Much research has argued the business case for gender diversity on boards. But it is pressure applied by big shareholders that seems to have progressed the cause of women in US boardrooms.
New research shows that campaigns by the “Big Three” shareholders—BlackRock, State Street and Vanguard—over three years appears to have significantly shifted the composition of US boards in favour of women.
The news comes in the same week Nasdaq, the tech market, sought permission from US regulators to introduce new listing rules that would compel listed companies to disclose diversity statistics for their boards.
While a rule change would mark a major advance, the new research demonstrates attitudes are changing. Indeed, the research also indicates that under pressure from investment houses corporates eschewed their usual networks when seeking female boardroom candidates. That kind of recruitment policy, the researchers speculate, could have big implications for the way boards are run.
The research, led by Todd Gormley, a professor at Olin Business School, looked at board appointments made from 2016 to 2019 following public and private engagement projects. Statistical examination reveals the number of female directors increased 41.7% from 13.2% to 18.7%. The number of companies appointing their first female director also increased.
After controlling for developments such as a change in corporate culture and pressure from the #MeToo movement, the investigators conclude that the main driver of change was shareholder persuasion.
Launched in March 2017, State Street’s crusade was named “Fearless Girl” and placed its attention on boards with no female representation. Meanwhile, campaigns by BlackRock and Vanguard worked to place at least two women on each board.
But perhaps the most interesting development is how women were recruited. The researchers found that new female directors “were less connected to the CEO and existing board members”. Indeed, the stats indicate that there was a 75.5% cut in the likelihood of a new female director being in their CEO’s pre-existing network.
Using traditional networks, more likely to consist of other male directors, builds obstacles in the way of increasing female recruitment and representation, according to the researchers.
Outsider influence
There were other discoveries. New female appointees were more likely to find themselves in senior board roles, such as chairing audit or nominations committees.
The results may augur well for further growth in the recruitment of women. Female committee chairs are well placed to push for greater diversity among new boardroom recruits.
Appointing outsiders also has advantages. The researchers suggest they could improve oversight or “enhance the monitoring of management”, as they put it.
There is another possible upside. Given women often come with a distinctly different set of values and skills, they could influence how boards and their companies are run.
The writers conclude: “Our findings show that the Big Three can … use direct intervention to influence corporate governance by pressuring companies to adopt governance reforms that are easy to monitor at scale.”
Shareholders and women
While that’s all good news, the picture may be more complicated and potentially less optimistic than it seems. According to current research conducted by Corinne Post, a professor of management at Lehigh University, US, shareholders do, on average, support female board candidates a little more than they support male counterparts. But they do so when things are going well, and especially when there are no or very few female directors on a board.
Support for female boardroom candidates can also dwindle prematurely, she says. “We find that as soon as there are a few women on the board, shareholders withhold their preferential support for female directors.”
Research from elsewhere points to a tendency for companies to end adding women to their boards when they have a pair of female members, a phenomenon dubbed “twokenism”.
Post observes a third development: confidence in women appears to diminish when companies hit a a rough patch. “We find that when a firm hits performance turbulence, or is embroiled in some sort of controversy, shareholders stop favouring women directors in their votes.”
That’s bad news for female directors and seems to suggest they carry the can for trouble. Others have uncovered a lack of confidence in women. Maria del Carmen Valls Martinez, an economist at the University of Almeria, Spain, and an expert on boardroom diversity across Europe, says women are too often placed in “soft positions” such as audit committees, HR, marketing and corporate social responsibility.
“Women are rarely placed in financial management or as CEOs,” she says. “In fact, although the number of women is increasing, it is still insufficient and there is still discrimination even after the appointment of board members.”
Nasdaq’s reform of listing rules comes as a major boost to the cause of board diversity. Adena Friedman, president and chief executive of Nasdaq, says the aim is to increase transparency at exchange-listed companies on board composition and their “diversity philosophy”.
“We believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
The move has been welcomed. According to Christopher Davis, chair of the investor activism group at law firm Kleinberg Kaplan, investors will embrace the development. “I think it represents a rapidly coalescing societal consensus that greater diversity is required and is not happening fast enough absent top down requirements.”
Gender pay gap legislation
In the UK progress has been made. The FTSE 350, as an index, has reached a target of ensuring 33% of all board appointments are women. However, there is work to do for 41% of companies in the index which fall short. In September, the business secretary, Alok Sharma challenged the laggards to get their boards in order by the end of the year.
Recent analysis by Debut, a careers platform for graduates, concludes women occupy 36% of board roles across FTSE 100 members. A third have yet to reach the 33% target. The most diverse company, based on gender, is Diageo with 63% of board roles held by women. Auto Trader, Rightmove, Severn Trent and Taylor Wimpey follow closely behind with 56%.
Other measures have shone a spotlight on equality issues, including gender pay gap legislation, introduced in 2017, that compels companies to publish details of the pay differential between male and female employers.
According to Fiona Hathorn, chief executive of Women on Boards, the focus from shareholders is welcome but pressure needs to be maintained. “Let’s be clear, in the UK we have only really been working on the FTSE 350. Outside the FTSE 350 we have seen almost no progress as regards diversity on boards. So, initiatives like gender pay gap legislation is key to raising the issue of diversity of thought in boardrooms across the UK.”
While the academics behind this latest research offer a cause for optimism, investigators elsewhere suggest the progress of women on boards may be a trickier issue than it seems on the surface. This is no time to be complacent.