November 21, 2016
An opinion essay by Patricia Q. Connolly, Executive Director, Center for Corporate Governance.
According to the recent Women on Board report by the Forum of Executive Women and PricewaterhouseCoopers, there is increasing pressure on companies to commit to diversity in the boardroom. The report indicates there is “slow, but increasing change each year” in this region and that “progress toward gender parity in the boardroom and c-suite is far from complete.” Despite these lackluster statistics, I see positive possibilities for the future of women in the boardroom.
As the executive director of the Center for Corporate Governance at Drexel University’s LeBow College of Business, I am often called upon to see if research supports the idea that adding women to the boardroom increases shareholder value. Recent research shows that there are economic reasons to include more seats at the table for women. The 2015 MSCI report indicated that companies in the MSCI World Index with strong female leadership generated a return on equity of 10.1 percent per year, as opposed to 7.4 percent for those without such leadership. In 2016, The International Monetary Fund found that adding one additional woman to the senior management team or on the board of directors while keeping the size of the team or board unchanged is associated with a 3% to 8% higher return on assets. I believe that women sitting at the table goes far beyond gender parity. Companies that understand the changing business landscape, facing disruption from new technologies, increased regulation, geopolitical turmoil, and the rise of the shareholder's voice, have identified and are actively seeking diverse talent. Companies that need to be faster to add women to the board are missing out on the opportunity to secure the best and brightest talent.
The boardroom needs a range of perspectives to contribute to a thoughtful and challenging discussion. Diverse opinions allow for positive friction and creative disagreement. The basic premise of diversity of thought is the need to bring together different ideas. It also has been shown to guard against groupthink that contradicts good governance.
Many investors have become more vocal about who’s sitting in the boardroom. They are not waiting for the SEC to tackle the issue of board diversity in defining what “diversity” actually means. To enable investors to make more informed decisions, they want more information about a company’s director nominees, and they want boards to think about tenure and diversity. Directors have paid attention, and many have changed their board composition as a result – 61% added a director with a specific skill set, 46% added a diverse board member, and 34% say they added a younger board member.
Additionally, 35% say someone on their board should be replaced due to aging, needing to prepare for board meetings, or needing more correct expertise to move forward. In addition to the call from regulators and legislators for diversity, investors are eager to secure the benefits of the improved performance and governance that gender diversity produces. There is mounting evidence that participation by women in the boardroom contributes to a more thorough and effective dialogue, which will bring U.S. public companies closer to gender parity and its many related benefits. Footnotes: 1 Harvard Law School Forum on Corporate Governance and Financial Regulation, Gender Diversity on Boards: The Future Is Almost Here, March 2016; 2 PwC, 2016 Corporate Directors Survey, October 2016.