Why boards need diversity The representation of women in workforce has risen substantially but their participation on corporate boards is still limited. The economic importance of equality must be understood
Although participation of women in workforce is increasing worldwide, it is not commensurate with higher leadership roles. Female participation on corporate boards is still only a small fraction of their overall participation. In Australia, women’s labour force participation rate reached the highest ever in January 2018 at 60.5 per cent, whereas in places like Canada, the US and the European Union, women are almost half of the workforce. However, representation of women on boards is abysmally low. In emerging economies such as India, female board members are to the tune of 10 per cent, whereas it is slightly better in Western nations like Canada with 18 per cent female representation. However, expectation of gender diversity on boards is increasing by various stakeholders. Frequent headlines in the media call for increased diversity in corporates. Institutional investors, too, have been increasingly pressing for female directors on boards. Further, it has also been found that gender diversity on boards improves financial performance.
Overall, organisations can accrue three specific benefits from board linkages: Advice and counsel; legitimacy; and channels for communicating information and for gaining preferential access to commitments or support from important elements outside a firm. The sources of these benefits can be categorised as directors’ human capital (for example expertise, skill, knowledge and reputation) and relational capital (example available resources through a network of relationships).
Regarding the first benefit, that is the boards’ provision of advice and counsel, we see that the directors’ tasks are non-routine and involve “big picture” matters rather than day-to-day operational issues. Boards set the parameters within which strategic decision-making occurs, are often involved in strategy initiation and participate in all phases of a firm’s strategic development process. However, boards also meet infrequently, have limited information about the firm and rarely involve themselves in strategy implementation. Because of their fiduciary responsibility to shareholders as overseers of management, boards are often characterised as active questioners of management and the status quo, but at the same time, due to paucity of time and information, we should also acknowledge their limited roles as overseers.
Providing a second category of benefits, directors lend legitimacy to organisations. Directors of large corporations are highly visible to societal actors, who grant legitimacy and who are influenced by prestige, such as institutional investors and, thus, directors can legitimise firms. The final benefit is the provision of channels of communication to external entities and gaining influence, support, commitment or favorable access to resources via these channels. Researchers have found that valuable information is disseminated between firms through boards and that they are helpful in acquiring resources from important external sources.
Having discussed the board of directors linkage benefits, let us look at the effects of female representation on these advantages. Although we continue to examine each benefit separately for ease of discussion, we recognise that in practice, they are not mutually exclusive. An equally important recognition is that although female representation on a board may result in any or all of these benefits, a firm may purposefully select a female director purely for advice and counsel, yet also benefit from the legitimacy or access to resources she lends to the organisation.
It has also been proved beyond doubt that compared to homogeneous groups, diverse ones exhibit increased information, search and greater range of perspectives. Further, they generate more alternative solutions to the issues. Specifically, with regard to gender, research suggests that people of different genders possess different norms, attitudes, beliefs and perspectives, based on these differences. Gender diversity has been found to facilitate creativity within groups but also leads to clashes within groups because others find it difficult to identify with those of a different gender. However, because boards are engaged in non-routine problem-solving and meet infrequently, improved brainstorming, creativity, consideration of diverse perspectives and questioning of status quo, in which they engage, may represent “functional conflict” and benefits that outweigh other, possibly negative implications for communication.
The legitimacy of organisational practices is conferred by societal members and the society’s values regarding organisational diversity put significant pressure on firms to include females on their boards of directors. The pressure for gender diversity comes from a number of different stakeholders that firms depend upon. Few organised interests have argued against such board appointments. For example, institutional investors scrutinise corporate boardrooms for diversity, reputation and credibility of a firm, in both internal and external labour markets. The situation may improve if they include women on the board. Thus, all other things being equal, gender diversity within boards of directors adds legitimacy to an organisation.
By virtue of their different experience sets, beliefs and perspectives, women have the potential to link firms to different constituencies than men. Women are the primary purchasers in the United States, making 88 per cent of all purchases and controlling spending in almost half of all households with assets of more than $500,000. The importance of female purchasing power is recognised in the boardrooms. Larry Johnston, CEO of the Albertsons grocery chain, recently stated, “Women have insight into our customers that no man — no matter how bright and hard-working — can match. This is important when 85 per cent of all consumer-buying decisions made in our stores are made by women.”
In addition to linking an organisation to customers, female directors serve as role models to individuals inside the firms, as mentors for aspiring women employees and as a signal to other women in the company and in the labour force that their concerns and issues will be heard. Similarly, women directors signal that an organisation offers opportunities for career growth to both current and prospective employees.
Finally, female directors may also link a firm to important suppliers. As already mentioned, many institutional investors have policies of investing only in firms with a commitment to gender representation. Female directors can provide important ties to these organisations, serving as symbols of commitment to minorities and females. In sum, female representation on boards of directors may link firms to different customers, current and potential employees and important suppliers, including investors. Given these statistics and pressures for greater female representation, why do some firms have more women on their boards of directors but others do not? Are their any organisational predictors for determining the women participation in boards? Focussing on organisational characteristics that are predictive of women on corporate boards, on the other hand, allows us to systematically explore under what conditions a firm’s board is more likely to include female directors. By identifying firm characteristics, one can provide a helpful framework for understanding what types of directors can benefit a firm most.
The first predictor is the size of the company. Larger and more visible firms experience more pressure to conform societal expectations as they are the most visible to the public and are likely to be under scrutiny. Societal expectations for gender diversity among a variety of stakeholders (example investors, customers and communities) place pressure on such firms to increase female representation in their upper echelons. The second predictor is the nature of the industry. In particular, businesses vary in their degree of dependence on females in the labour pool. Thus, being in an industry with a large female employment base should tend to increase the benefits of female representation on a firm’s board of directors.
The third predictor is diversification and the firm’s corporate strategy or level of diversification, too, may influence the value of these benefits. Firms operating in a single business environment face confined environmental dependencies compared with those operating in multiple product-market environments. Spanning multiple product-markets likely increases the value of a broader set of perspectives and ties to external constituents provided by gender diversity at the board level. That is, as a firm’s scope of environmental dependencies increases as a result of diversification, the value of ties to different stakeholders in the environment and the increased breadth of perspectives represented by females on the board are likely to grow in importance.
Proper board linkages are important for management practice. At its broadest level, firms can benefit from such links and a purposeful selection of board members who can help manage environmental dependencies is valuable to a firm. In terms of female representation on boards of directors more specifically, the size of the organisation and nature of industries are important predictors and can provide an opportunity — both for women seeking to advance into the corporate elite and for firms seeking to improve their gender diversity.
(The writer is Assistant Professor, Amity University)
Writer: Hima Bindu Kota
Courtesy: The Pioneer