Should gender diversity be mandated for women on boards?

I just took part in a panel and debate/discussion on gender diversity on NZX listed boards. This was at the NZ Initiative’s Miro Summit. Was a very interesting discussion with contributions from some very experienced board directors – both male and female.

It is Chatham House rules, so can’t quote people directly but I can quote my own remarks, which are below:

New Zealand has a reasonably good track record of achievement for women.

Yesterday was the 119^th anniversary of the day women in NZ got the vote, after Governor Lord Glasgow signed the new Electoral Act into law – making NZ the first independent country to do so.

 Some of the arguments against suffrage included “Would the home-loving New Zealand wife be ‘unsexed’ by participation in politics, her grace and softness lost? Would her husband be less than a man to allow her to participate? Would the reform lead to unthinkable role reversals where wives made the speeches and husbands fried the chops?”

Personally I quite like frying chops, and thinks we can agree we have come a long way in 119 years.

 As many of us know we recently had a female Prime Minister (as was her predecessor) a female Governor-General, Speaker, Chief Justice, and CEO of the then largest private sector company.

However that does not mean all is rosy for women of course. We have research showing women get paid less than men on average. I won’t fall into the trap of Alasdair Thompson and repeat his suggestion as to the cause. There are in fact a number of factors behind the average pay difference. One of the most interesting is that there is a pay differential even very early on in a professional career – long before factors should as time off for children comes into play. It seems the reason might be that young men are more aggressive pay negotiators – they will push for more pay, while young women tend to accept whatever the employer offers.

 But to put things in context, the gender pay gap in NZ is the 2^nd lowest in the OECD.

 NZX has just 9% of directors who are women on their top 100 board. The ASX is up to 13% or their top 200. The NZX numbers may improve with their new disclosure rule, but frankly both 9% and 13% are embarrassingly low numbers. To be fair to Australia I understand 25% of new appointments are women following a voluntary gender disclosure rule. NZX of course is implementing a mandatory one. In the US the Fortune 500 companies have 16% female directors.

Now one can take a view, so what. Does it matter if boards are all men, as 57% of NZX100 boards are? Should we be gender-blind when it comes to board members? Personally I think diversity is important on boards – not just gender diversity, but skills diversity and personality diversity also. A board of seven insurance actuaries would be as unbalanced as a board comprised of seven entrepreneurs such as Rod Drury.

But does gender matter? Well there is an old book called men are from Mars and women are from Venus and while that is about relationships, I think it reflects that men and women do often think differently. There are some advertisements that men love and women loathe, and vice-versa.

There is also some empirical research. A study of Fortune 500 companies in the US from the 25% of companies that had the most female board members had 53% higher return on equity than those companies in the bottom 25% in terms of female board members. This is a correlation, not necessarily causative, but still powerful research. It would be very interesting to see someone apply the same research methodology to NZ, and see if the results are the same. Maybe Oliver can add it to his work list!

Some say there are not enough women who have the commercial experience to be directors of NZX companies. Putting aside the fact this can be a self-fulfilling prophecy, I don’t accept this.

For many years now more women than men graduate from university. In 2010 55% of commerce and business graduates were women. 59% of law graduates are women. And overall 64% of all graduates are women. On a separate issue, we need to do something about male education in this country.

I’ve been on a couple of company boards as a non-executive director. All four of my boards chairs have been women, and while these were small organisations, I certainly rate their ability to serve on boards of larger companies if they had the opportunity. One of them in fact has served on almost a dozen central and local government owned company boards with distinction, including major SOEs. She’s a fellow of the Institute of Directors yet until last year I believe she had never been on the board of a NZX listed company. 

 23% of IOD members are women, which means there are roughly 1,300 female directors in New Zealand of whom only 45 are on an NZX100 board. In the state sector 41% of directors are women. So again I don’t accept that the 9% figure is simply because there are not enough suitable women. I note two of our largest law firms are now chaired by women – Russel McVeagh and Minters.

But despite the fact we do have a clear problem, I do not favour mandated quotas for board members, for six reasons. 

1. Philosophical – not the role of the state to tell shareholders who to put on their boards. Companies are entitled to make bad decisions. We already see too much effort from the Government in trying to tell both people and businesses what to do.
2. Slippery Slope – why stop at mandated gender diversity. Race and age could well have arguments made for them as we have few Maori and few young directors. I think age is arguably just as important in terms of having diversity of thought around the board table.
3. If we single out gender as a proxy for diversity, then we may give a false confidence and weaken efforts to improve diversity in other areas.
4. One size doesn’t fit all. While it is unwise for most companies to have all male boards, companies which specialise in, for example, men’s clothing might be fine. Mind you, in my experience most men have women choose their clothes for them, so maybe not the best example.
5. A quota may not lead to more women on boards – just lead to Roseanne Meo being on 20 boards instead of 10!
6. With a quota system, there will be a suspicion that some appointments will be tokenistic, and some female directors will be judged as having succeeded in getting board appointments only because of their gender. That’s unfair to them.

So having identified the problem, and also rejected quotas as a solution, what would I do.

Well I think the problem is the method of recruitment for Directors amongst large NZX100 companies. Most recruitment seems to be done informally amongst those who are known to current Directors, which makes it hard for new Directors to break through.

NGOs and smaller companies often formally advertise for directors, as does the Crown and Local bodies. It is rare you see an NZX company advertise.

Why on earth do large companies still hand pick directors? Imagine if your CEO told you that they are not going to advertise for a COO, but instead appoint someone he or she knows to be well qualified. You’d tell the CEO to pull their head in, and advertise the role. What is good for the goose is good for the gander.

I think the solution, or a partial solution, is not quotas, but instead just persuading NZX companies to operate open recruitment processes for directors. The new disclosure policy should identify the companies that have all male boards, and it will be very interesting to compare how many of them do open recruitment of directors, compared to those who use the shoulder tapping method.

So in summary I do believe that companies should be allowed to make mistakes, and they should be allowed to have all male boards, but believe the combination of the initiatives by NZX, the IOD, the Govt and more generally the business community will see NZX boards become move diverse over the next five to ten years. But even if they do not, then the Government has no more of a role mandating gender quotas on private company boards, than they do regulating the maximum pressure of shower nozzles.

I should point out that one Director pointed out most NZX companies do do searches for new Directors, rather than just approach someone they know – however they tend not to advertise – rather use specialist recruitment agencies.