Gender Diversity in the Boardroom: Finding an Optimal Level?

By Won-Yong Oh, Loren Falkenberg, and Jim Dewald

There has been an increase in the number of women serving on boards. Today, everyone talks about “more” women in the boardroom. The more, the better? Probably, not always. In this article, the authors propose that there should be an “optimal” level of gender diversity in the board depending on organisational and company needs.

 

Recent tracking of gender balance on corporate boards reflects that there has been an increase in the number of women serving on boards.1 Among Fortune 500 companies, about 20% of the directors are female, and one-third of new director positions have been filled by women.2 A number of European countries, including Norway, Germany, France, Belgium, Iceland, and Italy, have legislated quotas for female board members.3 But even with this positive trend, there is an ongoing debate on how to increase gender diversity; however, we suggest that a more critical area of focus is identifying the appropriate gender balance and qualifications to improve board performance.

Research indicates that female directors broaden board discussions, facilitate collaborative approaches to leadership, and increase attention towards stakeholders’ interests.4 More importantly, having even one female director may improve board performance, while having more than one positively changes the dynamics in the boardroom.5

After completing a series of interviews with more than twenty male and female directors from North America, Europe, and Asia, we conclude, however, that simply enforcing “a gender quota of 40% (e.g. Norway) or less” will not lead to improved board performance. Rather than enforcing a “broad-based quota” or assuming that a “set diversity ratio fits all organisations”, we propose it is more important to align the gender composition and skills/knowledge matrix with the operating context of the organisation (i.e. the demographics of the key stakeholders).

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We identify three steps towards improving board performance via the appropriate gender composition.

Aim for the “Right” Numbers. The targeted gender ratio should be based on the company’s operating context. A North American director noted that industries with a greater number of female stakeholders, such as employees, clients, and suppliers, will have a greater pool of female candidates from which to select directors. For example, an appropriate gender diversity ratio might be even higher than 50% of women in industries where females comprise a majority of customers and employees.6 Five of the eight board members of American Water Works Co. are women.7 The senior vice-president of human resources justified this proportion saying that the company wanted the board to look like the customers and employees.8

Research indicates that female directors broaden board discussions, facilitate collaborative approaches to leadership, and increase attention towards stakeholders’ interests.

 

Also, the right number of women on boards may vary across countries. A male director in an Asian country said, “While I strongly agree that women directors are valuable in the boardroom, it is extremely difficult to find qualified candidates because there is a greater glass ceiling in our country, compared to European or North American countries.” In contrast, a Canadian director noted that part of identifying the right numbers is to ensure that there is both female and male representation on a board and that both genders have a voice.

Clearly Define Board Needs. Before nominating new directors, whether male or female, the needs of the board should be carefully reviewed. It is relatively easy to identify the functional backgrounds (e.g. accounting, finance, and law) needed; however, a more difficult task is to identify individuals who can advise a firm’s complex organisational decisions, including setting strategic directions, managing relationships with stakeholders, and dealing with emerging societal issues. Even though the experiences and skills required for such tasks are less obvious than functional qualifications, the company should define the board’s needs clearly.

A major concern regarding gender quota systems, without careful consideration of board needs, is that a quota-based system may result in selecting women who lack the required qualifications. One director from Norway said, “Selecting females based on gender, rather than qualifications, has not led to better board performance.” Thus, it is important to establish a system of selecting directors based on experiences and skills that can satisfy the board needs.

Find Hidden Talents. A key challenge is finding qualified directors. Many board nominating committees overtly state that women should serve on their board, but add that very few women have sufficient qualifications. The irony of this belief is that all directors must have previous experience as a director. A conventional point of search for board nominees is through “named executive officers” or senior management teams. However, 95% of CEOs in Fortune 500 companies are men, indicating that it is still very difficult to find a woman in the named executives’ offices.9 Then, where should the company search for candidates? Boards need to expand their screening process to find women who are just under the radar screen of having their picture appear in the annual reports.

One director from Norway said, “Selecting females based on gender, rather than qualifications, has not led to better board performance.” Thus, it is important to establish a system of selecting directors based on experiences and skills that can satisfy the board needs.

 

Casting a wider net beyond the conventional area is the key. Nomination committees and search firms should not overlook the untapped pool under the C-suite officers. One director told a story of a search firm presenting a board with a list of candidates dominated by men. The board had to push back by refusing to accept a list of candidates that was less than 50% female. Some of these female candidates might have less experience, but still have the appropriate level of judgement and critical perspectives contributing to the board discussion. Once candidates reach a certain threshold of qualification, it is less likely that their contributions to a board vary that much due to the differences in their years of executive experience.

In summary, optimising gender diversity in the boardroom is an important issue for effective board decision-making and strategic involvement. It is about more than responding to the public’s concern about women’s equality. Therefore, discussions of board diversity need to move beyond quotas to understanding factors that influence the “optimal” gender diversity for a given board, and to identifying and obtaining the “appropriate”, rather than the unobtainable, background and expertise.

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Won-Yong Oh is the Lee Professor of Strategy at the Lee School of Business, University of Nevada, Las Vegas in the US and an Adjunct Professor at the Haskayne School of Business, University of Calgary in Canada. His research areas include Board of Directors, Top Management Team, and Corporate Social Responsibility.

Loren Falkenberg is an Associate Dean in the Haskayne School of Business, University of Calgary.  She is an Academic Director for Governance Programmes of the Institute of Corporate Directors in Canada and taught at the Haskayne School of Business, and has served on three boards (including as Chair).

Jim Dewald is the Dean of the Haskayne School of Business, University of Calgary. He has served on over 20 boards, including 5 corporate boards in leadership positions (Chair or Lead Director). Prior to entering academe, he was active in the Calgary business community with senior leadership positions (CEO).

 

References

1. Credit Suisse. “The CS Gender 3000: The Reward for Change” September 2016.

2. http://fortune.com/2015/11/19/fortune-500-women-board-seats-2016-prediction/

3. https://www.thestar.com/opinion/commentary/2016/09/26/quotas-required-to-have-more-women-on-corporate-boards.html

4. Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A meta-analysis. Academy of Management Journal, 58(5), pp.1546-1571.

5. Kramer, V.W., Konrad, A.M., Erkut, S. and Hooper, M.J., 2006. Critical mass on corporate boards: Why three or more women enhance governance(pp. 2-4). Boston: Wellesley Centers for Women.

6. Hillman, A.J., Shropshire, C., and Cannella, A.A., 2007. Organizational predictors of women on corporate boards. Academy of Management Journal, 50(4), pp.941-952.

7. http://ir.amwater.com/officers-and-directors

8. http://business.financialpost.com/executive/e-suite-women/women-are-slowly-getting-more-seats-in-the-board-room

9. http://fortune.com/2015/06/29/female-ceos-fortune-500-barra/?iid=sr-link9

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