Measures to Increase Gender Diversity on Corporate Boards

, New York Law Journal

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On Aug. 26, 2013, the California State Senate passed Senate Concurrent Resolution (SCR) 62,1 which calls for greater representation of women on corporate boards, with a 30-6 vote. Although this resolution does not require corporations to take action, it encourages publicly traded corporations in California with fewer than five board seats to have at least one female director, those with five to eight board seats to have at least two female directors, and those with nine or more director seats to have at least three female directors. It also sets the goal that all publicly traded corporations in the state have at least one woman by 2016. This issue became a front-page headline when Twitter filed for its initial public offering and revealed that its seven-member board was exclusively composed of men. Twitter has named Marjorie Scardino—the former CEO of Pearson—to its board in December 2013.

The resolution cited a number of studies demonstrating positive correlations between gender diversity on boards and improvements in corporate governance and financial performance. One of the largest studies, which was conducted by the Credit Suisse Research Institute and covered 2,360 companies worldwide from 2006 to 2012, found that companies with a market capitalization of more than $10 billion that have at least one female director outperformed peer companies with all-male boards by 26 percent.2 In addition, the Credit Suisse study found that companies with at least one female director averaged higher net income growth, lower net debt-to-equity ratio, and faster reduction in debt compared to companies with no female directors.

Other studies cited in the resolution found that diversity on corporate boards is associated with more effective corporate governance and improved financial value.3 Most recently, a study from the University of British Columbia's school of business in the Journal of Corporate Finance concluded that companies pay less for acquisitions if they have more women sitting on their boards, indicating that women are less inclined to chase risky deals and tend to demand more for the company's money.

Yet, despite evidence showing that greater gender diversity on boards may be beneficial to corporations, women continue to hold a low number of board seats. In 2013, women held approximately 21 percent of board seats of the 100 largest U.S. public companies listed on NYSE or NASDAQ, and only two of those companies have boards comprised of at least 40 percent women.4 Since larger companies tend to have more diverse boards, this percentage decreases when smaller companies are taken into account: While 16.9 percent of directors in the S&P 500 are women, the percentage is 13.5 percent in the S&P Midcaps and 11.3 percent in the S&P Smallcaps.5

Worldwide, women hold 11 percent of board seats at the largest companies. In addition, female representation on corporate boards has increased only incrementally over the past several years. From 2004 to 2012, the percentage of female directors at Fortune 100 companies increased from 16.9 percent to 19.7 percent.6

Initiatives and Advocacy

SCR 62 is part of a larger effort, both in the United States and globally, to increase gender diversity on corporate boards. The United States has tended to favor government action that, like SCR 62, encourages board diversity rather than mandating companies to take specific actions. A rule adopted by the Securities and Exchange Commission in 2009 requires public companies to disclose in their annual proxies whether and how board or nominating committees take diversity into account in identifying board nominees.7 SEC Commissioner Luis Aguilar, who has spoken often about the need for greater diversity on boards, has indicated that this disclosure rule is only a first step. Because it does not define "diversity," the vagueness of the rule has allowed companies to provide disclosures that do not address racial or gender diversity.8

Scott Stringer, the newly elected New York City comptroller, has floated plans to increase female board representation by appointing a "chief diversity officer" to the comptroller's office, sponsoring shareholder initiatives calling for greater diversity, and working with pension funds and other investors to put pressure on companies to increase the number of women directors.

In addition to government initiatives, industry and non-profit organizations have been formed to advocate for greater gender diversity on boards. One such group, the "Thirty Percent Coalition," which is comprised of senior business executives, national women's organizations, institutional investors, corporate governance experts and board members, has taken action by sending letters to large public companies with no female board members and, in some cases, filing shareholder resolutions asking companies to commit to greater gender diversity on their boards.

Another group, "2020 Women on Boards," campaigns to reach 20 percent representation by women on U.S. corporate boards by 2020.

Quota Laws

In contrast to the voluntary approach taken in the United States, several countries, most of them in Europe, have passed quota laws requiring a minimum percentage of women on public company boards. In 2003, Norway was the first country to pass such a law, mandating that public companies achieve 40 percent representation of women on their boards within five years. Non-compliant companies risked fines or even dissolution. Since then, Belgium, France, Italy, the Netherlands and Spain have passed similar laws.

The sanctions imposed on companies that do not meet the quota vary from country to country and include fines, suspension of director benefits and compensation, or public disclosure explaining why the target was not reached. In some countries, such as Spain, there is no specific penalty for non-compliance, although gender diversity is taken into account in awarding public subsidies and state contracts.

Most recently, in November of 2013, the new coalition government in Germany announced its plans to require German listed companies to fill 30 percent of their supervisory board seats with women starting in 2016, and to set and publish individual binding targets to increase female representation in top management by 2015. In Germany, women currently fill just north of 17 percent of positions on supervisory boards, and only 6 percent of management boards.

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