Since the start of this year, at least 40% of board members at large French firms (including those with over 500 employees and annual revenues in excess of €50 million) must be female. Companies that fail to comply with the quota system risk seeing any additional male nominations blocked, as well as a freeze on all board remuneration.
Legislating gender diversity is hardly controversial in Europe, where women today account for just under 25% of board members at the largest listed companies. (By comparison, they hold roughly 19% of board seats at S&P 500 firms and fewer than 3% of seats at TOPIX-listed companies.)
However, it’s not clear that such quota systems – which also exist in Belgium, Iceland, Italy, Germany the Netherlands and Spain, and will be introduced in 2018 in Portugal – have much trickle-down impact.
A recent review of the pioneer in this regard – Norway, whose 40% quota for female directors came into force in 2006 – found that “the reform had very little discernible impact on women in business beyond its direct effect on the newly appointed female board members.”
There are also reasons to challenge the conventional wisdom that greater gender balance on a board level is linked to superior financial performance. Despite the publication of multiple studies that claim to demonstrate such a correlation, there is little evidence that having more women in the boardroom actually causes profitability to increase.
That distinction – between correlation and causation – is important.
Consider the correlation between sleeping with one’s shoes on and waking up with a hangover. While the presence of shoes in bed may be statistically interesting, the Hush Puppies obviously aren’t the cause of the headache.
In this case, too, there are additional variables that may inform why companies with diverse boards perform better – including that companies that do better tend to attract more diverse board members.
Indeed, a 2016 Peterson Institute study of some 22,000 firms in 91 countries found that “the impact of women’s presence on the board is not statistically robust.”
Writing on the same topic last year, professor Alice Eagly, a fellow at the Institute for Policy Research at Northwestern University, summarized current findings: “Taking into account all of the available research on corporate boards … the net effects are very close to a null, or zero, average.”
Even if the evidence suggests that boardroom diversity doesn’t necessarily deliver higher profits, that’s no reason to abandon the larger effort. On the contrary, social justice and female empowerment are themselves entirely worthy goals.
Meanwhile, there is an area in the organization where gender diversity seems to more clearly pay a dividend: senior management, where fewer than 25% of all roles worldwide are held by women.
Having a higher proportion of women at the C-suite level is strongly correlated to improved corporate performance, according to the Peterson Institute, which argues that “a more diverse leadership team tends to deliver better outcomes on average.” The same study found that female CEOs did not significantly underperform or overperform when compared with male chief executives.
In other words, having a robust pipeline of senior women – who are actively involved in day-to-day management – is more important to corporate profitability than such diversity in the boardroom or CEO’s office.
That fact may be frustrating for governments that legislate diversity through quick-fix board quotas, especially since it’s a lot easier to count such seats than it is to identify senior management positions, which vary greatly from one firm to the next.
It’s also disappointing news for investors keen to capitalize on the diversity dividend through similarly simple math that just doesn’t add up.
That said, what’s the harm in linking boardroom proportionality and increased corporate profitability, since that serves the goal of equality?
Such myths, according to professor Eagly, “set people up to expect that corporate financial gains … follow easily from diversity. Of course they don’t. That expectation could sideline people from understanding and overcoming diversity’s challenges.”
That’s why organizations that are truly committed to this effort must recognize its complexity, and support policies that help every woman navigate what Eagly calls “the labyrinth of leadership,” which is replete with barriers to success – from the entry level to the very top.
Kristel Cools is group head of Asset Management at KBL European Private Bankers, a member of KBL European Private Bankers, which operates in the UK under the name Brown Shipley.