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ESG: Women on boards

Countries across the world are taking differing approaches to boosting female participation on company boards, finds Jonathan Williams . But is progress being made?  

Ensuring the boards of investee companies are diverse, skilled and represent a range of views and stakeholders is a matter that is receiving greater attention these days. But the issue of gender diversity does not yet receive the attention it arguably deserves, even with high-profile champions such as Christine Lagarde, the first woman to head the International Monetary Fund (IMF).

In a 2014 interview with US public broadcaster NPR, Lagarde argued that companies with more representative and gender-balanced boards and, more importantly, women in senior management positions were more profitable and “actually give a better return to their shareholders”. 

The cause of improving board diversity is being championed in different ways across Europe. The UK has the 30% Club and annual updates of measures proposed in the government-commissioned 2011 Davies Review. Germany has taken a more interventionist approach and earlier this year passed a law requiring that 30% of members on supervisory boards at large listed companies be female by next year – with the quota rising to 50% by 2018. 

A further 3,500 German firms with employee board representation will be required to set their own targets for increasing diversity and face leaving the posts vacant if women are not hired to fill the required proportion of roles. 

In comparison, Scandinavian countries have been held up as a model, having tackled gender pay gaps and parental leave issues decades ago. Board diversity has increased. According to data from the NGO Catalyst, Norway and Finland lead European listed companies on diversity with over 35% of listed board appointments handed to women in the former and 30% in the latter. 

Christine Lagarde

Christine Lagarde, managing director of the IMF and champion of board diversity

But Maria Oldin, managing director of Switzerland-based EDGE, which provides a certification for gender equality, warns against placing Scandinavian countries on a pedestal and highlights her native Sweden. “What’s interesting in Sweden is that, perhaps in some ways Scandinavia is living off its old merits and resting a bit on its laurels.” 

However, Sweden has recently seen a notable improvement, with 27.9% of board members of listed firms now women, up from 24.7% in 2014. Eva Halvarsson, managing director of the national pension buffer fund AP2, says the improvement recorded by its annual Female Representation index is the biggest leap since 2004 and shows that nomination committees are exerting greater responsibility. 

Nevertheless, at the current pace, parity will be achieved only in 2042. “There is still much to do,” says Halvarsson. “But I am convinced that this issue has now attracted the attention necessary for accelerating future development in this area and to ensure better utilisation of the competence available.” 

The real question for investors is what impact this trend has on returns – if at all. One of the more authoritative studies on the subject is by Credit Suisse. Its Gender 3000 report from 2014, found that gender diversity was on the rise across all 40 countries covered. It also found that more diverse boards had superior returns adjusted for sector bias – with a compound excess return of 3.7% since 2005 for those with at least one woman on the board compared against companies with none. 

A report by McKinsey said in 2012 that its findings were “startlingly consistent”, as both return on equity and earnings before interest and taxes (EBIT) were higher at diverse firms. Similar work undertaken by the Rotterdam-based asset manager Robeco earlier this year also found companies with outperformance of 2.17% a year, although it would only go so far as to say there was a “positive” relationship between diversity and return, rather than a causal link. For its part, Thomson Reuters has found that MSCI World companies with mixed boards are more likely to achieve a performance mirroring or slightly outpacing the index, whereas companies with male-only boards underperformed.

Credit Suisse also struck a note of caution, finding that quotas do not always help solve deep-seated structural issues. “Yes, [quotas] focus debate,” the report’s authors Julia Dawson, Richard Kersley and Stefano Natella argued, “but we have concerns that they detract from the real issue of gender equality throughout the management pipeline by encouraging tokenism.”

Proportion of women on boards of listed companies by country

Oldin, whose organisation assesses companies based on five areas – equal pay, recruitment and promotion; leadership development; mentoring and training; flexible working; and company culture – echoes concerns that board diversity targets should only be seen as a means to an end. “We say [board composition] is an important indicator, but in order to ensure that the board level is the way it is, the pipeline needs to be examined.” To this end, human capital management (HCM) issues have to come to the fore, such as disclosing gender balance and pay differentials across the entire firm, rather than simply at senior level, allowing greater emphasis to be placed on these matters. 

For now, HCM is a secondary issue, especially in the absence of comparable metrics for institutions to assess companies against. But diversity and gender quotas, either voluntary or mandatory, are often part of pension funds’ engagement policies. As Halvarsson notes, it falls to nomination committees to ensure diversity of talent remains on top of the agenda. It is for this reason that both the Universities Superannuation Scheme and RMPI in the UK have enshrined in their joint voting policy that they will withhold support for re-election of nomination committees of companies that fail to put in place targets and that fail to meet targets. 

Those fearing that more gender-balanced boards might result in more conservative or risk-averse companies also need not worry, according to Credit Suisse. Its research found that while returns were higher, companies with female management were also not likely to shy away from taking risks. However, the research also noted the possibility of selection bias – those charged with appointments might simply prefer risk takers, regardless of gender. 

While the overall evidence points towards the financial benefits of more diversified boards, the question of soft targets versus hard quotas remains one for governments to consider. It will fall to institutions to police companies to ensure compliance is more than cosmetic, regardless of the approach chosen. Deep-seated cultural issues will require more than shareholder intervention. 

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