen Harper, to focus on this issue.