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Quotas are not the answer to boardroom diversity

Board appointments to fill quotas not based on merit could alienate established board members, warns Liz Murrall

08 Nov 2012

By Liz Murrall, Investment Management Association

Gender business represented by female and male signs

THE ISSUE OF WOMEN in senior positions is very much in the spotlight. Even David Cameron has been criticised for not allowing women into his so-called ‘Eton boys networking circle'.

For investors the important thing is that their investee companies have boards that are effective. A board should be the best fit for the company and one with a cross-section of ideas, skills and knowledge is going to be better equipped to develop the company over the long-term, challenge previously held assumptions, embrace new ideas and manage different stakeholders.

There is also evidence that greater diversity, particularly of gender, can have a positive effect on corporate performance. Nor is it is just about gender. Too often board members come from an accounting or legal background, with too few having marketing or international experience.

Quotas

One common suggestion has been that quotas should be introduced such as that in Norway whereby 40% of board members are required to be women. The positive thing about quotas is that they work. But what they don't do is address the fact that the lack of women on boards is often a symptom of their underrepresentation at senior executive levels from where many board members are recruited. Quotas may only exacerbate this - deterring ambitious women from taking on executive positions by offering them a direct route to non-executive directorships.

Board appointments to fill quotas not based on merit could alienate established board members; not just men but also women who have been promoted through the ranks. Incoming women could find it difficult to earn respect when their appointment is known to be to fill a quota.

A proposal for a 40% quota within Europe was recently rejected. We understand the proposal is expected to be re-submitted, but more as an objective for companies rather than a legislative target.

What is needed?

Market-led measures can ensure that boards are diverse and address any gender imbalance.

For example, Lord Davies' report of February 2011 set a target of at least 25% of FTSE company boards to be made up of women by 2015 and that FTSE 350 companies should set out the percentage of women they aim to have on their boards in 2013 and 2015. His Progress Report, one year later, noted that women account for 15.6% of all directorships in the FTSE 100, up from 12.5%; women account for 9.6% of all directorships in the FTSE 250, up from 7.8%; and the number of all male boards in the FTSE 100 was down to 11 from 21.

It is also important that companies are transparent on how they are seeking to increase gender diversity and what they have done. The disclosures required by the UK Corporate Governance Code in a listed company's annual report underpin this and mean that shareholders can challenge companies on their diversity policy. The Code required companies to report on the work of the nominations committee which should have regard for the benefits of board diversity. Following Lord Davies' review from October this year, companies have to report annually on their diversity policy, including gender, and their objectives for implementing the policy and the progress made.

Diversity is also one of the factors to be considered when a board evaluates its own effectiveness. Moreover, the government is looking at introducing the disclosure of proportion of women on boards as part of improving narrative reports in accounts.

In Europe the European Roundtable of Industrialists has a scheme to which major companies, such as Vodafone, Phillips, Siemens and BASF, have signed up. Each year signatories publish the number of women in senior positions and in the work force at large, and their targets.

This transparency allows progress to be monitored and shareholders can judge if a company's diversity policy is adequate, how the policy has been implemented in practice and the impact it may have on a board's effectiveness.

Other voluntary initiatives help to keep the issue on the agenda and enable those committed to improving gender diversity to work together. For instance, the 30% Club brings together chairs of UK boards and investors committed to increasing the proportion of female directors and who support a goal of 30% of board positions being occupied by women by 2015.

Companies themselves need to help build the pipeline by developing and training women so that there is a sustainable pool of credible female candidates who can become executive and non-executive directors. They should also allow their executives to take up at least one non-executive position. They can also contribute by recognising their employees' commitments outside work and allow for flexible working, for example parental leave, so that both men and women can progress in their careers.

In conclusion, we need diversity within boards but board positions should be based on merit and not to fulfil quotas. Nor is it one size fits all in that there needs to be diversity between boards as well as within them.

Liz Murrall is director of corporate governance and reporting at the Investment Management Association

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