Gender diversity reforms have helped UK company boards, but they are failing in other countries – new research explains why

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This article was written by Dr Jannine Poletti-Hughes, Senior Lecturer in Accounting and Finance at the University of Liverpool Management School and was originally published in The Conversation:

It may take close to 300 years to achieve gender equality and the empowerment of all women and girls, according to a UN progress report on its sustainable development goals (SDG), Gender Snapshot 2022. This is way off the 2030 deadline set when the SDGs were adopted by UN member states in 2015.

Closing the gender gap in the corporate world will contribute to meeting these goals. This means not only boosting women’s participation in the workforce, but ensuring that women are represented equally in positions of power and leadership within companies. However, global progress has advanced at different rates, with some countries lagging far behind.

Worldwide corporate governance reforms have encouraged changes in the composition of boards of directors for the last two decades. While they vary in scale and severity, gender diversity regulations generally aim to increase the pool of female talent at companies and to make boards more independent in terms of how their members are chosen and appointed.

And for good reason. A gender diverse and independent board can help a company in several ways. Research shows that boards which are gender diverse can boost company performance and lower the probability of corporate fraud, for example.

Independent directors – those with no attachments to the corporation – contribute more effectively toward decision making. They tend to have fewer potential conflicts of interest, as well as different expertise and social networks to board members with existing links to the company.

Gender diversity regulations that apply to companies’ boards of directors are either voluntary – that is, entirely at a company’s discretion – or enforced through legal quotas. But research I recently published with my colleagues shows that voluntary gender diversity regulations often don’t work.

Progress on gender reforms

Norway was the first country to introduce a proportional gender quota for listed and state-owned companies in 2003. Other countries followed suit in trying to boost gender equality, either by also establishing board-level gender quotas or by making recommendations of a voluntary nature in codes of good corporate practice.

Since investors are likely to appreciate companies following good corporate governance practice, voluntary gender regulation can be an incentive to appoint more women to corporate boards. These recommendations are non-binding, however, and tend to be vague in setting a target for board diversity. This might promote a “one and done” approach, where compliance is achieved with the appointment of a single female director.

Our research also shows such one-off appointments tend to be internal or based on existing relationships – that is, a director that is not independent. This can be because finding qualified women externally is more costly.

By contrast, gender quotas set at 30%-40% of board composition achieve higher female board representation faster. Certainly, many countries – including European states such as France, Germany, Italy, the Netherlands and Spain – have dropped voluntary regulations altogether, in favour of legislative quotas. Gender quotas may also force companies to look externally in search of more talent to fulfil the required targets, creating a more independent board.

Company boards of directors should aim to be more diverse and independent.
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Ineffective voluntary regulations

Our research also found that voluntary gender diversity regulations are particularly ineffective in countries with a strong familial culture, such as Mexico. This kind of culture is associated with societal attitudes and expectations that establish the role of women as carers and men as breadwinners. In such countries, women might have to overcome barriers to reach a board appointment because of stereotyped perceptions about their advisory and leadership abilities.

In countries with a strong familial culture, we found that female director appointments are likely to be symbolic and are predominantly based on relationships. To publicly demonstrate commitment towards the voluntary reform, companies don’t tend to draw from the pool of externally available talent, which means they don’t get the corporate benefits of board gender diversity.

Because voluntary gender reforms are ineffective in incorporating female directors who are independent to the board, they reduce overall board independence. Only gender quotas are successful in increasing the proportion of independent female directors on boards in such cultures.

Mexico introduced a voluntary gender quota regulation for company boards in 2018, making the basic recommendation of “incorporating women on the board of directors”. After two years, the proportion of women on company boards of directors had increased from 7.3% to 9%.

This is an improvement, but at a much slower pace than, for example, the UK, which saw female directors on boards increase from 9.5% to 17.4% two years after establishing a similar voluntary regulation in 2011. And by 2020, the UK had no more “one and done” boards – women now make up around 40% of non-executive directors on the boards of FTSE 350 companies.

In this way, the UK performed as well as other countries that have quotas, such as Norway and France, where seats held by women on boards in 2021 were about 42% and 43%, respectively.

The independence element has been particularly difficult to achieve in Mexico’s familial culture, with the percentage of female directors with no previous ties to a company growing from 0.9% of all directors in 2018 to only 1.9% in 2020.

This research shows the benefits of legal gender quotas over voluntary regulations. But as a first step towards addressing this gender diversity issue, particularly in countries with a strong familial culture, voluntary regulations could be made more specific.

In the case of Mexico, even a tweak to current recommendations to specify the appointment of women who are independent to boards of directors could go a little way towards increasing board gender diversity. For more significant progress towards global gender equality goals, however, legal quotas seem to be the best way forward.The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.