There is increasing pressure on Boards to appoint female members to their ranks. BlackRock recently released a report “Glacial Change in Diversity at ASX 200 companies” claiming:
- the growth of representation of women on Boards continues at a glacial pace (17.8% of ASX 200 Directors are female);
- disclosures made by ASX 200 companies regarding their gender polices point towards Boards not appearing to take the issue seriously.
BlackRock warned if this did not improve, quotas and extra regulation could follow. A growing body of research points to the benefits of improving gender diversity on Boards, not least the well publicised work of Credit Suisse, which after analysing the performance of over 2,000 companies across the globe concluded that investors would have achieved better returns if they had invested in companies with women on their Boards.
Regulatory pressure to act is increasing. To meet the ASX Corporate Governance Council’s disclosure requirements that became effective in January 2011, companies must establish a diversity policy and publish a summary of the policy, which should include measurable gender diversity objectives. Companies must also disclose the proportion of women in the company, in executive positions and on the Board. Legislation starting in the 2013-2014 reporting period now requires organisations with more than 100 employees to report to the Workplace Gender Equality Agency on the gender composition of their workforce and the existence of any strategies or policies to support gender equality.
The issue for many Boards with increasing their gender composition is that to add female members, other members need to exit – Directors can acquire more skills and become more engaged, but they cannot change their gender.
So who needs to go? Monitoring agency GMI Ratings noted that over one quarter of S&P 500 Board roles in the US were currently held by men who had served on their Boards for 10 years or more. GMI Ratings pointed to the belief that the longer a Director serves, the more entrenched they become: in the UK Corporate Governance code, Directors of over nine years’ tenure are presumed to be no longer independent. Another problem with entrenched members is that if a Board has many experienced members, it risks a future point where the experienced members all retire at once and create a knowledge transfer problem – research Egan Associates conducted for the March Newsletter revealed the average ASX 200 Director age was over 60 and was even higher for Chairmen. Given these issues, this category of long-serving male Directors would appear to be ripe for an exit, making room for the appointment of female Directors, which our research indicated are on average five years younger than the average Director.
Yet the cull would have to be brutal. GMI Ratings noted that in the US, 46% of those long-serving males would have to be replaced by women in order for 30% of all S&P 500 Board seats to be held by women. Currently, 17.5% are filled by women. To reach 40%, the proportion of long-serving male Board seats that would have to go would be 84%. Many good Directors would be forced out, showing that such a solution to the gender imbalance is just as arbitrary as quotas.
In last month’s newsletter we highlighted our analysis that showed companies with Directors on average serving their third or fourth terms performed better than those with Directors of average lower or higher tenure. Thus it would appear to be as ill-advised for Directors to leave a Board when they still have valuable contributions to make as if they were to stay too long.
There is no arbitrary cut-off after which a Director stops contributing. Each Director will be different, depending on their circumstances and skills. The trick is knowing which Directors are sliding into complacency and therefore ripe for departure versus those who will continue to be significant contributors.
One good way to get a handle on this is to conduct a Board Review process, which looks at how the Board functions as a whole and how each Director contributes to the Board’s processes. Boards may also want to complete a Board Capability Assessment, which maps Director skills to see where overlaps and gaps occur. Issues of succession – who is already planning to leave and when – and sustainability – how many experienced Directors are there and how close to retirement are they – should also be taken into this account at this stage. Only with this information at their fingertips are Boards ready to make the exit decisions necessary for a Board renewal process that will improve not only their gender diversity, but also their skills and other forms of diversity.
The next step is to put a criteria-led search process into place and not fall into the trap of holding a conversation around the Board table ending in “George is a good chap. Let’s appoint him.” This does not meet accountability standards and will not achieve diversity, or indeed any, goals. In short, it no longer cuts the mustard. Given low turnover rates of Boards (over the last year only around 10% of ASX 200 Board roles were vacated) it’s important to get each appointment decision right.
(As a postscript, The Australian Financial Review’s Rear Window accused BlackRock after the report’s release of throwing BlackRocks in glass houses – the column clocked BlackRock as only having 10.5% female directors on its Board, as opposed to the 17.8% ASX 200 average.)