November 26, 2012

What does it take to get more women on Canadian boards?

Yvan Allaire | Financial Post

In 2010, only 14.4% of directors of the 100 largest Canadian publicly-listed corporations were women. In the same year, roughly 7% of board members were new and in only one-in-five instances was the new member female, according to the 2010 Spencer Stuart Board Index.

Even to a patient, passive observer, that rate of change is glacially slow. At one time, there were plausible reasons to explain the weak representation of women on boards — the historical lag in the number of women with management degrees or the established networks from which board candidates were chosen. But the ratio of women in graduating MBA classes has increased swiftly in the past 20 years. In Canada, a Catalyst survey reports, that ratio has hovered above 33% since the early 2000s, yet the ratio of women on Canadian and U.S. boards in 2011 is closer to that of women MBA graduates in 1975 at a mere 11%.

“The ratio of women on Canadian and U.S. boards in 2011 is closer to that of women MBA graduates in 1975 at a mere 11%.”

Governments have opted for one of two approaches to increase the number of women on boards. In January 2011, the French government enacted a law obliging companies to meet a female director quota of 20% by 2014 and 40% by 2015. The percentage of women on the boards of the 120 largest publicly-listed French companies was 11.4% in 2010. Any appointment to the board by a company which contravenes these obligations will be declared void and board meeting fees will be withheld until the situation is corrected.

In February 2011, a task force, created by the British government, submitted its report calling on British corporations to set a firm female director target of 25% by 2015. In 2010, the percentage of women on the boards of targeted British corporations was 12.5%. The French option risks triggering perceptions of affirmative action, a most damaging consequence for the whole effort. The British approach, unsupported by public and binding commitments, may turn out to be mere window dressing.

There is another issue: the turnover rate of board membership. The 2010 Spencer Stuart Board Index showed there were some 87 new directors out of a total 1,150 directors of the 100 largest Canadian corporations, a rate of slightly more than 7%. With that turnover rate, board membership only changes entirely every 10 years; with a turnover rate of 10%, the board would turn-over 1.5 times in 10 years; and with a turnover of 15%, it would change completely over a five-year period, or three times in 10 years.

The turnover rate may accelerate as board members age and policies continue to be adopted to limit directors’ age and years of service. The rate will also increase as boards do a better job of evaluating directors and removing those who do not meet high standards. But it is doubtful that a rate much higher than 7% is sustainable long term and it may not be wise governance to experience too high a rate of board turnover.

Given current turnover rates and the observed rate of one woman for every five vacancies, women would account for 16.6% of board members in five years and 18.8% in 10 years (up from 14.4% in 2010). Raising the ratio from the current one-in-five to one-in-two would bring the ratio of women on boards close to 40% in 10 years. That may seem like a long time, but it does account for the fairly slow rate of board turnover.

Corporations must make vigorous and public commitments to raise the participation of women on boards. Policies targeting a reasonable turnover rate of board membership should be adopted; boards should commit to a policy of appointing one woman for every two board vacancies until women represent 40% of the board. That may not meet the calendar and deadline of some activists on the subject, but it is a fair and balanced way to generate benefits for all parties.