Economy

What Actually Works If We Want To Increase Gender Diversity In Corporate America

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Women still hold less than 17 percent of board seats at America’s largest companies, a figure that hasn’t improved in eight years. Some countries have made more progress, although none except Norway, which has a strict quota requirement that boards be 40 percent female, gets close to 50-50. So what can be done to actually open up the board rooms to more women?

ThinkProgress spoke with Aaron Dhir, Professor of Law at Osgoode Hall Law School and Visiting Professor of Law at Yale Law School and author of the forthcoming book Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity. In the book, he reports on the results of his interviews of Norwegian board directors about their quota as well as his study of the one, vague rule regarding diversity in the United States. A slightly edited version of the conversation follows.

In thinking about gender diversity at the top of corporate America, why focus on boards?

A lot of people are skeptical about the importance and relevance of boards, particularly in the North American context. It stems from two concerns, first that boards typically delegate day-to-day decision-making to senior executives, and second that we probably expect too much from them, to advise management and the CEO but on the other hand to monitor management. It puts them in a sort of conflict. If when they’re making decisions they’re relying on the opinions of executives, how can you effectively monitor those same people?

I think those are fair critiques, but at the same time focusing on boards is useful as a starting point for diversity in corporate governance for practical and substantive reasons. On the practical side, many jurisdictions around the world already subject boards to some degree of regulation, whereas that’s not necessarily the case with senior management. On the more substantive front, I don’t think we should have a lack of appreciation for the power of boards. In both the U.S. and Canada… the board is not able to delegate certain functions to management. Also crisis after crisis we see this renewed call for more active, more probing, more intelligent boards. There have also been studies suggesting that because the board plays a role in the appointment of senior executives, more gender diverse boards are related to more gender diverse executive suites. Not the least of which to say the board is core location of power in society.

Where does the lack of diversity on boards come from? Is it because there’s a pipeline problem or a discrimination problem?

There’s three ways to look at the reasons for the statistics. Either it’s a pool problem and there is a shortage of women qualified to be directors, or there’s a sufficient pool of qualified women and they’re opting out or not leaning in, or third there is a sufficient pool and they’re interested in directorships but they’re not being selected. My own view in North America is that it’s number three: there is a sufficient pool and that pool is interested in these positions, but those individuals are not being selected.

There’s a very similar approach, whether we’re talking about the U.S., Canada, or Norway, in how corporate boards are recruited. The most important step is to tap into the social and economic networks of existing board members and the CEO. When you have that kind of informal process in play, it’s natural that the subjective biases that effect the broader population will come into play. The first is implicit cognitive bias: there’s a large body of social science research suggesting a perception that men are better at business activities and we as a society perceive men to be more effective leaders than women. The second process at play is a tendency for us to associate with people who are socially similar to ourselves. So the fact that boards and nominating committees are likely to recruit members from their existing networks, and those networks tend to be socio-demographically homogenous and closed to outside members, leads to an appointment process that’s not inclusive.

If we want to see greater gender diversity in the corporate world, do we need some kind of intervention?

Traditional economic theory suggests that discrimination will be dealt with by the market. But if you look at statistics, that hasn’t proven true. I don’t mean to suggest that law is the solution to everything, because surely it isn’t. Intrafirm initiatives, civil society initiatives, databases of board-ready women are all very, very important. But I do think that legal intervention is necessary as well, especially to curb implicit cognitive bias and closed social networks. But what form should it take? I think different degrees of legal intervention will be tolerable in different countries depending on the overall political culture. I don’t think there’s any one-size-fits-all approach.

In 2008, Norway was the first country to enforce a gender quota for board members. Has it worked?

In terms of a raw increase in numbers, there’s no question that it’s worked. But I think its success is deeper than that. I conducted interviews with both male and female corporate directors [in Norway] because I wanted to understand their lived experiences both before and after the law came into effect. They emphasized the variety of perspectives and experiences women bring to the board, they valued women’s independence and outsider status, stressed women’s greater propensity to engage in more rigorous deliberation, risk assessment, and monitoring. The other thing I found striking about all of this is that most of the directors I interviewed who were in support of the law said initially they were either opposed to it or very hesitant about it or agnostic, not supporters. It was only after seeing the law in action and directly experiencing its effects that they came around to endorse it.

So whether or not it’s a success depends on what we want from it. Along the lines of increasing the level of constructive conflict and cognitive diversity in the boardroom, at least through eyes of directors I interviewed, it has been a success.

What has the quota been like for Norwegian women themselves?

One of the major critiques is that quotas may stigmatize the women that they intend to help. [Ed. note: The worry is that women will be thought of tokens or unqualified candidates who got their positions only because of the quotas.] I can say it’s clear that the women directors I interviewed generally did not speak about the law in a way that suggested it had stigmatizing effects. Rather, the majority of the directors I interviewed characterized it as something that had democratized access to a space that had just been unavailable to them. For some I think the reason that there hasn’t been stigma relates to critical mass. Because the quota mandates a gender balance, it makes marginalization and stigmatization pretty difficult.

Are there any potential pitfalls of Norway’s quota law?

Yes. I do have a concern about whether there may be a gender essentializing effect here. Also, if part of the reason that women on the board contribute to effective governance is because they’re outsiders, they’re outside of male networks and therefore more willing to challenge norms, what happens as they gradually assimilate onto boards and become part of the networks of male directors? I think we just don’t know the answer to that; these quotas are too new to know. But it’s something we need to look for.

Another thing is a Michigan study found that Norwegian firms had a pretty significant reduction in value after the quota. But when I read that study what I get is that you had an influx of directors that had very different backgrounds, they were less senior, less apt to have prior CEO experience, and that all happened very quickly. If that’s correct, there are likely ways we can minimize the effects of an abrupt exogenous shock. For example, interim quotas to slow down the process, say pegged at 20 percent before we get up to the higher 40 percent level, or longer periods for compliance so it’s a more gradual increase in numbers. These are a few examples, but I discuss others in the book.

The United States doesn’t have anything like a quota. Instead, the Securities and Exchange Commission has a rule requiring companies to say whether they consider diversity in selecting board members. Does it work?

I think it depends what we want from it. If the goal is to just get corporations to talk about diversity, have them produce a vocabulary of diversity, then sure it works. Compliance rates are very high. I analyzed the proxy statements of S&P 100 companies for the first four years of rule and in almost all years firms did consider diversity.

But in the final version of the rule, the SEC chose not to define diversity. Most frequently [companies defined diversity] with reference to experiential characteristics. Only about half reported on socio-demographic characteristics of gender, race, or ethnicity. If [increasing those types of diversity] is our concern, and I think it should be, then no, I’m skeptical that the rule as currently drafted will eventually increase diversity levels. My worry is that it allows companies to conflate identity-based diversity with other forms of difference: knowledge, experience, values, beliefs. If you design a rule that gives such significant flexibility to corporations to come up their with own definitions of diversity, that might actually undermine diversity efforts related to gender and race. What incentive do they have to pursue gender or racial diversity? Having demonstrated in their filings that they do consider diversity in some way, in compliance with legal requirements, I worry they’ll be in a state of moral coverage and disinclined to go a step further. That’s speculation, but the data gives at least initial cause for concern because there’s very little difference in the year over year disclosures. You might think as firms become more accustomed to accounting for this information and articulating it in their disclosures, they might modify their practices. But there’s very little distinguishing the contents from year to year.

Could the U.S.’s non-quota, reporting-focused approach actually increase diversity if it were tweaked or reformed?

I suspect that disclosure is probably the most viable option [for increasing diversity] given the U.S.’s general resistance to intervention in the marketplace and resistance to quotas. So although European-style quotas might be a more direct way of increasing gender diversity, at the end of the day the political obstacles and also potential constitutional obstacles are likely insurmountable.

Within those limitations, are there ways to revise the rule to make it less anemic and more robust? In the book I give two recommendations for redesign. First of all, I suggest that the SEC needs to define diversity as including socio-demographic characteristics. That’s, I think, the starting point. The second recommendation I’ve made is that the SEC should consider revising the rule to reflect a “comply or explain” approach to disclosure. The format of comply or explain disclosure is that companies have to report on whether they comply with some sort of standard or best practice, and if they don’t they have to give an explanation for their noncompliance. There is some flexibility here – you can avoid a one-size-fits-all mentality.

What I’ve suggested is that the rule be revised to set out certain diversity-related reporting steps or practices and ask firms to explain why those steps or practices haven’t been taken. For example, to adopt a diversity policy, and if you haven’t, why haven’t you? To disclose the information of existing levels of representation, and if you haven’t, why haven’t you? To establish your own measurable objectives and to assess your progress in meeting those objectives, and if you haven’t, tell us why not. When you evaluate the board when you do annual evaluations incorporate diversity into those evaluations, and if you haven’t, why not? To confer diversity-related duties and responsibilities to the nominating committee, and if you haven’t, why not? These examples are drawn from comply or explain jurisdictions around the world. This model is typical of much of the European Union and often associated with the UK, but actually there are some instances of comply or explain that already exist in the U.S.

There’s no guarantee, but hopefully this would promote a conversation between firms and regulators. If you have to explain why you are doing something or not doing something, then hopefully that will result in deeper contemplation by firms. And it should be open to the regulator to say okay that’s fairly convincing, we understand why, or to say maybe that’s not so convincing, have you thought about this? I should say that in other countries that have comply or explain, one of the drawbacks is that often the explanations that companies provide are insufficient, and if you just leave it to shareholders to review explanations then that [process] doesn’t necessarily work as well as it might. If this suggestion is to work, it will be key for the SEC to play a role in monitoring the explanations, to have these kinds of conversations. I also think that civil society groups should play a role in that as well.

Minus potential political resistance, could a quota system work in any country?

It’s very difficult to know, at this early stage, if a quota system will work in countries whose social welfare and egalitarian commitments are different from Norway’s. Since Norway we’ve seen the spread of these quotas to France, to Italy, to Belgium, to Iceland, for example. There are different variations of it, but I think we have seen the model spread. And quotas are also at different stages of consideration in other countries. In Canada there are actually two proposals in the air right now. One bill in the Canadian Senate seeks to move forward with a quota, and the Ontario Securities Commission is moving forward with a comply or explain proposal. Time will tell if quotas can be effective outside of Norway — we’ll need to watch and study developments in other countries very carefully.