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Addressing the gender gap

|Written By Vawn Himmelsbach
Addressing the gender gap

New rules now require listed companies in seven provinces and two territories to report annually on their approach to adding more women to senior-management positions and their boards of directors.

The new rules don’t set quotas, but rather allow companies to make voluntary changes, so there’s concern gender disparity on boards won’t disappear as quickly as some would like.

The securities regulatory authorities in Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Québec, and Saskatchewan have adopted the rules, which went into effect on Dec. 31, 2014, geared toward increasing transparency for investors.

The new rules require companies to report on the number of women on their board and in executive officer positions; how the board or nominating committee considers the representation of women during the selection process; and how the company considers representation of women in filling executive officer positions; as well as company targets regarding the representation of women on the board.

What we’ve seen for decades, to varying degrees, is that boards have been principally comprised of white men in their 60s, says Jennifer Longhurst, a partner with Davies Ward Phillips & Vineberg LLP.

“As a result of a wide variety of factors, we see businesses now grappling with a broad range of issues partly influenced by the increased focus on corporate governance and risk management,” she says. “So it raises the question as to whether a relatively homogenous group of individuals with similar backgrounds and experiences can bring the broadest range of solutions to the table.”

In the Davies Governance Insights 2014 report, the firm found there has been a modest increase in female representation, as well as a positive trend in overall leadership by women on boards — but gender disparity persists and the rate of change continues to be relatively slow.

The rationale that underlies the new rules of disclosure to promote diversity is the view that boards are more effective at decision-making when there’s a greater diversity of perspective, says Longhurst, adding that research suggests boards with two or more women tends to bring a beneficial change in culture and leadership.

“You can see positive impacts on company performance and stock price,” she says. “There appear to be some real tangible benefits to increasing diversity.”

There are no quotas, nor are there prescriptions to foster diversity or board renewal. Rather, the new rules promote a model that grants companies flexibility in how they want to approach the issue.

Many times the qualifications for directors are fuzzy or nebulous. “What needs to happen for boards to diversify is you need to enlarge the pool to people you don’t know,” says Richard Leblanc, an associate professor in law, governance, and ethics at York University. He is also a member of the Academic Advisory Board with the Canadian Coalition for Good Governance.

“There’s a natural tendency to bring on people you have a prior relationship with and that limits your pool, because for the most part you’re excluding a large part of the population,” he says.

When board members know each other, the tough questions don’t get asked. “It promotes group think,” says Leblanc. “If [a new board member] is not previously known, the performance of the board increases.”

Directors also tend to recruit people who serve on multiple boards, so they’re “over-boarded” and less effective. “If you’re an executive and on more than two boards, it’s actually a red flag, it’s not a badge of honour,” says Leblanc.

But entrenchment leads to pushback from those who view the new rules as threatening. And they’ll put forward all sorts of myths and misinformation to maintain the status quo.

“It’s like a club,” says Leblanc. “That’s what boards are up against — it’s difficult to peer review your colleagues. That’s why wiggling happens and entrenchment happens. It’s not comfortable to ask someone to step down.”

If you look at the leaders of corporate Canada, they’ve typically been men, “so I’m not sure it’s a myth to say the pipeline hasn’t been readily available,” says Longhurst. In certain industries, for whatever reason — whether because of biases or more legitimate reasons such as few women in the workforce — it’s not as easy to identify appropriate candidates.

“What we’ve seen change, though, is some of the traditional criteria for selecting board members has significantly broadened,” she says. “You don’t want a board comprised entirely of CEOs, especially because of the increased demand for a board’s time.” And that opens the door to a more diverse candidate pool.

Wendy Cukier, vice president of research and innovation at Ted Rogers School of Management’s Diversity Institute at Ryerson University, says corporate boards have much lower levels of representation than those in the education and health-care sectors. “What’s more interesting to me is that there are huge disparities within sectors,” she says.

In its DiversityLeads 2014 report, the Diversity Institute found that some of the largest private-sector companies have at least 40 per cent women on their boards, while on the other hand almost 40 per cent had no women whatsoever on their boards.

“What that tells you is this is not a problem with the pool,” says Cukier.

As we move toward more objective and systemic approaches — such as looking at skills matrixes — we’re going to level the playing field, she says. And the comply-and-explain rules will encourage private-sector companies to reflect on the composition of their boards.

“Shining a light has a huge impact on behaviour,” says Cukier. But, she adds, it may not be enough. Some argue for more extreme measures such as quotas, but “sometimes if you push too hard you get more resistance.” So it’s not clear whether quotas work better than voluntary targets, she said.

“The other piece is to really understand the business case for this,” says Cukier. “This is not about political correctness, this is not just about compliance, this is about ensuring the governance of your organization reflects the people who work there and the people you serve.” And research suggests organizations are more effective when they have leadership that is more diverse and inclusive.

According to the DiversityLeads 2014 report, diversity on boards supports improved organizational performance: Companies with a higher percentage of women on top management teams and boards perform better financially, with higher sales revenue, greater number of customers, greater market share, and greater relative profits. It also provides stronger links to citizens, clients and customers, and helps attract and retain top talent.

“Regulatory frameworks are important, but at the end of the day as Canada is becoming more diverse these sorts of things do hit the bottom line,” says Cukier.

 “I don’t know if anyone says we need to get two more women on [our] board because we’re going to be more profitable,” says Carol Hansell, founder and senior partner at Hansell LLP, who does board advisory work and sits on several boards.

“I don’t think that in most cases it’s a matter of people being resistant to putting women on boards,” she says. “The people making the decisions don’t know enough women; their field of vision for people who they think can do these things doesn’t include women.”

Boards are often thought of as an old boys’ club, and when they need a new director they look for someone they’ve seen do this before, so it’s self-perpetuating. If they’ve never seen a woman do it, she said, they don’t tend to consider them.

“Governments have done a really good job of walking the walk . . . and they do it themselves by putting women on Crown corporation boards. I don’t see that translating into private boards, maybe because the private sector doesn’t look to Crown corporations,” says Hansell.

But she’s not sure how much longer we can carry on that way.

“While it may be difficult for some people to come up with a woman to put on the board, they’re now accountable,” she says.

“I think nobody wants [quotas] but there are more and more people being dragged toward the conclusion that they may be the only solution,” says Hansell. “This is very, very slow progress that we’re making.”

Indeed, there has been a lot of dialogue in the legal community about whether the rules have gone far enough.

“I’m a believer myself in wait and see — see what is disclosed, see how that gets picked up and what the result of that is,” says Dorothy Quann, vice president and general counsel for Xerox Canada and a member of the executive committee for the Legal Leaders for Diversity and the YMCA of Greater Toronto’s Audit Committee, of which she is a past member of its board of directors.

To bring more diversity to boards, the first thing that’s needed is dialogue, she says.

But there’s a need to develop the pipeline. “We need women in the pipeline to move up in [their] organization, and that’s a challenge to get women to the top of the organization,” she says.

Some companies have set diversity targets, with executives’ annual bonuses tied to those targets, “so you’re starting to see those types of initiatives taking place,” says Quann. Many of the banks, for example, already have strategies and metrics in place around diversity. “A lot of us will be borrowing from them,” she says.

But it has to be seen as a business imperative, she added. The banks were doing this before it was mandated because they saw a business case for it. “If you’re using a headhunter, you have to tell them you want to have a candidate pool that’s very diverse,” says Quann. “You have to make sure [women] are given leadership development.”

But there’s also a misperception that there are no women in the pipeline. “Why don’t you think of senior women lawyers in law firms?” says Quann, adding that many have experience in everything from securities to M&As.

“They’ve worked with boards, [and] a number of women are very senior and may possibly be thinking of retiring. Senior in-house lawyers are used to working with management,” she says. “I’m suggesting to folks that this might be a pool of candidates that is very sophisticated, comfortable working at the top of the house, and also [understands] governance at the board level.”

There’s also an assumption that people with private-sector experience can make contributions to non-profit or public boards, but not the other way around. “Running a hospital or university is actually in many respects way more complicated than running a corporation,” says Cukier. “You’re having to balance interests in ways that are very different than the private sector.”

And there happens to be a higher percentage of women in agencies, boards, and commissions in hospitals, universities, and large NGOs who could make a contribution to private-sector boards but are not considered, says Cukier. “You are picking from a relatively small pool [if you’re only looking at the private sector].”

The question is, if in three years time there hasn’t been enough progress, what’s going to happen? In the European Union, for example, slow progress with voluntary measures to increase the number of women on boards resulted in a 40 per cent quota imposed on European boards.

“The underlying expectation is if we don’t see enough progress the belt buckle will tighten,” says Leblanc. “I’m not sure [the voluntary rules] are enough to stimulate progress, so we cannot rule out quotas.”

And one female on a board is not an indicator of success; research indicates boards need at least two to three women in order to effect change.

Indeed, Leblanc has advised some women to look at European boards, because they have better opportunities there. “You want the best people in that room,” he says, “and there are incredible women CEOs that are not being asked [here].”

Where do Canadian boards stand?

On one end of the spectrum, leaders in diversity already have policies in place, with fixed targets (usually in the range of 25 to 30 per cent) and a date by which they intend to meet those targets, says Longhurst.

On the other end of the spectrum, some organizations have no diversity policies; perhaps the board is comprised of founders or stakeholders in the establishment of the company. Diversity may be one of several issues under consideration, but not the most pressing issue in terms of what they need to accomplish to create shareholder value.

Many organizations are somewhere in the middle, looking to adopt a policy but not enshrining actual fixed targets. “What they do is acknowledge that diversity can be beneficial, that it’s one of many factors in identifying candidates for a board, not just gender,” says Longhurst. Setting a quota may not make sense until they do a closer investigation of existing policies and procedures.