Does board diversity matter?

Introduction: When Norway made it compulsory for listed companies to have 40 percent female board members, it took the threat of de-listing non-complying organisations to achieve that target. Across the world still less than 15 percent of board seats are held by women. In Australia, pressure is now being applied by the ASX and by some investor organisations for companies to achieve a 40 percent female board member target. But does board diversity really matter?

From the University of Sydney Business School this is Sydney Business Insights the podcast that explores the future business.

Sandra Peter: My name is Sandra Peter and to explore board diversity and whether it really does matter, I'm joined by Dr. Danika Wright from the Discipline of Finance at the University of Sydney Business School. Danika has been tracking female board representation and the real impact of women in the boardroom. Welcome Danika. Thank you for talking to us today.

Dr Danika Wright: Thank you.

Sandra: We're talk about board diversity. So first we need to figure out what is a board and what's the role they play in a firm?

Danika: This is such an interesting and important concept for us when we're trying to understand how firms are run and what kind of performance they're going to be able to generate for shareholders and broader stakeholders. The board, ie the board of directors, is a group of individuals who are ultimately responsible for the governance and strategic direction and management of a firm. So what this means is that they're providing the strategic direction of the company, they're working with the CEO to determine how they're going to implement that strategy. They perform advisory and mentoring services to the CEO to help them achieve a lot of that strategy and they also very importantly monitor the performance of the firm and of the CEO. The board is also setting the compliance and control systems of the organisation which means that when the firm's financial reporting is conducted there's systems in place to ensure that this is done in a timely and accurate way. So I guess we could say that what the board does is hire and potentially fire the CEO and make sure that the CEO has the resources and strategy to help a firm create value for their stakeholders.

Sandra: Board diversity is something that's been in the news and it's been discussed quite a lot. Let's talk a little bit about what is board diversity and why does it even matter.

Danika: This sits in a bigger question of what makes a board effective. If the board has this huge role of making sure that the firm is run well from a governance perspective, that we've got corporate controls in place to make sure that the CEOs are following the strategic direction of the business then we want to make sure that the people who comprise the board of directors have the right skills and experiences themselves to make sure that it operates well. When we talk about board diversity we're really talking about all of the differences among the directors that comprise the board. So this could be their gender, age, ethnicity, their skills, and their experience both professionally and from their personal lives. In terms of talking about a director's past experience there's some really interesting ideas that come out which say that people's lives in their personal space aren't totally different from what they do in their workspace. If you are a risk taker in your personal life and you have a pilot's license and in your professional life you happen to be running an organisation you're probably more likely to take more business risks there as well. And another angle of research has shown that even experiences from very early on in life for example the idea of the cohort known as "Depression Babies" people who grew up through the Great Depression tend to be much more conservative when they make financial decisions than people who grew up in boom times and had much more positive economic experiences as youngsters when it comes to their future professional lives.

Sandra: In what ways does board diversity matter then?

Danika: So board diversity and how it impacts a firm's performance is actually a very difficult thing to try and measure. While we see a lot of reports that come out and say that a board which has more gender diversity, a board which has more female representation on it, performs better, is associated with a company that has better financial reporting, better systems in place. The issue is that what we're generally looking at with those statistics is correlation and what you'll find out in every first year statistics course you do is that correlation isn't the same as causation. And so this research has a lot of issues which are tied up in an idea called endogeneity - the fact that a firm is performing well and the fact that women are on their board might actually have to do with the fact that those women chose to be on a board that was performing well. There could be all kinds of other things associated with a firm that's performing well which has encouraged them to appoint women to the board. So it's very difficult to try and disentangle all of these different components. I guess ultimately why we come to the conclusion that there's a business case for diversity on boards is that we shouldn't be constrained by barriers to the best people being appointed to boards. And so those barriers could be cultural they could be ingrained in the institutions of a country for example where childcare access is limited or unequal. That's where you start to get a difference between the career progression of men and women and ultimately who is then able and available to serve on the boards of companies.

Sandra: What does board diversity look like in Australia?

Danika: So in Australia it really depends what kind of company we're looking at. Particularly in the large companies the top 50 by market capitalisation, we do have reasonably good gender diversity. In fact last year in 2016 we reached a record number of female appointments for ASX 200 firms where the total number of female appointments was just over 40 per cent of all director appointments.

Sandra: That's fantastic news.

Danika: There are differences though when we break it down and look at different industries and within that top 200 there's still quite a few companies which don't have more than one woman on the board. So when we talk about gender diversity it's sort of a question of what impact one woman can have on the board vs. whether a critical mass is more likely to achieve some gender diversity impact. So certainly within the top 200 there's been a dedicated push and concerted effort to increase the number of women who are on boards and the number of boards who have at least some female representation. As I said the top 200 companies is where there's a lot of focus both by institutional investors and analysts, they're the companies that we tend to see the most about. Outside of the top 200, the smaller firms which make up the Australian stock market, there's not as much information about gender diversity on their boards and the data that we do have access to indicates that female representation there is much lower.

Sandra: There have been a number of policies introduced around the world that tried to set quotas to address this issue of how many female directors you have on boards in companies of different sizes. So what do these policies look like around the world and what are some of the outcomes that they've had?

Danika: So probably the most well-known gender quota policy has been the one which was introduced in Norway. This stipulated that firms, listed companies, in Norway needed to achieve a 40 percent female representation across all boards. This was actually a law passed back in 2003 and we think about how long ago that was, it was very controversial at the time it received a lot of attention around the world and actually was very negatively received in Norway at the time, there was a lot of criticism about what this would mean for positive or reverse discrimination about whether it would mean that women are being appointed to boards in a very tokenistic sense, about whether it would lead to not the best person or people based on merit making it on to those boards. When the law was first passed, firms were very reluctant to tackle the problem of gender diversity and really it was only when negative penalties were introduced or proposed by the government that would see firms that didn't comply with these quotas that the companies did get on board with the quota and by 2008 they did have all of these quotas being met, the 40 percent representation. What we've seen since then though is a lot of other countries adopt either quotas or other policy targets which encourage and incentivise gender diversity.

So between 2008 and 2015 there were eight countries that had legal quotas. Many of these were in Europe so countries such as Belgium, Iceland, the Netherlands, there was also countries like India that proposed quotas which required at least one female to be on the board. Now there's mixed success with how these have turned out. In many of the European countries, there was some resistance at first but gradually the number of women on boards increased. In India, this was only introduced in 2015 but a lot of companies which when they were faced with the potential penalties for not complying started appointing family members as their token woman to the board just in order to comply. But not all countries have introduced quotas. Some countries instead have introduced targets or governance codes which have specific recommendations for how boards should organise their nominating committees. These are the subcommittees of the board who meet to try and determine well who should be joining the board, who should be standing for election to the board, and the governance code in a number of other countries have recommended that these nominating committees do specifically consider gender diversity when they're making appointments to the board.

So most of the early research really looked at what happened in Norway. When Norway introduced their gender quota rule, it was a very big shock not just to the Norwegian stock market but to the broader set of firms around the world who were wondering whether this was something that their own countries might start to impose and adopt. Researchers who considered the Norwegian law that was passed considered what the market reaction was like and found the market reaction was negative implying that stock market participants thought that this wouldn't lead to very good outcomes. And also from an accounting perspective firm performance declined as a result of these quotas being introduced. But very importantly we need to realise that there was other things going on here. While we had more women being appointed to boards and the quota requiring companies to do that, you had a different type of person coming onto the board - not just their gender but also being younger having less years of professional experience and the more recent research which has gone back and re-studied what happened in Norway has found that the financial performance isn't negatively affected now by those gender diversity targets. In fact what they're seeing is that there's not a positive effect either. So we're getting these boards which are more diverse but we still have this unanswered question of whether diversity influences firm at performance and how it might do that. What they generally have found though is that there's broader implications from having these sort of quotas. So in Norway it has helped to change the cultural attitudes and what's considered the norms. It's introduced a whole new spectrum of role models for future directors - male/female, different ages, different backgrounds to be involved with the leadership of organisations. Very broadly though there is a big issue around why women are underrepresented on boards to start with. And if we are looking at just that sample who have made it through well by getting past the glass ceiling are they different in another way from women out there who are working or making it into executive positions? So when we consider women who have made it onto a board they've burst through that glass ceiling, maybe they have a very similar professional experience or personal background to the men who they're working with as well. And so the overall diversity, it might be gender diverse, but it's not diverse in a whole range of other aspects.

If there's issues which prevent women getting into leadership positions through an organisation or developing the skills and expertise to make them effective leaders on a board then quotas aren't going to be effective. We need to as a community, as a culture, look at all of those other barriers that might prevent women getting into those roles. So for example in Scandinavian countries which have quite family friendly workplaces the proportion of women who serve on boards who are married who have families is much higher than if we look at a country like the United States. Women who serve on boards in firms in the United States are more likely to be single and more likely to not have children. So there's a much broader set of issues here than just setting a rule in place that targets gender diversity.

Sandra: There seems to be controversy around these policies so if you look back at Australia now do we need these policies in Australia? Do we at the moment have anything similar to that? And what have been the effects of what we've been able to do so far here?

Danika: So in Australia at the moment there is no mandatory quotas for listed firms. In 2010 though the ASX corporate governance guidelines did introduce for the first time diversity recommendations. Essentially what they were requiring companies to do was improve the reporting to their stakeholders and shareholders and the broader market about what policies the firm itself had in place to promote gender diversity particularly in senior leadership roles. The approach was very much an "if not, why not" strategy. So if you didn't have a gender diversity strategy then you needed to explain to the market why not and for a lot of small companies they didn't and they had explanations such as we're so busy just getting our other systems in place that that's not on our current radar. It's something we might look into in the future but it's simply not something we've had time to sit down and work through at the moment. So that was in 2010. And when we look at female appointments to boards on an annual basis, after the ASX adopted this new recommendation in 2010, we saw an increase in female appointments to boards from an average of around five to eight percent prior to 2010 to an average which is set over 15 percent since then and that's across the whole market not just the top 200. The largest 200 companies though this is where there's a lot more focus from large institutional investors from analysts and in 2014 the Australian Council of Superannuation Investors which is a super fund grouping, this is where we have a very large amount of investment wealth being managed within Australia.

This group ACSI adopted a policy target where they would consider punishing companies in the top 200 who didn't have gender diverse boards. Ultimately their target is to achieve a 30 per cent board diversity across all top 200 firms by 2017. So by the end of this year. So the ASX corporate governance guidelines went some way towards incentivising companies to increase the gender diversity of their boards. Said only though the Australian Council of Superannuation Investors plans to start voting against sitting directors who aren't supporting or promoting women onto their boards has triggered a much more significant increase in female representation. As mentioned in 2016, there was record appointments of women to boards in the top 200 comprising around 40 per cent of new director appointments. But really when we go and look at the largest companies in Australia, that top 50 within the top 200, there's a big push to hit 30 per cent by 2017. Back in 2013 women made up around 19 percent of directorships. In 2015, it was around 25 per cent and given the current rates of appointments we're certainly on track to hit that 30 percent by 2017. Now in terms of what the effect is of these policies which have been adopted in Australia, it's really too early to tell exactly what kind of effect this is going to have on the financial and accounting performance of the firms. What we do see is when we go and look at the women who are joining boards, they do tend to have very high levels of education though that comes at the cost potentially of the number of years of experience they have.

Over time though what we I guess we'll need to find out is what characteristics of the women who join boards start to dissipate over time. So over time once they have more experience, once they're older as they join, do they start to look more like their male counterparts or do they continue to have different characteristics which allows gender diversity to be one of the broader concepts of diversity which can create a better performing board.

Sandra: What's the future of boards and of diversity?

Danika: So there's certainly a lot of questions for us to keep exploring. Given the changing nature of boards themselves, given the change in cultural norms and also regulatory approaches to diversity on boards we've got a lot of scope to keep exploring this from a research perspective. What is coming through though in the recent literature is there's not really a silver bullet for how to most optimally form a board. Board generalisations are very difficult to make. And increasingly the research is recommending that it depends on the type of company that we're looking at. Startup companies have very different requirements to be successful than firms which are much more mature and established and potentially facing further growth constraints. So when we have a real start up sort of company, what are they really looking to grow with? They need someone to help advise them on that growth strategy, how to take it to their business to the next level. If they're lacking the financing to get there then those board directors play a really important role in mentoring the CEO and helping create connections across the business and to other parts of the market where they might be able to get access to capital to further their future growth.

That's a very different mandate for a board in a startup then to what a board of a more mature organisation is going to be doing. If we think about boards such as Woolworths which are working in very constrained environments, there's a lot of price pressures, very mature industry, what they're trying to do is ensure that they can still find a way forward, innovate in ways that make their business still relevant, look for ways where they can continue to grow or start looking at whether their business should look beyond their traditional operating space. And where this leads the future of boards is how the shift from monitoring moves into an emphasis on the mentoring and advisory capacity of boards. And this is also then in line with what we're seeing where there's more emphasis on trying to identify and measure and assess how the human capital and social capital of the directors of boards can impact firm performance. So the future research into boards is going to be really exciting because at the moment there's been a lot of focus just on the gender diversity. But remember diversity is much broader than that. There's also age, there's the skills, there's the expertise of the directors who are coming on and what's going to be really interesting to try and measure as we go forward is how diversity across a broader spectrum is affecting firm performance, how it interacts across different measures of diversity and how and whether these policies have achieve their desired outcomes.

Sandra: So we'll be talking about this again. Thank you so much for talking to us today.

Danika: It's been my pleasure. Thanks so much.

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