Gender quotas: A necessary evil?
Nicole Van Crombrugghe member of the Brussels Bar, partner of LVP LAW (Brussels), member and former treasurer of EWLA is the author of this article along with Diler Erdengiz entitled: GENDER DIVERSITY IN THE BOARDROOM OF LISTED COMPANIES
IN EUROPE AND IN THE UNITED STATES OF AMERICA:
The Beijing UN Declaration and Platform for Action, which was adopted during the Fourth World Conference on Women, already in 1995 acknowledged the low proportion of women among economic and political decision makers at various levels and the need to address the underlying structural and psycho-social barriers through affirmative measures.
Various studies have since demonstrated the benefits of promoting gender diversity at management and board levels. The most recent McKinsey Report has shown that there is substance to the economic efficiency arguments: it has identified that companies with the largest share of women in their boardrooms outperform companies that have no female presence on their boards. While the survey emphasizes the danger of asserting causality between performance and gender diversity, it underlines that such results provide a “factual basis to continue to argue in favor of greater gender diversity in corporate top management.”
However, changes are proving to be slow. The 2010 report on the progress of equality between men and women, and in particular the section on the gender balance in women leadership, has made it clear that there is still a long way to go before achieving the equality in decision-making that both the Women’s Charter and the European Commission’s Strategy for Equality between Women and Men (2010-2015) have set as a priority.
Some European countries have taken the lead in this process. This was the case in Norway, which was the first country to adopt a gender legislation, followed by countries such as Spain (in 2007), Iceland (in 2010) and France (in 2011). In other countries, such as the Netherlands, Denmark, Poland and so far Belgium the “comply or explain” approach has been preferred and gender diversity has been addressed through corporate governance codes.
Some other countries in turn are reluctant if not altogether adverse to adopting rules that aim to build gender diversity in the boardroom.
In countries that have adopted legislation so far, the scarce representation of women in the boardroom has been addressed by setting mandatory quotas. The question certainly arises whether this is an adequate proposition. Most recently, the former Latvian president for instance announced that quota measures were “demeaning” to women and that it implied that women lacked the potential to reach the upper echelons of corporate governance on their own merits.
Existing Legislation: the Norwegian and the French Examples
Since Norway was the first country in Europe to legislate gender quota requirements, it has not only set a framework for best practices but it has made the challenges involved with the quota system apparent as well. Furthermore, while Spain, Iceland and France have legislated quota requirements, none of these laws are in effect yet, making Norway the only country that currently has legislation in full force.
Norway began its quest for boardroom equality in 2003 by “recommending greater gender balance on boards”. Yet the ineffectiveness of this recommendation caused the Norwegian legislature to draft statutes 18 months later. The Companies Act, which came into full force in 2006, encompassed public limited companies, state and municipality owned companies and cooperative companies and stated that such companies had to have women sitting in 40% of its board seats where there were 9 or more members on the board. The Act was later extended to private limited companies where municipalities owned two-thirds (or more) of the shares. In 2010, 42% of board seats which came under the statute were held by women, a clear indication that gender quota requirements coupled with heavy sanctions are indeed effective. Yet aside from its apparent success, Norway presents another valuable lesson: quota requirements will always be met with resistance but firm consequences and proper framing are essential for support and enforcement.
Norway´s legislation has been deemed as a type of “shock bombing” which was spearheaded by the Minister for Trade and Industry Ansgar Gabrielsen from the country´s Conservative party. In subsequent reflections, Gabrielsen highlighted the importance of creating an “earthquake” in order to change engrained attitudes towards gender quotas and diversifying the issue as not only one of women´s rights but also as an issue of “tapping into valuable under-utilized resources”. While it may be too soon to determine the “economic impact” of the gender quota, it is obvious that the method is surely effective in achieving prima facie gender parity in the boardroom.
The most nascent legislation requiring gender quotas was passed in France in 2011 requiring a 40% quota of female directors in boardrooms of listed companies by 2016. Not unlike Norway, the legislation was first proposed by the right leaning party Union pour un Mouvement Populaire (UMP) and garnered support from conservative businessmen and women due to the somewhat reluctant realization that while not preferable, gender quotas were “the only way of encouraging progress” in the sense that “there [was] a real realization that things [were] not going to change on their own”. Indeed, France´s then Secretary of State for the Family had dubbed it as a “necessary evil” while the UMP´s president likened the legislation to an “electro-shock”, similar to the feelings surrounding the gender quota legislation in Norway when it was first introduced.
Pending Quota Legislation: Italy, Belgium and Germany
Other countries such as the Netherlands, Germany, Belgium and Italy are presently debating the adoption of similar policies.
The draft currently examined in Italy by the Justice and Constitutional Affairs Commission presents a number of interesting features:
(i) gender diversity is planned not only to be introduced into the boardrooms of listed companies but also onto the management boards (consiglio di gestione) (when they include at least 3 members) and onto the boards of statutory auditors (collegio sindacale) of those same corporations. One third of those board members would need to be chosen in view of a criterion which ensures gender balance and which would be valid for three consecutive terms of office;
(ii) monetary sanctions are invoked if this gender requirement is not met within a remedy period that would be granted by the Commissione Nazionale per le Società e la Borsa (Consob).
Failure to comply within a four-month remedy period would allow the Consob to fine the company in default for an amount ranging from 100,000 to 1,000,000 EUR when boards or management boards are involved and from 2,000 to 200,000 EUR when boards of statutory auditors are concerned. If the company still fails to abide by the legal requirement within an additional three-month remedy period, the members elected in contravention of the law would see their office nullified.
The pace of this change would be swift since once the law is approved it would enter into force within one year and its provisions would apply starting from the very next renewal of the boards concerned. At least 20% of the directors and statutory auditors would need to belong to the least represented gender by the very first elections following entry into force of the law.
The provisions of the law would apply to companies incorporated in Italy, which are controlled by public administrations and are not listed. A regulation would implement those provisions.
In Belgium, the 2009 Corporate Governance Code, which is the code of reference for companies incorporated in Belgium whose shares are accepted into trading in a regulated market ('listed companies'), already acknowledged that gender diversity is necessary in boardrooms . The Corporate Governance Commission, which initiated that Code, recently issued additional recommendations seeking to clarify and to complement the statement contained in the Code in that respect.
In addition, a draft law was recently approved by the House of Representatives . Pursuant thereto:
(i) one third of the Board of autonomous economic public entities and of listed companies should be composed of members of the other gender. The same would apply to the National Lottery;
(ii) large listed companies would be given a period of six years to adjust the composition of their Board. Smaller listed companies and companies which fail to meet certain thresholds on a consolidated basis would be granted an eight-year period. Companies whose shares are listed for the first time would be required to comply, as of the first day of the sixth book year following their listing.
(iii) subsequent appointments in violation of the diversity requirement would be null and void;
(iv) any advantage linked to the performance of the directors’ office would be suspended as long as the Board is not composed as required by law.
In accordance with the law-making process in place in Belgium, the document approved by the House of Representatives was forwarded to the Senate where it is currently under examination. At this point in time, it is therefore uncertain whether and when the draft will become effective legislation.
Reactions in Belgium to the approved draft are diverse as can be expected.
The Federation of Belgian Enterprises (FEB), for instance, is fervently critical of the legislation, criticizing it as a sign that the government does not trust Belgian businesses to conduct their affairs in accordance with their own standards. The FEB views gender quotas as being too rigid and rather supports a more gradual approach which would allow the quota to be implemented over a period of seven years rather then the current six year grace period.
According to a survey of 714 directors of small and medium sized enterprises (SME) conducted by the Syndicat Neutre des Indépendants (SNI), 81% of Belgian SMEs are opposed to the introduction of quotas for the boards of directors of listed companies due to a widespread belief that both genders are already fairly represented on the boards of directors. Yet the Belgian general public would beg to differ: according to a study by StepStone, 38% of Belgians favor gender quotas, which is higher than the European average of 34%.
The greatest support for the legislation comes from various women´s leadership groups such as the Committee on Women and Business and the Institute for Women and Equality who believe in the effectiveness of the Norway precedent i.e. that such a change in the gender composition of board rooms cannot be created without a push from gender quotas and firm sanctions. The Minister of Employment is also an enthusiastic advocate of implementing gender quotas.
Recently, in Germany, the possibility of instituting gender quotas in corporate boardrooms has also entered the discourse and was further fueled by the director of the Deutsche Bank Josef Ackermann´s refusal to acknowledge the material importance of the presence of women in corporate boardrooms. While German Chancellor Angela Merkel has acknowledged the need for gender parity in board rooms as well, she nonetheless has shied away from the idea of mandatory quotas at the present, yet still keeping the option open if German corporations refuse to utilize their “one last chance”.
More recently, a study published by the German Institute for Economic Research has shown that out of 900 board members in the largest German corporations, only 29 of these board seats belong to women. This startling result has had a cataclysmic effect which began with the German government initiating a dialogue process with Germany´s 30 largest companies. However, the government is split within its own ranks as well, with camps split between instituting firm sanctions and gender quotas versus “the idea of voluntary, flexible quotas”. Women´s labor rights groups have reacted to voluntary proposals, more recently organizing protests in Berlin and demanding that the government “[do] something about the absence of women in top jobs and the boardroom” stating that while gender quotas may not be desirable it is the only option that guarantees the achievement of gender parity.
The European Vice-President Viviane Reading has made public statements that gender quotas may indeed be necessary if businesses do not “voluntarily” increase the numbers of women in German boardrooms. Reading could use a new mechanism introduced by the Lisbon Treaty which “provides for incentive measures to be applied in the field of anti-discrimination”; such incentive measures would most probably come in the form of a directive which would be “immediately applicable” across all EU member states. While it is currently unclear how the EU could legislate in this area, it is doubtful that companies will make a real effort in this regard without “credible sanctions”. Although it is too soon to tell whether rumors of implementing a gender quota will be sufficient threats to propel change in the demographics of boardrooms as some instances have shown, Germany remains on the radar of individuals who support gender equality in the upper ranks of corporate governance.
Corporate Governance Codes: the Finnish example
Finland has taken an affirmative stance known as the “if not, why not”/ “comply or explain” approach whereby companies are required to explain the reasons behind any deviation from the Finnish corporate governance code i.e. not having a female board member. It has been suggested that this approach provides a middle ground between the total voluntary approach taken by the United States on one end of the spectrum, and the quota model with strong sanctions adopted by Norway on the other end, giving the company “more flexibility in the application of the Code”. In fact, it has been suggested that for countries and legislators struggling with a stubborn constituency, the “if not, why not” approach could be utilized, such as in the context of Germany.
The requirement of having at least one female board member is known as Recommendation 9 and did not exist in the Finnish corporate governance code until 2008 when legislators realized that the existing 2003 code which only suggested the presence of both genders on corporate boards was not a strong enough incentive to push for change. The Recommendation, titled “Number, Composition and Competence of the Directors”, simply states that “both genders shall be represented on the board” i.e. the presence of only one female is adequate compliance with the code.
While there have been criticisms that this may lead to “tokenism” and that the “if not, why not” approach might not be a deterrent, the active media coverage surrounding the gender imbalance in boardrooms has suggested that companies would rather comply with Recommendation 9 then have their annual Corporate Governance Statement scrutinized by the media and receive negative press as a result. Already, there have been publications exposing companies that do not have female presence on their boards.
Although Finland did recently consider the adoption of gender quotas, it decided against it due to the “cool reception” of the proposal alongside feelings of comfort brought about by the fact that currently women hold 24.5% of boardroom seats, mainly spurred by the already existing corporate governance code.
The Myth of the Organic Approach and Resistance to Quotas
The United States
In the United States, instituting quotas for women in the upper echelons of corporate governance is viewed with utmost suspicion, often harking back to memories of affirmative action policies instituted in the 1960s to combat racial discrimination. Such quota requirements were often struck down by the United States Supreme Court as unconstitutional for being too rigid and therefore violating the Equal Protection Clause of the 14th Amendment of the United States Constitution.
The notion that quotas create reverse discrimination can also be found in attitudes towards instituting gender quotas in corporate governance structures. Arguments are often made that to accept women into board rooms due to quota requirements would be artificial and inefficient since it is pervasively believed that there are less qualified women then a hypothetical quota amount would require and that women would be chosen “simply because they are women”.
To date, there exist no gender quotas for governing boards of private or public companies that are required to file with the Securities and Exchange Commission (SEC). Rather then adopting a quota approach, there has been a trend to “coach” women on how to function in executive hierarchies and become effective leaders in boardrooms.
Recently, the SEC passed enhanced disclosure requirements requiring corporations to disclose “whether and if so how a nominating committee considers diversity in identifying nominees for director”. Since the SEC allowed diversity “to be defined in whatever way the company and board [deemed] appropriate”, companies are free to exclude gender from this formulation. A recent survey by PriceWaterhouseCoopers revealed that the majority of directors surveyed found the diversity disclosure requirement as the “least valuable” out of all the new proxy disclosure statements.
The United States Congress has also passed Section 342 of the Dodd-Frank Act which contains a mandate for the SEC to set up an Office of Minority and Women Inclusion (OMWI) in order to “develop standards for equal employment opportunity and racial, gender, and ethnic diversity of workforce and senior management; increased participation of minority-owned and women-owned businesses in programs and contracts of the agency; and assessing diversity policies and practices of regulated entities”. Yet, as of this date, OMWI has not been established and is already being criticized by conservatives as possibly being unconstitutional.
Regardless of such efforts, it has been reported that only 11 out of Fortune 500 companies had female chief executive officers in 2011. In its most recent Women on Boards report, GovernanceMetrics International determined that out of 1763 companies surveyed, the aggregate percentage of women on boards of directors was 12.3%, while only 9.7% of surveyed companies had at least 3 women directors on their boards. Furthermore, only 2.2% of companies had a female board chair.
While the possibilities of increasing the numbers of women on boards of directors of corporations and the methods through which such change could be instituted remain unclear, it is highly unlikely that a gender quota system will be implemented in the future. The United States will most probably look to Europe and observe quota effectiveness with the hopes that the same results can be achieved organically, although prior lessons have shown that this is indeed a false hope.
Eastern and Central Europe
In Eastern and Central Europe, the lack of women in positions of power in the private sector is the “norm”. This “strong resistance is…based on the understanding that quota regulations are a phenomenon of the Soviet past, as an example of the period´s `forced emancipation´”, quite similar to feelings harbored in the United States by the corporate elite i.e. that the quota system is a relic of the past. It is therefore not surprising that there exist no gender quota legislation and the existence of soft laws that integrate gender diversity in the form of corporate governance codes are few and far in between in the region.
In Poland, the 2010 update to the Code of Best Practice for Warsaw Stock Exchange Listed Companies featured Recommendation 9 which suggested that public companies “ensure a balanced proportion of women and men in management and supervisory functions in companies, thus reinforcing the creativity and innovation of the companies’ economic business”. It remains to be seen whether this recommendation will be heeded by companies and whether there will be monitoring implemented to measure the progression of any improvements or whether Poland will turn to legislating gender quotas in the hypothetical situation that Recommendation 9 is not taken seriously.
This sour attitude and resistance towards quota legislation and soft laws can also be seen from the 2010 Green Paper published by the European Commission which was collated through questionnaires sent to public and private European businesses and public entities. Amongst other queries, the questionnaires asked whether businesses and public authorities agreed that “including more women and individuals with different backgrounds in the board of directors could improve the functioning and efficiency of boards of directors.”
The responses to the questionnaire were issued mainly by the ministries of finance of various Eastern European countries; the results were less than surprising given the pervasive attitude towards the representation of women on corporate boards. For example, the Ministry of Finance of Estonia stated that they did not believe that “diversity of the composition of the board of directors [should be] the criteria when recruiting members of the board of directors” and that “including more women…on the board could improve the functioning and efficiency” of the boards. The Czech National Bank issued a statement doubting that there was any “reliable evidence” that adding women to boards of directors would increase efficiency, that such initiatives should “proceed from the institutions themselves” and that it was simply “not possible…to order a proportion of female representation” in the Bank´s governing bodies.
On the other hand, there were a few governments that approached the issue more amicably. The Slovak government and the Slovak National Bank issued a joint statement expressing that while the inclusion of women on boards of directors was a formidable goal, the “expertise” of members should be the final arbiter and that if there were to be binding legislation, an “adequate transition period” should be implemented. The Czech Ministry of Finance too agreed that the inclusion of women in corporate governance was an issue that had its merits yet stressed that it should be considered as an additional “characteristic” to the merits of those individuals considered for board membership, thus differing from the point of view of the Czech National Bank. However, overall, there was no unqualified support for the inclusion of women on boards and those that did not out rightly disagree showed very tempered support.
Best Practices and (Un)Conclusion
While Norway is currently the only country who has had legislation in full effect for long enough to be able to gather data on quota effectiveness, there have been various sets of best practices that have been observed and those that can be applied by companies directly without awaiting governmental action. Accordingly, the recent McKinsey Report has drawn up thirteen “gender diversity measures” through which companies may begin shattering the glass ceiling.
Furthermore, according to the Lehman Brothers Center for Women in Business, businesses should “be aware of the situation within the company by introducing continuous monitoring of all human resource issues from a gender perspective, ensure that the company implements policies that facilitate good work-life balance…, introduce measures to provide the type of support needed to develop one´s career…[that includes] developing networks, coaching and mentoring and introduce specific action to help prepare women for leadership positions through suitable training and hands-on experience.”
Gender Quotas: A Necessary Evil?
It is a challenge to provide a conclusive overview of such a dynamic issue since at the moment of this writing, developments are taking place both in public discourse as well as in parliaments across Europe and the United States.
So far, countries that have adopted successful measures aimed at ensuring gender diversity in the boardroom have done it through gender quotas.
Whether gender quotas are the best solution to solve the issue of the lack of gender equality in the boardroom remains an open question. Most women would probably answer by the negative: merits and capabilities should be the reference. The current lack of adequate female candidates is also regularly pointed at and the Norwegian example demonstrated that this might be a source of difficulty in achieving the expected target. However, it would seem that implementing a quota solution is the most effective method for Boards to open their doors to gender diversity at a reasonable pace due to the fact that although “most executives recognize the positive impact of gender diversity on company performance…this belief does not translate into action”.
Finally, measures seeking to guarantee the access of women to the boardroom have so far been restricted to listed or state-owned companies. It is obvious that all companies would benefit from the participation of both genders in their management and that the benefit of such a guaranteed access should also be extended to all corporations.