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

8 Quotas

Chapter Summary

• Internationally, the use of quotas to enforce gender diversity on boards has become an accepted means to address the issue of representation on boards.
• In the EU, the voluntary approach to gender diversity in the boardroom has come under attack from those who see too little change taking place.
• Norway continues to be the most high-profile example of a country where quotas, backed up with the threat of sanctions, has led to a significant increase in the proportion of women on boards.
• The gender composition of private sector boards in the UK has been subject to considerable scrutiny leading to an increase in the number of female board members.

Introduction

8.1 The purpose of this section is to look beyond current trends and see what changes are likely to affect the issue of boardroom diversity in the future. Increasingly, across European countries, the use of quotas to enforce gender diversity on boards has become an accepted means to address the issue of representation on boards.

8.2 In March 2014, the Economist looked at the issue of gender quotas for boards. One reason for the political and social shift to the increased acceptance of, and application of gender quotas, either voluntarily or as legally binding requirements, was seen to be the result of the shift in the rate of higher education amongst women. In 2014, the Economist argued that, 'one reason is a growing impatience with the glacial pace of voluntary change: women are the majority of all graduates almost everywhere in the developed world, but make up a smaller share of the workforce the further up the corporate ladder they go. Another is that Norway's quota law has not been the disaster some predicted'^[111].

Quotas

8.3 Although there are some signs that public and private boards are becoming increasingly more diverse as highlighted in this report, looking ahead it is possible to see some significant policy change taking place regarding the application of quotas to enforce diversity on boards.

8.4 The Scottish Government, as outlined in section 4.3, has stated its support for a quota system to increase the number of women on public boards thereby ensuring that they reflect the communities they serve.

8.5 The most recent high-profile UK government commissioned report on women on boards, decided against recommending the use of quotas to improve gender equality on boards. This decision was based on the small number of those surveyed as part of the report that supported quotas but also because the report's authors believed that 'board appointments should be made on the basis of business needs, skills and ability'^[112]. Responsibility for improving the proportion of women at board level should, according to the report, be left to business.

8.6 In the media, there is an increasing level of discussion on the possible use of quotas to address gender imbalances in the boardroom. Articles supporting the introduction of quotas have appeared in The Guardian^[113],[114]. Writing for the Guardian, Richard Portes, Professor of Economics at the London Business School concludes that 'quotas simply compensate for the many barriers that impede progress' in a male dominated system that makes 'few allowances for the asymmetries in child-rearing'. The Financial Times has published evidence on the effectiveness of quotas as a means to improve gender diversity in the boardroom, noting that 'early analysis appears to show that quotas work'^[115]. Meanwhile, the Telegraph has published an article outlining arguments against the introduction of such measures. The Telegraph article argues that quotas do not address the underlying causes that impede female advancement to the boardroom. To do this governments must instead focus their attention on better childcare tax breaks and the need for companies to develop and mentor their own women to help them rise to the top. Quotas, the article states, risk putting a 'sticking plaster over the real reasons why women aren't making it as much as they should be'^[116].

8.7 In late 2013, the European Commission moved closer to imposing a form of gender quota on major public companies in the European Union. Two committees of the European Parliament voted in favour of a proposal by the European Commission to require certain public companies to increase the representation of women on their boards. The proposed law would apply to large public companies and would impose sanctions for those companies that failed to meet quotas. Sanctions would be decided by member states.

8.8 The proposed law would require companies that do not have non-executive boards composed of at least 40% women to introduce selection procedures for board members that would give priority to qualified female candidates. The quota system would not apply to companies with fewer than 250 employees and revenue below 50 million Euros.

8.9 Several major EU countries have already endorsed quotas as a way of increasing the number of women in senior board positions. Germany, France, Holland, Spain and Italy have systems in place to enforce compliance with quota systems.

8.10 This shift in the policy landscape has taken place partly because the voluntary approach to gender equality is not seen to be creating sufficient change at a fast enough pace. The gender gap in corporate management boards continues to be seen as an injustice to which a range of legal and voluntary approaches are currently being applied. The most high profile example of the use of quotas to enforce gender diversity on boards has taken place in Norway where mandatory quotas have increased the proportion of women on boards to 40%. Voluntary mechanisms, an approach favoured by the UK and US governments, have sought to enact change through corporate governance and codes of conduct specifically relating to gender diversity. These approaches adopt a 'comply or explain'^[117] approach but carry no sanctions, unlike under mandatory quota regimes.

8.11 Quotas are perceived as initially good to increase representation, but evidence suggests that for some women their presence is considered demeaning. Hurn^[118] states 'it is recognised by many companies that they cannot do without the innovation that is generated by a diverse workforce, but mandatory quotas are considered counter-productive. Many women managers see them as demeaning and patronising and would themselves prefer to gain seats on the board by merit through their own efforts, experience and qualifications'.

8.12 In the EU, Hurn points out, that there is more support for the imposition of quotas. In 2011, France introduced legislation requiring listed and unlisted companies to reserve at least 20 per cent of the seats on their boards for members of each gender by 2014 and 40 per cent by 2014. This has increased the number of women on boards from 12 per cent to 22 per cent. In Italy and Belgium, a minimum of one third female representation is required. While Spain and the Netherlands have introduced legislation setting a mandatory target of 40 per cent by 2015 for female directors of large companies. Germany is also considering setting a required quota. Norway, although not a member of the EU, brought in legislation for a quota system for listed companies in 2003.

8.13 In Norway, over 40 per cent of non-executive directors are women but less than 10 per cent are executive directors and there is little support to increase the numbers. There is also concern about the relative youth and lack of relevant experience of some of the new women appointed as directors^[119]. Grosvold et al^[120] examined female directors on boards and showed growth was higher in Norway with no observable negative effects prompting them to state: 'Our study, then, appears to show that affirmative action programmes may have the potential to generate a radical growth in female representation in the boardroom. A more widespread adoption of such programmes would cement the position of women in the boardroom and within wider society and, absent of evidence of harmful effects, could form the basis of good governance practice throughout western economies'.

8.14 Viviane Reding, the EU Commissioner for Justice, Fundamental Rights and Citizenship, has called for large companies to raise the proportion of female directors in EU companies to 40 per cent by 2020, saying: ''I don't like quotas, but I like what quotas do''. Hurn notes that a Euro Barometer poll commissioned by Ms Reding's directorate found that in 2011, 75 per cent supported the introduction of legislation to enforce the gender balance on boards and over 40 per cent of those companies surveyed considered an eventual 50 per cent share for women would be realistic^[121]. A McKinsey Consultancy study^[122] in 2010, of 245 large European companies showed that most of the companies surveyed take the issue seriously, with some 90 per cent claiming to have some form of diversity programme in place.

8.15 Legal enforcement of diversity legislation has been shown to be successful in the U.S. and gains in women's board representation have also been linked to the passage of the Sarbanes-Oxley Act of 2002. This federal law was in response to 'reports of corporate mismanagement, managerial excesses, and misrepresentation by corporate executives'^[123]. This created changes in corporate governance structures by requiring a level of accountability among boards and a reduction in the number of insider and affiliated directors. This has created greater board diversity by pushing for broader external searches of qualified members^[124].

International Approaches

8.16 There is significant variation in the way in which countries have adopted quotas. Variation in approaches can be seen in terms of: severity of sanctions (in Norway a company may be dissolved for failure to comply whilst in the Netherlands companies may be asked to explain why they have not met quotas); timescales for reaching quota targets; incentives; whether the law is temporary or permanent; the size of the companies required to enact quotas; the ownership structure of companies required to enact quotas; and the range of roles on the board that are covered by quota requirements^[125]. Annex 1 has more detailed information on the legal instruments used in each country to reduce the gender gap.

8.17 Countries that have opted instead for a voluntary regime have developed a range of measures that use: the 'comply or explain' principle; transparency in promotion and recruitment processes; education and training initiatives; corporate governance codes; and charters promoting women in management^[126].

8.18 An alternative way in which these voluntary approaches can be understood divides them into three categories: Good practice in companies (e.g. setting targets; developing training programmes); cross-company and sector initiatives (e.g. awards, charters); and industry self-regulation instruments (e.g. Corporate Governance Codes)^[127]. Examples of good practice include training and mentoring or sponsor programmes and the implementation of voluntary gender quotas at a company level^[128]. Cross-company and sector initiatives, including: awards, databases of women interested in becoming board members; networks (e.g. the European Professional Women's Network); and mentoring initiatives (e.g. the FTSE 100 Cross-Company Mentoring Programme^[129]). Industry self-regulation also takes the form of Corporate Governance Codes. These tend to be guidelines rather than binding measures with non-compliance requiring an account in company reports rather than external oversight as we see in the case of the statutory approaches.

8.19 It should be noted that whilst Norway is cited as an example of the impact of statutory quotas, it also introduced a series of voluntary measures in conjunction with legally binding quotas. There were efforts to select women with board potential and provide training on aspects of board membership. Norway also established a series of databases onto which women with relevant experience were invited to register. Approaches included the 'Female Future'^[130] and the Network to Promote Women in Decision Making in Politics and the Economy^[131]. This latter approach identified several factors that were crucial to increasing gender equality in Norwegian boardrooms. These were: the provision of training directed toward women considered likely candidates for the boardroom; stakeholder engagement with training activities; and the presence of female role models.

The Experience of Norway

8.20 In Norway, which was the first country to introduce a quota for women on boards, the proportion of women on boards has reached the 40% required by law. The Norwegian Companies Act was passed in 2003 and imposes regulation on gender composition for a wide variety of company boards, public limited companies, state and local government owned companies as well as cooperative companies. The quota regulation for state owned and inter-municipal companies became effective in 2004, for new public limited companies in 2006, and for all public limited companies in 2008, for municipal and cooperative companies in 2009^[132].

8.21 It is important to note that the baseline of female representation from which Norwegian public boards were starting from was considerably lower than is currently the case in the UK. In 2002, the year before the gender quota law came into force, the proportion of women on boards stood at 6%^[133].

8.22 It is useful to summarise the political and public debate that took place prior to the introduction of the law. These arguments are focussed on social justice; skills; and democracy, as outlined below.

Social Justice Arguments

Proponents: Arguments formulated by the supporters of the quota legislation emphasised gender balance as a principle of justice. They underlined justice in the sense of redistribution of resources, claiming that positive discrimination is necessary in order to achieve gender equality. Male domination of Norwegian boards was seen as unacceptable and a possible indication of gender discrimination.

Opponents: The main counter-argument was that regulation of the gender composition of corporate boards would not be fair. Recruitment to corporate boards should not be based on the gender of candidates. The owners should have the right to select the candidates they find most suitable to sit on the board. Quota regulations were considered to be illegitimate unequal treatment and as discrimination against men^[134].

Skills Arguments

Proponents: The human capital argument claimed that, since the total talent potential of a population is distributed fairly evenly between men and women, the extreme male dominance in corporate boards indicated underutilisation of women's skills. Boards tend to recruit only from the talent pool of the male population, while qualified and competent women candidates are not seriously considered.

Opponents: The skills-related argument against quota reform was primarily that it would lead to less competent women replacing more competent men. The claim was that not enough women had the relevant experience, and that the recruitment of qualified women had to start earlier and further down the organisational hierarchy to create a pool of well-qualified women. In addition, it was asserted that owners are best qualified to select the most competent board members.

The Democracy Argument

Proponents: The democracy argument was particularly prominent among the government's justifications for the quota legislation. It was argued that more gender-equal participation in economic decision-making was crucial for Norwegian democracy. A related argument concerns the importance of equal rights to participation in the boards of influential companies, where the state often is a major owner.

Opponents: A main counterargument concerned economic democracy, in the sense of shareholders' democracy. The claim was that the quota law would hinder owners' democratic right to recruit candidates and, in particular, interfere with the election process at the shareholders' meeting. Owners invest in their companies and risk their money; they should therefore have the right to decide who they want to represent them on the board. Regulation was therefore seen to challenge the owner's autonomy.

8.23 What are the lessons from the Norwegian experience? Firstly, sanctions are necessary to enforce compliance. Although no new sanctions were introduced because the law was an amendment of an existing one, it was clear that the threat of fines and company dissolution was necessary to enforce compliance: 'The successful implementation of the quota was due mainly to sanctions, the toughest of which was the forced dissolution of noncompliant companies. When there were no sanctions in the initial phase, companies did not widely implement the policy on a voluntary basis'^[135]. Secondly, positive measures were also introduced to encourage companies to improve their gender representation. Several databases were established to which women could register and companies were able to search for potential candidates. The Norwegian employers association created a training programme to which companies could send their employees to improve their skills. Thirdly, quotas required the support of a wide political spectrum. The proposed legislation had the backing of a broad political alliance of centre government and left of centre parties. Fourthly, it took a decade from the introduction of the law to achieve 40% female board members.

8.24 Seierstad and Opsahl^[136] indicated that the legislative mandate of the Norwegian Government was a successful enabler for improving gender balance on corporate boards. However, Bøhren and Staubo^[137] stated that overall, the mandatory gender balance may produce firms with inefficient organisational forms or inefficient boards.