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,
and nearly 60 per cent of graduates;
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.
The Cranfield Female FTSE Board Report, for example, highlighted
more than 2,500 women ready and capable to take on board-level
positions. 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.
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.
This was echoed by the European Commission.
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
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.
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
· A more diverse boardroom offers wider
perspectives that better reflect the customer base and workforce
· 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
· 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;
· Some studies point to the fact that greater
diversity, particularly of gender, can have a positive effect
on corporate performance.
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.
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,
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.
These assertions have been reiterated in subsequent studies
and were drawn upon in evidence by the Government.
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.
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".
Dr Ruth Sealy, Deputy Director of Cranfield's International
Centre for Women Leaders, agreed that it was "virtually impossible"
to prove a direct link.
The other limbs of the argumentfairness, equality of opportunity,
better retention of talent, and a more reflective and challenging
boardare 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.
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".
However, as the Minister said, "causality is probably impossible
to prove one way or the other
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, rather
than on the direct financial impact of increased female board
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.
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".
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
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.
The legal case for action on boardroom
|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.
Such limitations are likely to apply to positive action at EU
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. 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."
27. For many witnesses, however, it was important
for any action to be non-legislative in nature.
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.
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".
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
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
29. Others wanted a stronger role for the EU,
believing that progress was best achieved by action at a European
level. The European
Commission asserted that an EU response would better achieve the
potential benefits for all citizens.
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";
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.
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.
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. 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.
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
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.
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 membersor, for larger boards, to be at least
30 per cent femaleto establish a "critical mass"
of female representation. At that point, it is suggested that
corporate culture begins to shift and women board members exert
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.
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
viewed a 25 per cent target as too modest, and inclined towards
the 40 per cent proposed at EU level.
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."
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
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".
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. This, it said,
would be the "stepping stone" which, when reached, "will
have prised open the lid on a tightly knit group
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 distractingPWC
called a single figure "meaningless" and warned that
it could encourage complacency when reached.
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.
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.
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
Q41 (Helene Reardon-Bond, GEO) Back
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
Cranfield University School of Management International Centre
for Women Leaders, The Female FTSE Board Report 2012: Milestone
or Millstone, op. cit. Back
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
European Commission Back
Professor Sylvia Walby Back
Donnelly RR, Fiduciary Duties and Other Responsibilities of
Corporate Directors and Officers, 4th ed., 2008-2011
Morrison & Foerster LLP, US Back
NAPF, IMA, IDDAS, GC100, ABI, ELA, CBI, NEST, QCA, NHO, Q18 (Caroline
Normand, BIS), Q114 (Otto Thoresen, ABI) Back
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
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
IMA, Fawcett Society, An Inspirational Journey, Professor Sylvia
Walby, Aviva, Arlene McCarthy MEP, Mary Honeyball MEP, NEST, European
Commission, Q55 (Lord Davies of Abersoch), Q48 (Jonathan Rees,
GEO), Q113 (Joanne Segars, NAPF), Q246 (Helena Morrissey), Q298
(Jo Swinson MP) Back
ABI. See also Q245 (Arni Hole, Norwegian government) Back
McKinsey, Women Matter, 2007, 2008 and 2010; Catalyst,
The Bottom Line: Connecting Corporate Performance and Gender
Diversity, 2004 Back
Credit Suisse Research Institute, Gender diversity and corporate
performance, 2012; Deutsche Bank Research, Towards gender-balanced
leadership, 2010; Ernst & Young, Mixed leadership,
Campaign for Merit in Business, Ray Russell, Michael Klein Back
ELA. See also Q248 (Helena Morrissey) Back
European Commission Back
Positive action includes all measures to prevent or remedy past
discrimination, for example by addressing structural disadvantages.
It goes beyond merely prohibiting discrimination and can include
the imposition of quotas. Back
See, for example, Case C-407/98, Abrahamsson Back
The Mentoring Foundation, ILM, An Inspirational Journey, IDDAS,
PWC, IMA, 30% Club, NAPF Back
NAPF, 30% Club, The Mentoring Foundation Back
IMA. See also PWC, IDDAS, An Inspirational Journey, ILM, Aviva,
ABI, Aberdeen Asset Management, Spencer Stuart, CBI, NEST, EHRC,
Marina Yannakoudakis MEP, GC100, NHO, Q149 (Simon Walker, IoD;
Sir Michael Rake), Q178 (Michael Reyner, MWM Consulting), Q204
(Dr Ruth Sealy), Q261 (Helena Morrissey, 30% Club) Back
Arlene McCarthy MEP, Mary Honeyball MEP, NAWO, QCA, EWL, TUC Back
European Commission Back
Austrian Federal Chancellery Back
ABI, 30% Club Back
Q249 (Helena Morrissey, 30% Club) Back
First developed in Rosabeth Moss Kanter, Men and Women of the
Corporation, 1977. See also Joecks, J. et al, Women on
Boards and Firm Performance: What Exactly Constitutes a 'Critical
Mass'?, 2012; Kramer, V. et al, Critical Mass on Corporate
Boards: Why Three or More Women Enhance Governance, 2007;
Konrad, M. and Kramer, V, How many women do boards need?,
2006; Kramer, V. et al, Critical Mass on Corporate Boards:
Why Three or More Women Enhance Governance, 2007 Back
European Commission Back
EHRC, NAWO, Mary Honeyball MEP, TUC, PWC, NAPF, 30% Club, ILM,
Dr Barnali Choudhury, Mentoring Foundation Back
TUC, NAWO, Austrian Federal Chancellery Back
Q108. See also Q108 (Professor Sylvia Walby; Dr Karen Jochelson,
EHRC; Dr Annette Lawson, NAWO) Back
Q108. See also Q108 (Dr Karen Jochelson, EHRC). Arlene McCarthy
MEP also supported "realistic" short term targets on
the way to equality. Back
Q249. See also Q168 (Simon Walker, IoD) Back
ibid. See also Spencer Stuart Back
ibid. See also IMA, An Inspirational Journey Back
Cranfield University School of Management International Centre
for Women Leaders, The Female FTSE Board Report 2012: Milestone
or Millstone, op. cit. Back
30% Club Back