The great board diversity challenge

Linda-Eling Lee is global head of ESG research at MSCI. She wrote the report ‘Women on boards: global trends in gender diversity’, which finds that companies with strong female leadership outperform others by 36 percent in terms of return on equity.

What are the main challenges globally to having more women on company boards?

First of all, there is a lack of understanding that having more diverse boards is really an issue about having better quality board oversight and substantial performance rather than simply about financial issues. There’s an assumption that having more diverse boards is something that is more reputational in nature or a bit more about window-dressing, when in fact there is increasing evidence that having more diverse boards could lead to better oversight and better performance of companies: we see that these companies experience fewer governance-related controversies and show stronger returns on equity.

The second driver is that there have not been any notable changes in how searches occur when a board seat opens up. From a cultural and institutional inertia point of view, if you don’t change the way you do searches and where you’re looking, you’re always going to end up with the same kind of candidates.

The third challenge is the common belief that there’s a pipeline problem, some sort of a qualifications gap, which assumes that if there were any qualified women they would be considered for a board seat. But there’s no standardized way of assessing whether a particular director is overly, equally or less qualified. Our report looks at biographies of the 17,000 or so directors who currently sit on the boards of MSCI World Index companies. When we compare them using different types of qualifications such as having held leadership roles, we find slightly more sitting male directors have held C-suite roles than sitting female directors. But when it comes to non C-suite roles such as managing directors and other types of leadership positions, there is absolutely no gap at all; in fact, the sitting women directors are actually more educated than male directors.

So digging more into that sort of data rather than making assumptions that there are no women coming into the pool would help.

Which countries have adopted the most measures to promote gender diversity?

We’ve seen most progress at the board level in countries that have put in mandates: Belgium, France, Germany, Iceland, Italy, Malaysia ‒ for new appointments ‒ and Norway. The ones we’ve highlighted as having the highest percentage of female board seats are Norway, Sweden and France. In the latter, the mandate is recent and there’s been a very significant ramp-up: the numbers were very low and now they’re among the highest in the world.

In our analysis this year, we compared the percentage of women on boards in these countries with gender diversity in the CEO and CFO roles. We found a discrepancy in the US: with a fairly average percentage of women on their boards, US companies really lag behind the countries I just listed, but they actually have the most women in CEO and CFO roles –they’re just not getting on the board.

And in France, which has the highest percentage of women on boards ‒ at more than 30 percent ‒ there isn’t one female CEO among the 70-odd companies on the MSCI World Index. So if you’re just looking at the board level, you’re going to get a slightly different picture from what you’d see if you’re looking at the executive ranks.

How do you believe investors can help push the agenda for strong female leadership at the companies they invest in?

There are two main ways; the first is engaging companies on their board composition and really approaching it from a quality perspective. Right now, in order to put more women into these seats there are basically two avenues: you can either convert a seat that opens up more frequently than you have historically, which we’ve called an accelerated conversion rate scenario approach. The other way is to open up more board seats.

This is actually an issue that goes beyond gender diversity and is more broadly about board quality. In a typical year about 8 percent of the seats typically turn over. In some countries such as the US, you have one in five seats filled by a director who is older than 72 and has been sitting on the board for more than 12 years (so is no longer an independent director). If you were to change the number of seats that are open from about 8 percent to 10 percent a year, you could significantly increase the percentage of women who are sitting on boards.

The other avenue would be to accelerate the conversion rate of any seat that opens up by encouraging companies to connect to a larger pool of candidates. There have been investor initiatives to try to encourage companies to go to alternative databases featuring candidates with more diverse backgrounds. CalPERs and CalSTRS, for example, began an initiative some years ago to build a database as a resource for companies exploring an alternative route to fill their seats.

And there’s a second route we’ve started seeing quite a lot over the last six months: a number of investors are now interested in allocating capital toward the companies that have more diverse leadership. This is a little bit more ‘putting your money where your mouth is’ where there is sufficient belief in the financial benefits of having more diverse boards, and investors are interested in identifying those companies and actually coming up with investment products or strategies that try to capture this advantage. I believe that seeing greater allocation of capital toward those companies will also shift some behavior on the corporate level.