Overcoming Barriers to Equality and Diversity Representation on Public, Private and Third Sector Boards in Scotland

4 Background Evidence

Chapter Summary

• There is a substantial body of evidence that demonstrates that gender diverse boards have a positive effect on corporate performance.
• Public boards have traditionally had a greater proportion of female board members than private boards.
• Private sector companies with gender diverse boards appear to perform better than those with a lower representation of female board members.
• In the international context, countries that have increasingly used legislation and / or implemented gender quotas have higher levels of female boardroom membership than those that have adopted voluntary approaches.
• A challenge is to increase the supply of women in organisations able to rise to boardroom positions - referred to as the leaking pipeline.

Introduction

4.1 There has been a shift away from the concept of gender equality in the boardroom as being the 'right' thing to do to one of emphasising instead the financial benefits of equality and the case for good governance^[7]. This shift has also taken place at a time when there are increasing demands for legislation to impose change to gender diversity on boards. These demands are proposed by those who see insufficient momentum to gender equality in the boardroom. Indeed, it has been suggested that there is a possible link between the way in which the debate has shifted away from gender equality as a right to one of good governance because 'if gender diversity on the board implies a greater probability of corporate success, then it would make sense to pursue such an objective, regardless of government directives'^[8]. The assumption underlying this line of thought is that if firms understand fully the economic benefits of female representation in the boardroom, then there will be no need for statutory measures to enforce compliance.

4.2 At a Scottish level, women account for 36% of Ministerial appointed, regulated public boards^[9]. However this figure varies significantly by the type of public board. Health boards, Executive non-departmental public bodies (NDPBs) and Advisory NDPBs have higher rates of female representation on their boards. However public corporations and executive non-department public bodies (NDPBs) fell below 20% representation for women on their boards.

4.3 Under proposals outlined by the then Deputy First Minster, Nicola Sturgeon, an independent Scotland would introduce quotas to ensure that 40% of director level positions in large public and private organisation would be reserved for women^[10]. In March 2014, the then Cabinet Secretary for Commonwealth Games, Sport, Equalities and Pensioners Rights' Shona Robison launched a consultation on the possible use of mandatory quotas to ensure at least 40 per cent of public boards are made up of women^[11]. The principal driver of this change was the need to ensure that boards represent the communities they serve. The Cabinet Secretary stated that, 'a board needs to reflect the people it serves and this in turn will make it better equipped to deal with decision making and improve its performance. Our ambition is for Scotland's public and corporate institutions to properly reflect the communities they serve, which we know will contribute to moving us towards the Scotland we wish to see'^[12].

4.4 As of November 2014, Nicola Sturgeon as the new First Minister, with Scotland's first ever 50/50 gender balanced cabinet, will launch early next year a "Partnership for Change Pledge" to achieve a 50/50 split on boards by 2020 ("50:50 by 2020"). Further, post-Referendum, the Smith Commission Report^[13] has recommended that Scottish Parliament's powers will include the introduction of gender quotas in respect of public bodies in Scotland.

4.5 The UK government is aspiring to appoint women to half of all new appointments to the boards of public bodies. Progress towards this aspiration appears well advanced. Between April and September 2014, the percentage of new public appointments achieved by women in England reached 44%^[14].

4.6 In 2011, a UK Government commissioned review of boardroom diversity by Lord Davies of Abersoch - using the number of women on FTSE 350 corporate boards - noted that 'boards perform better when they include the best people who come from a range of perspectives and backgrounds'. Since 2011, the proportion of women on boards of the FTSE 100 companies has increased from 12.5% to 22.8% in 2014. In the same period there has been an increase from 7.8% to 17.4%^[15] among FTSE 250 boards.

4.7 In the UK and internationally, the rationale for improving gender representation on corporate boards is based on evidence that suggests inclusive and diverse boards are more likely to be effective boards, are better able to understand their customer needs, able to develop new ideas and possess a broad range of experience. The business case for improved female representation on boards states that: strong stock market growth among European companies is most likely to occur where there is a higher proportion of women in senior management teams. Companies with more women on their boards were found to outperform their rivals with a 42% higher return in sales, 66% higher return on invested capital and 53% higher return on equity. Data from the Harvard Law School Forum on Corporate Governance and Financial Regulation notes that: 'the results of a 2012 study of nearly 2,400 companies showed that from December 2005 to December 2011, large-capital companies with women directors outperformed peers with no women directors by 26% and small to mid-capital companies with women on the board outperformed their peers with all male boards by 17%'^[16].

4.8 Carter, et al^[17] and Lockwood^[18] found a positive relation between gender and ethnic diversity of the board and corporate performance. Slater et al.^[19] in a study comparing the financial performance of the Diversity Inc. Top 50 Companies for Diversity to a matched sample found evidence that firms with a strong commitment to diversity on average outperformed their peers. Dalton and Dalton^[20] suggest that having diverse viewpoints represented in boardroom discussions ultimately benefits shareholders since each board member can make a unique contribution based on having different backgrounds and perspectives. If boards have members from diverse backgrounds then they are thought to be more transparent by Upadhyay and Zeng^[21]. However, those from diverse backgrounds are poorly represented on many boards. Daily et. al.^[22], Domhoff^[23], Zweigenhaft and Domhoff^[24], and from a large-sample quantitative research Hillman, Cannella, and Harris^[25], suggest that ethnic minorities and women are generally disadvantaged in obtaining board positions at large firms.

4.9 Forbes and Milliken^[26] and Milliken and Martins^[27] define diversity as 'visible' and 'less visible'. Visible diversity includes observable attributes (race, ethnic background, age, gender) while less visible diversity relates to underlying attributes (education, technical capabilities, functional background, board tenure, socioeconomic background, personality characteristics, values, skills, knowledge, occupational background, range of industry experience). Carpenter and Westphal^[28] refer to these two types as demographic diversity and functional (job-related) diversity. Singh and Vinnicombe^[29] found that women are frequently absent from very senior positions in the FTSE 100 companies, and argued that 'male directors form the elite group at the top of the UK's corporate world, and few women break through this glass ceiling into this elite, despite making inroads into middle management'.

4.10 Several studies^{[30],[31],[32],[33],[34]} show that social network ties are important in accessing seats on boards. From a US study of 500 CEO's drawn from Forbes 500 companies, Westphal and Stern show the 'ingratiatory behaviour directed at individuals who control access to board positions can provide an alternative pathway to the boardroom for managers who lack the social and educational credentials associated with the power elite'. For these authors ingratiatory behaviour includes flattery, opinion conformity, and favour rendering. They found that people engaging in this were more likely to receive board appointments at other firms where their CEO serves as a director and at boards to which the CEO is indirectly connected to. Therefore Westphal and Stern^[35] argue that inter personal influence can substitute for not being of the socio economic and demographic characteristics that typify the elite. This implies that those of minority status are discriminated against because 'they must engage in a higher level of interpersonal influence behaviour in order to have the same chance of obtaining a board appointment'. Given monitoring by the board, potentially entrenched CEOs like to recruit people they personally know and are comfortable with to serve on boards^[36]. Studies on group behaviour have shown that socially homogeneous groups have greater transparency among members as the communication barriers are low and communication is impeded when there is ethnic and gender diversity^[37]. Hence, there is a need to allow people from diverse backgrounds to access networks to connect to the organisational elite and to improve communication between them. However, conformity should not be encouraged as it is associated with 'groupthink' and directors of socially homogeneous boards face peer pressure to conform to groupthink, which favours setting a lower monitoring norm as the benefits of a greater level of monitoring are to be shared by people outside that group^[38]. Non-diverse boards are also less likely to communicate effectively with external stakeholders^[39].

4.11 International evidence on addressing barriers to gender equality at board level points to a range of arguments developed to support greater equality - these are summarised below^[40].

A Signal of a Better Company

There is a significant body of research that supports the idea that there is no causation between greater gender diversity and improved profitability and stock price performance. Instead the link may be the positive signal that is sent to the market by the appointment of more women: first because it may signal greater focus on corporate governance and second because it is a sign that the company is already doing well and is confident in the capacity and ability of its employees.

Greater Effort across the Board

Greater team diversity (including gender diversity) can lead to better performance. There is evidence to suggest that where there is greater gender diversity individuals are, on average, likely to do more preparation for any exercise that they know is going to involve working with a diverse rather than a homogenous group. It is not necessarily the performance of the minority individuals that have enhanced the result. Rather, it is the fact that the majority group improves its own performance in response to minority involvement. Simply put, nobody wants to look bad in front of a stranger^[41].

Access to a Wide Pool of Talent

Across the majority of labour markets, women now account for the greater proportion of graduates. By 2010, the proportion of female graduates across the world came to a median average of 54%. This compares with a median average of 51% female graduates in 2000. A company that achieves greater gender diversity is more likely to be able to tap into the widest possible pool of talent.

International Comparison

4.12 Change to gender representation on boards is taking place at different rates in each of the countries we looked at. In countries that have implemented quotas there is, as one would expect, higher levels of female boardroom representation than in those that have adopted a voluntary approach. However regardless of the pace at which change is taking place, there is a consistent trend for female representation in the corporate boardroom to be significantly lower than their public sector counterpart. It should however be noted that international comparisons are problematic because the availability of information varies by country but also the methodologies used to calculate and define equality varies. The table below gives an overview of variation in the proportion of women on private and public sector boards for selected countries.

Table 1: International comparison of proportions of women on private and public sector boards. Figures from national country statistics in the period 2008 to 2009 (blank spaces where data is not available).

Country	Private	Public
Norway	40.2%	40%
USA	14.6%	-
Canada	15.1%	42%
UK	11.7%	33.3%
Europe	9.7%	-
Spain	9.1%	45%
Australia	8.3%	-
New Zealand	7%	35%

Source: UK Government Equalities Office, 2009^[42].

4.13 There appears to be a trend for public sector boards to have a higher proportion of women than in the private sector. In New Zealand's public sector, 35% of board members are female in contrast to 7% of private sector boards. Similarly, in Canada women occupied 42% of board positions in the public sector and only 15% in the private sector. Suggested explanations for these differences cite: legislation to enforce gender diversity and the presence of greater family friendly and flexible working practices in the public sector.

Pipeline Issues

4.14 As highlighted by the Lord Davies "Women on Boards" (2011) report, a challenge is to increase the supply of women in organisations able to rise to boardroom positions. The process of having more women promoted through the organisation is referred to as supply - the corporate pipeline. However, despite similar proportions of male and female graduates entering organisations, fewer women than men are coming through to the top level of organisations. The Lord Davies report refers to the leaking pipeline which is at least in part explained by high levels of female attrition caused by barriers such as the lack of flexible working arrangements, work life balance issues and/or disillusionment at the lack of career progression.

4.15 Recommendations are made in the Women on Boards 2011 report that there needs to be more investment in developing talented women. There are difficulties in doing this as stated in the report: 'Many consultation respondents told us that women with corporate experience were frequently overlooked for development opportunities and that there were differences in the way that men and women were mentored and sponsored, which gave men the edge over their female peers. Others cited gender behavioural traits as a key issue, whereby women tend to undervalue their own skills, achievements and experiences'.

4.16 In the report it is also pointed out that there are a low number of successful female role models who can inspire. This compounds stereotypes and reinforces perceived difficulties in reaching boardroom positions. Attention is also drawn to the perception that the many women in leadership positions in academia, the arts, the media, the civil service or professional services are often overlooked because they do not have specific corporate experience, and Chairmen perceive that they will not be able to cope with corporate politics and decision making.

4.17 Ruderman, et al, (1995^[43]) believed that problems in how job assignments are made contribute to the differential advancement of women compared to men. They undertook an in depth study of gender differences in the actual promotion decisions made in one American Fortune 500 company and discussed possible explanations for and implications of their findings. They found that men got promoted because senior management knew them and were "comfortable" with them. This was stated almost four times more for men than women. The next cited reason for men being chosen for promotion was their availability. This was given as a reason for male promotion almost seven times that of women. Reasons for women being promoted was stated, in order of importance, as being: desire for diversity, continuity, being pushed (i.e. self-marketing and lobbying and getting people to lobby for them) and personal strength.

4.18 Thirty-one per cent of the women were described as having pushed for the job, whereas only six per cent of the men were described this way. Ruderman, et al, (1995) found that this experience frustrated women and was not always appreciated by their bosses. To keep the pipeline flowing, Ruderman, et al, (1995) argue that 'promotion-decision dynamics must be made visible and discussable so that decision makers can better understand their unintended consequences and, in turn, practices can be modified truly to support managerial diversity'.

4.19 According to Vinnicombe (2011)^[44] 'mentoring has almost become the ubiquitous solution for any professional woman experiencing problems with promotion'. Investigating the nature of mentoring Ibarra et al. (2010^[45]) observed that although women are being widely mentored, 'the mentors offered to women, however, are significantly less senior that those offered to men. Women often lack the high-level relationships which their male colleagues find easier to foster in the male dominated executive suite'. Thus equality is needed in the mentoring process.