House of Lords - Women on Boards - European Union Committee

Women on Boards - European Union Committee Contents

CHAPTER 2: the case for action

12. In order to consider what form any measures to improve gender diversity on boards should take, it is necessary to examine the reasons that are advanced for taking action. In the evidence we considered, two key reasons were put forward.

13. The first is the need for fairness and equality of opportunity. Women make up 45 per cent of the labour force in the United Kingdom,[23] and nearly 60 per cent of graduates;[24] yet only 17 per cent of board positions in the United Kingdom, and around 14 per cent in the EU as a whole, are occupied by women. This does not reflect a lack of available talent, a point stressed repeatedly in our evidence.[25] The Cranfield Female FTSE Board Report, for example, highlighted more than 2,500 women ready and capable to take on board-level positions.[26] The figures strongly indicate that opportunities for progression are not shared equitably between men and women, and it is absolutely vital that this issue is addressed.

14. A more proportionate body of female board members would better tap into the wealth of available talent in the labour market.[27] It would also reflect the public interest. Arni Hole, Director General of the Norwegian Ministry of Children, Equality and Social Inclusion, noted that the case for action in Norway was based partly on the premise that greater diversity reflected a better return on public investment in higher education.[28] This was echoed by the European Commission.[29] For Professor Sylvia Walby OBE, UNESCO Chair in Gender Research at Lancaster University, the legal privileges granted to companies also gave the Government a legitimate interest in greater female representation.[30] These arguments add an interesting nuance to what is a clear starting point: we have a duty to make use of all available talent and to strive to ensure that opportunities for progression are available and accessible fairly, regardless of gender.

15. The second strand of argument is predicated upon the business benefits of a more diverse boardroom. This question links intrinsically with the core functions and responsibilities of a board. Broadly defined, the responsibility of a board is to oversee an organisation's business and affairs. In most companies, and particularly in the United Kingdom, the board holds ultimate responsibility for the direction of the company and has a supervisory remit over the officials to whom it delegates general company decisions and actions.[31] The role of a board should inform our evaluation of this argument.

16. This second strand was outlined in a large number of submissions. These submissions focused on four particular benefits:

· A more diverse boardroom offers wider perspectives that better reflect the customer base and workforce of companies;[32]

· A more diverse board changes the culture in a boardroom: it offers greater challenge to proposed decisions, a broader spectrum of ideas, reduces the level of "groupthink" and is potentially more "risk aware", improving corporate governance;[33]

· Female board members can be role models to other women within and outside an organisation, and can demonstrate a company's commitment to gender fairness, helping companies to attract and retain a broader proportion of staff;[34]

· Some studies point to the fact that greater diversity, particularly of gender, can have a positive effect on corporate performance.[35]

17. The first three are indeed compelling. A board that draws upon all the talent available to it will be better equipped for the challenges it faces. It will also be better equipped to retain and develop staff in a competitive marketplace. In addition, the Association of British Insurers (ABI), the financial services trade association, said that such diversity was a positive signal to investors in this field.[36] This applies to diversity more generally, even though our attention is focused on gender for the purposes of this report. Though PriceWaterhouseCoopers (PWC), the multinational professional services firm, queried the academic evidence base for these claims,[37] we are persuaded by the case that has been argued cogently to us. Furthermore, we are confident that the case will only strengthen as the proportion of women on corporate boards increases.

18. The last of the stated business benefits is the most contentious. The idea of a demonstrable financial benefit derives from studies by the consulting house McKinsey and Catalyst, a research and advocacy organisation for promoting female career development, which suggested a correlation between women's representation at board level and the financial performance of companies worldwide.[38] These assertions have been reiterated in subsequent studies[39] and were drawn upon in evidence by the Government.[40] However, Professor Susan Vinnicombe OBE, Director of the International Centre for Women Leaders at the Cranfield University School of Management, noted that Catalyst and Cranfield had now renounced this line of argument owing to the difficulty of inferring causation from the data.[41]

19. We do not find the case for a causal improvement in the financial performance of businesses from increased female representation, in terms of improved revenues or returns on investment, compelling in the form advanced at present. There are too many other factors to take into account for diversity to be disaggregated reliably, and the fact that the case has been renounced by some of its most notable former proponents is indicative of its weakness. We agree with Professor Susan Vinnicombe: "you cannot correlate two or three women on a massive corporate board with a return on investment, return on equity, turnover or profits".[42] Dr Ruth Sealy, Deputy Director of Cranfield's International Centre for Women Leaders, agreed that it was "virtually impossible" to prove a direct link.[43] The other limbs of the argument—fairness, equality of opportunity, better retention of talent, and a more reflective and challenging board—are better ways to advance the strong case for improving the representation of women on boards to businesses.

20. It should be stressed that we reject any suggestion that improved diversity would be to the detriment of company performance, as was argued in some submissions we received.[44] As the Employment Lawyers' Association (ELA) stated, "it is difficult to see what disadvantages companies could suffer by reason of a higher representation of women on boards".[45] However, as the Minister said, "causality is probably impossible to prove one way or the other … ".[46] If this express link to financial performance cannot be proven more robustly, then it should be discarded from the argument. To do otherwise would put a case that cannot be proven at the centre of an argument for policy change. We urge the Government to argue forthrightly the case for improved gender diversity based on the "whole range of different advantages" that balance can bring,[47] rather than on the direct financial impact of increased female board representation.

21. The case for pursuing a greater representation of women on boards is an overwhelming one. There is a strong public interest in ensuring that opportunities are available to all, regardless of gender, that women entering the labour market are able to fulfil their potential, and that we make full use of the wealth of talented women in the United Kingdom. Importantly, there is also a clear benefit to businesses from a more diverse boardroom. A diverse board is more reflective of its customers, offers greater challenge to established thinking, and demonstrates to staff that an organisation is committed to developing all of its talent regardless of gender. We support the Government's engagement with this agenda and urge that it continues.

22. It is important that the case for action is made to businesses in a strong and positive manner. However, this case must also be intellectually defensible. Thus far, though we are convinced of the beneficial behavioural and social impacts of a more diverse board, we are not convinced by the evidence put forward for a direct link between gender diversity and financial indicators of business performance. Unless further research bears out the assertion as to direct financial benefit, such a claim should be discarded and the case for action made on the other compelling grounds identified.

The case for EU action

23. The strong case for action to improve gender diversity is only a starting point in our consideration. The next question is whether, given the prospect of EU legislation in this area, such efforts should be for national governments alone.

24. In competence terms, the Commission asserts a clear legal base for positive action.[48] The Minister disagreed as regards quotas for boards: "We do not believe that it is within the competence of the EU. We believe that regulation of boards is a matter for member states, so that is something we would seek to challenge".[49]

25. It is of course imperative that any action is concordant with EU law, and as a result the Commission must tread very carefully in putting together proposals in this area. We also accept that this is a complicated issue upon which we cannot make a definitive judgment, especially as we have not yet seen a specific proposal from the Commission. However, there appears to be a good arguable case that the EU has legal competence to adopt binding measures for positive action[50] in this area within the limits established by the Court of Justice: namely that any legislation creating quotas that would result in the appointment of substantially less well qualified women, or automatic and unconditional priority being given to equally qualified women, would be impermissible (See Box 2). We therefore consider it appropriate to judge the possible nature and scale of policy responses to boardroom gender inequality, including quotas, on their merits.

BOX 2

The legal case for action on boardroom gender diversity

Article 2 of the Treaty on European Union (TEU) sets out that gender equality is one of the core values of the EU and Article 3(3) makes clear that it is to be promoted within the internal market. This is buttressed by Article 8 of the Treaty on the Functioning of the European Union (TFEU), which provides that the Union will promote gender equality in its activities.

The legal base for the EU to adopt legislation aimed at ensuring equal opportunities and equal treatment in matters of employment and occupation is provided by Article 157(3) TFEU. This does not require a cross-border dimension for action. It does not expressly preclude positive action. Article 23 of the Charter of Fundamental Rights of the European Union, which has the same legal status as the Treaties, is consistent with the EU taking positive action.

Article 157(4) expressly enables Member States to adopt or maintain action in favour of women as the under-represented gender. The Court of Justice has laid down limitations; in particular that a woman chosen for a particular post must be of substantially equal qualification as the male candidate, and that the appointment process must take into account the specific personal situations of all candidates.[51] Such limitations are likely to apply to positive action at EU level.

26. Our contributors welcomed the EU's engagement with boardroom gender diversity as a means to raise its profile and to encourage effective action, albeit with varying degrees of enthusiasm.[52] The Trades Union Congress (TUC) made this positive case most clearly: "Without pressure from the EU, it is quite possible that the momentum that has gathered behind this issue would be lost and incentives to address this problem would dwindle."[53]

27. For many witnesses, however, it was important for any action to be non-legislative in nature.[54] The Investment Management Association (IMA), a trade association for the United Kingdom investment management industry, reflected many of these submissions. It cited the need to respect cultural diversity across the EU, particularly in terms of differing board structures and policy approaches in Member States, as the reason to refrain from legislation.[55] Otto Thoresen, Director General of the ABI, summarised this line of argument: "Given the way that our markets operate, it is better to have the statement of intent and the clarity at European level of what is required and what we are trying to get to but then allow the individual countries, given their background history and structures, to move in the way that they see as most effective".[56]

28. The Government shared this view. Jonathan Rees, Director General of the Government Equalities Office, said that they "see no need for the EU to legislate in this area … ",[57] whilst the Minister saw most value in the EU taking a role in "sharing best practice, shining a spotlight on the issue and making sure that [the issue] is on the agenda … ".[58]

29. Others wanted a stronger role for the EU, believing that progress was best achieved by action at a European level.[59] The European Commission asserted that an EU response would better achieve the potential benefits for all citizens.[60] It argued this partly because Member States feared that national companies would be disadvantaged by governments acting unilaterally on board diversity and so were resisting action, but also because a response would avoid practical problems caused by differing rules of company law. This view was shared by the Austrian Federal Chancellery, which said that EU legislation "could add more certainty and consistency in a single market";[61] and by Sonja Lokar, Chairperson of the European Women's Lobby (EWL), who thought that legislation could shift cultural attitudes and "speed up the process" of improving gender diversity.[62]

30. Some supporters of EU action were more circumspect. The ELA wanted the EU to take a role, but to leave significant scope for national action. Similarly France Henry-Labordère, Counsellor for Labour Affairs at the French Embassy, was keen to see co-ordination at a European level, but believed "that a graduated approach" of "reasonable voluntarism" was the most appropriate first step.[63]

31. The EU can, using its political influence, demonstrate leadership and put improved gender diversity onto the agenda in Member States. Indeed, Vice-President Reding deserves particular credit for doing exactly that since 2010, as the Minister noted.[64] There are of course cultural and legal differences in how boards are structured and, reflecting this, Member States have taken different approaches to tackling issues of gender diversity. It is important to respect those differences and the actions taken by Member States, but doing so does not preclude EU action. We were glad to see this acknowledged by opponents to quotas such as the ABI and the 30% Club, a campaign organisation dedicated to engaging business leaders with voluntary change.[65] Gender equality in the labour market is a matter of common importance in the Treaty; if there are actions that can take this agenda forward more effectively at EU level, they should be taken. The EU should be welcomed as a key partner in the drive to improve gender diversity on boards.

32. The question is thus one of the scale of that response. The EU's competence to legislate, if established, is tempered by the principles of subsidiarity and proportionality, as laid out in Article 5 of the Treaty on the European Union. Under the principle of subsidiarity, the EU can take legislative action only where action could not be achieved satisfactorily at Member State level, or the objectives could be better achieved at a European level (see Box 3). This is a sensitive question to be judged on a case-by-case basis, as we do in the following chapters.

BOX 3

The subsidiarity principle

The principle of subsidiarity is born of the wish to ensure that decisions are taken as closely as possible to the citizens of the EU. It is defined in Article 5(2) TEU:

"Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level."

The EU institutions must ensure "constant respect" for the principle of subsidiarity as laid down in Protocol (No. 2) on the Application of the Principles of Subsidiarity and Proportionality. This is supervised by national parliaments, as laid down in Articles 5(2) and 12(b) TEU, in accordance with the "reasoned opinion" procedure set out in Protocol (No. 2).

33. Gender equality in the labour market is a core objective of the European Union and is embedded within its Treaties. It is therefore proper for the EU to play its part in improving the representation of women on boards. The Commission should be bold in showing leadership on the issue and in maintaining the high profile of the issue across Member States.

34. The Commission should be prepared to act where it can drive the agenda forward more effectively than Member States acting alone. Although we acknowledge that there are arguments that can be made concerning subsidiarity and the proportionality of EU action, the EU does have competence to take some form of action in this sphere. The better course for those with concerns is to engage pragmatically with any proposals from the Commission rather than simply asserting that the EU has no power to act.

The ultimate target

35. Any action must have a stated aim. Often this is presented in terms of targets, and two of those are pertinent for the purposes of this inquiry. The first is the United Kingdom target: Lord Davies of Abersoch set a target of 25 per cent of board memberships being held by women by 2015, against which FTSE 100 firms are being monitored. It was suggested elsewhere that this target was set in line with what was felt to be achievable within the timeframe.[66]

36. The second is the Commission's preferred target, as expressed in its evidence: that women should hold 40 per cent of positions on boards by 2020. This comes from the idea in organisational literature that a board needs to have at least three women members—or, for larger boards, to be at least 30 per cent female—to establish a "critical mass" of female representation. At that point, it is suggested that corporate culture begins to shift and women board members exert substantial influence.[67] The Commission's chosen figure would seek to ensure that, even in Member States where boards are traditionally smaller, there would in most cases be at least three women on the board.[68]

37. Witnesses agreed that such targets were useful focusing measures on the way to more sustainable equality, rather than an end in themselves, but disagreed on which was the most appropriate.[69] Some viewed a 25 per cent target as too modest, and inclined towards the 40 per cent proposed at EU level.[70] Scarlet Harris, Women's Equality Officer at the TUC, said that: "There is a strong argument for targets to be achievable, but for them to be meaningful they also have to stretch and challenge."[71] For Dr Annette Lawson OBE, Chair of the National Alliance of Women's Organisations (NAWO), though, even a 25 per cent target could serve as "a perfectly okay target on the way to something better".[72]

38. Others urged pragmatism. Helena Morrissey, co-founder of the 30% Club and Chief Executive Officer of Newton Investment Management, insisted that she did "not want to snatch defeat from the jaws of victory by having a discussion about other things that should be done".[73] Although the 30% Club supported the 30 per cent target identified in literature, it was content with a 25 per cent target up to 2015.[74] This, it said, would be the "stepping stone" which, when reached, "will have prised open the lid on a tightly knit group … ".[75]

39. From our perspective, full equality of opportunity should be the ultimate target. This is not a specific number, but a point at which data demonstrate that women entering the labour market are not being institutionally disadvantaged in their careers, nor dropping out at more senior levels in disproportionate numbers. In that respect, a specific target could be distracting—PWC called a single figure "meaningless" and warned that it could encourage complacency when reached.[76] We agree to a certain extent: progress is reflected in the rate of change, and its perceived sustainability, rather than a single figure. This is especially so when Member States and companies are taking action from different baselines. Nevertheless, targets have a pragmatic political value, incentivising efforts by national policymakers and identifying companies that are not engaged, so we accept the case for them at national and European levels.

40. Any target must be both stretching and achievable. We therefore see the Commission's 40 per cent target for 2020 as too ambitious at a stage when even the best performing nation, Finland, is still well below that point. Conversely, we see the United Kingdom's 25 per cent target as setting sights too low. The best EU-wide target to set at this stage is 30 per cent. Assessments against the target should be contextualised by the rate of change being made. That is an important metric. Not only does it prevent unfair criticism of countries where best efforts are being made, but it informs the central judgment, to be made in the coming chapters, as to whether Member States are moving too slowly such as to justify strong EU action in this sphere.

41. Nationally, we urge the Government to build on achievements thus far and institute a follow-up target of 30 per cent, to be reached by 2017. This is in line with the trajectory estimated by the Cranfield School of Management, on the basis that momentum continues to gather in this area.[77] The 30% Club was in fact optimistic that the present rate of progress may even see 30 per cent of female board members on FTSE 100 companies a year earlier than that.[78] The Government should aim to reach 30 per cent as soon as possible as an important statement of their engagement with the agenda.

42. The ultimate aim is for women to be represented at senior levels in terms broadly proportionate to their levels of participation in the labour market. This would be a clear signal that opportunities are available fairly to both sexes. The best way to assess the achievement of this goal, in terms of board appointments, is to assess the rate of increase in the number of women on boards over time and its sustainability. However, we accept that broader targets for female board memberships can help to ensure engagement with the issue by companies and policymakers and thus we support their use.

43. The best target to use is that 30 per cent of board memberships should be held by women, the "critical mass" level identified as a catalyst for cultural change in the boardroom. This would stretch governments and companies to deliver sustainable change, whilst remaining achievable in the present climate. At a national level, the Government should institute a 30 per cent target to be reached by 2017, whilst striving to achieve a 30 per cent level of representation as early as possible. In Europe, the Commission should adjust its 40 per cent target for 2020 downwards to 30 per cent, whether in binding or voluntary proposals in this area. In both cases, judgment against the target set should be informed as much by the rate of change and the context of action as by the raw data of representation levels, with proper account taken of meaningful progress in Member States and companies starting from lower bases.

23 CBI Back

24 Q41 (Helene Reardon-Bond, GEO) Back

25 Professional Boards Forum, Brook Graham, ILM, NAWO, EWL, Q42 (Helene Reardon-Bond, GEO), Q52 and 77 (Lord Davies of Abersoch), Q90 (Dr Karen Jochelson, EHRC), Q105 (Scarlet Harris, TUC), Q170 (Kate Grussing, Sapphire Partners), Q198 (Professor Susan Vinnicombe) Back

26 Cranfield University School of Management International Centre for Women Leaders, The Female FTSE Board Report 2012: Milestone or Millstone, op. cit. Back

27 ABI, ELA, Fawcett Society, CBI, NEST, European Commission, Q41 (Helene Reardon-Bond, GEO), Q199 (Professor Susan Vinnicombe), Q257 (Helena Morrissey), Q275 (Sonja Lokar, EWL) Back

28 Q228 Back

29 European Commission Back

30 Professor Sylvia Walby Back

31 Donnelly RR, Fiduciary Duties and Other Responsibilities of Corporate Directors and Officers, 4^th ed., 2008-2011 Morrison & Foerster LLP, US Back

32 NAPF, IMA, IDDAS, GC100, ABI, ELA, CBI, NEST, QCA, NHO, Q18 (Caroline Normand, BIS), Q114 (Otto Thoresen, ABI) Back

33 Fawcett Society, IMA, IDDAS, GC100, Professor Sylvia Walby, ABI, Aberdeen Asset Management, Arlene McCarthy MEP, ELA, Spencer Stuart, Mary Honeyball MEP, NAWO, CBI, NEST, QCA, EHRC, Elin Hurvenes, European Commission, Q18 (Caroline Normand, BIS), Q22 (Jonathan Rees, GEO), Q56 (Lord Davies of Abersoch), Q88 (Professor Sylvia Walby), Q113 (Liz Murrall, IMA; Joanne Segars, NAPF), Q114 (Otto Thoresen, ABI), Q142 (Simon Walker, IoD), Q144 (Sir Michael Rake), Q193 (Will Dawkins), Q199 (Professor Susan Vinnicombe, Dr Ruth Sealy), Q203 (Professor Susan Vinnicombe), Q246 (Helena Morrissey) Back

34 PWC, Fawcett Society, ILM, Aviva, CBI, NEST, Mary Honeyball MEP, EHRC, European Commission, Q199 (Dr Ruth Sealy). Though see Spencer Stuart, which queried the visibility of appointments in this respect. Back