As institutional investors pressure companies to increase diversity in the boardroom, boards of directors should understand that it can take years to achieve gender parity, but those efforts pay off.
"When you're starting on this journey [toward gender parity], you have to be realistic about the time and effort necessary," said Kathy Higgins Victors, a board member at Best Buy Co. Inc. (BBY). "Reaching parity and the diversity that we have [at Best Buy], that was a five-year journey - it doesn't happen overnight."
Prominent institutional investors, such as BlackRock and State Street, have been engaging with their portfolio companies about the number of women on boards as a growing body of research suggests that having more women in leadership roles fosters more constructive dialogue and improves financial performance. MSCI research has shown that companies with a critical mass of women on the board, or at least three women, experienced a median gain in return on equity (ROE) of 10 percentage points and a median increase of 37% in earnings per share (EPS). Conversely, companies without women on the board saw median changes of a one-percentage point decline in ROE and a drop of 8% in EPS.
Women hold about 18.5% of all Russell 3000 board seats, according to the latest Equilar Gender Diversity Index. At the current rate of growth of women on boards, gender parity across the Russell 3000 would be achieved by 2034, Equilar said.
"The glacial pace of progress has definitely been frustrating," Eve Tahmincioglu, executive editor and digital director of Directors & Boards magazine, said during a webinar, titled, "Diversity Laws are Here: What Can Boards Do to Prepare?"
But momentum is building for more gender-balanced boards.
At the end of September 2018, California became the first state to require women on boards. Under the new law, public companies in the state are required to have at least one woman on their board by 2019. By 2021, companies with five board members are required to have at least two women, and on boards of six or more members, there must be at least three women. Public companies that fail to comply will face fines of $100,000 for the first violation, and $300,000 for any subsequent offense.
About 27% of public companies in California don't have a woman on the board, according to data as of December 2018 by relationship mapping service provider BoardEx.
California State Senator Hannah-Beth Jackson, the joint author of the bill, has said the current legislation came after she had written a resolution in 2013 urging companies in the state to put women on their board voluntarily. But five years after the resolution, Jackson found that public companies had made little progress, and decided to require action through legislation.
While California is the first state to address corporate diversity by law, some legal experts have suggested the legislation might be foiled due to the internal affairs doctrine, which says a corporation will be governed by the corporate statutes and case law of the state in which the company is incorporated. Still, no company or person has publicly come forward to challenge the law.
"I originally wasn't a big fan of mandates; however, as I've been involved in this for a number of years, I'm beginning to feel that if a board and company can't get [gender diversity] on their own, maybe a mandate isn't a bad thing," said Higgins Victors.
Now, New Jersey is reportedly moving ahead with similar legislation, and other states have adopted non-binding resolutions to encourage board diversity, noted Tahmincioglu.
"It's an issue that I think each state should be worried about," said Higgins Victors.
As companies consider a more gender-balanced board, they need to be committed to the process and evaluate the skillsets that the board requires.
"In today's governance, I believe you really need to look outside of your box; you really need to reach out to people that aren't the same as you," said Higgins Victors. "When you're trying to transform an organization - as we are at Best Buy - it's helpful to have other perspectives from other networks."
Higgins Victor noted when the Best Buy board was working toward gender parity in the boardroom, the directors had frank discussions about diversity, considered the value of non-traditional candidates with the right skills, and reached out to people who were not a CEO.
Usually, boards use their professional networks and executive search firms to find new directors.
Richard Taylor, vice president of employee experience at Nasdaq, noted that the company uses external recruiters for board positions and executive roles, and offers incentives for a diverse slate of candidates.
"We will pay full price if they bring us a very diverse slate," said Taylor. "We will dock them actually if they don't fulfill that need, so we are asking them to work harder and to look in new and different places."
With a diverse leadership team, it not only creates a strategic advantage but also makes it easier to attract great talent, both Higgins Victor and Taylor said.
"Having diverse thought and perspectives ensure that nothing is left out of the strategy," said Higgins Victors. "When you've got different perspectives and unique points of view that leads to a broader understanding of your customer base, and if you understand your customer base more deeply, you're going to understand what their interests are and that gives you a strategic advantage."
Click here to watch the full webinar.