Why It Matters To Have More Women On Boards

Why It Matters To Have More Women On Boards

Does it really matter who’s on the board of a company?

Is that the right place to start when it comes to solving for gender and pay imbalance in the workforce? The short answer: Yes.

Serena Fong, vice president of strategic engagement at Catalyst, a non-profit dedicated to advancing women’s leadership in the workplace, explained why board representation is so important. “They make decisions that directly impact what we buy, what’s in our fridge, the types of cars that are in our garages, they influence the strategic directions that a company is going to go in,” Fong said. “If you want an indicator of what a company’s culture is about, you need to look at how many women do they have on their board.”

In most of our nation’s largest and influential companies women remain severely outnumbered when it comes to board representation, including major tech companies such as Facebook, Yep, Intel, Apple, Tesla, and Snap. California recently passed a law that is encroaching on this gender gap.

California Senate Bill 826, requires the boards of publicly-traded companies to have a minimum of one female member on the board by 2019. And there’s more good news, the law requires female representation to increase over time. By the end of July 2021, companies must have at least two female board members on boards of five and at least three females represented on boards of six or more members. What happens if a company doesn’t comply? They could be hit with heavy fines.

Ellen Pao, who advocates for diversity in Silicon Valley after famously bringing a lawsuit against her former employer for gender discrimination, said that corporate boards have the power to change hostile and exclusive cultures at tech companies, especially since they’re responsible for hiring CEOs and other executive leadership.

“I’m hopeful that more diverse boards will help CEOs lead their companies and that start-ups will become more diverse and inclusive,” she wrote in a Washington Post Op-Ed in support of this law. “Think of all the scandals, product failures, harassment and discrimination we might have avoided if public company chief executives and founders had taken diversity and inclusion seriously from their early start-up days.”

Women only hold 15.5 percent of board seats in California-based companies listed on the Russell 3000 index, according to a study from Annalisa Barrett at Board Governance Research. Meanwhile, in the US roughly 20 percent of directors are female. The Equilar Index estimates that it will take 40 years for corporate boards to naturally reach a gender parity. “A mandate can be sort of a kick in the rear to make things happen,” said Caroline Turner, a former attorney and corporate executive who founded Difference Works, which trains business leaders on increasing diversity at their firms.

Europe has been ahead of the curve in adding women to corporate boards the past several years. In 2011, France passed a law requiring boards to be made up of 40 percent women. And, in 2018, according to a recent Fortune article, the country has “leapfrogged the US” when it comes to equality on corporate boards because of the country’s ruling. Sweden, Iceland, Finland, Germany, and Norway have similar laws.

Yet requiring women’s equality on corporate boards has proven controversial. After Gov. Jerry Brown signed the bill on Sept. 30, there was an outcry about how the law was surely unconstitutional, discriminatory towards men, and would face many legal challenges. Gov. Brown said as much in a letter explaining his signature. “Nevertheless, recent events in Washington D.C.—and beyond—make it crystal clear that many are not getting the message,” he wrote. He also noted, “Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America.”

In other words, it’s past time for women to have better access to corporate boards. But not everyone agrees with California’s new ruling.

California’s law, which was written by State Sen. Hannah Beth-Jackson, tries to make a clear business case for adding female representation to corporate boards. It cites studies by McKinsey, Credit Suisse and other financial firms that show companies with gender-diverse boards enjoying an increase stock performance and other metrics of profitability. Yet other studies confuse the issue. One University of Michigan study from 2010 shows Norwegian companies performing worse after having to add women to their boards after a landmark 2008 quota was required by law.

David Matsa an economist at Northwestern University’s Kellogg School of Management who has studied the Norway quota cautions against hanging the case for them on just the bottom line. “Following that logic would imply that if it turns out that those groups actually reduce profits, then that would be an argument against having a diverse leadership team,” he said.

Carrie Lukas, president of the libertarian-leaning Independent Women’s Forum, advocates for letting the gender imbalance on corporate boards correct itself. Because women make up almost half of the US workforce and are getting college and Master degrees at higher rates than men, the imbalance should sort itself out. “All of the trends are moving in a direction where they’re getting more and more power and prestige,” she said, adding that a mandate could erode that progress by making women on boards serve as merely tokens, diminishing their accomplishments.

By requiring larger companies to have more than one woman on their board, it seems that California’s new law is trying to guard against this. Several organizations have published studies showing a board of directors needed at least three women to change that governing body’s decision-making for the better.

Making a board more diverse won’t magically solve the gender pay gap or sexual harassment or even result in more diversity and equality in the workforce as a whole. However, it is an encouraging step towards equality in the workforce.

One study, by David Matsa and Amalia Miller, suggested that an increase in female board members meant an increase in the hiring of female CEOs and executives, as well as increases in their pay. “I am hopeful that making boards more diverse will eventually have a trickle-down effect on other women,” Matsa wrote in an email. “Although it is possible that this would happen on its own with time, it will happen faster if pushed along by other policies.”