At the end of August, the California legislature passed a bill that mandates gender diversity on boards of directors of publicly-traded companies headquartered in California. If the bill passes, California will be the first state in the country with such a requirement.
Many people are asking: Is such legislation going to help; can changes in corporate behavior be mandated by legislation?
Perhaps the question we should ask is not does legislation work, however, but why, in 2018 do we need legislation on this issue?
Women represent 51% of the population, nearly 60% of the wealth in the US, and 80% of its purchasing power. Multiple studies show that including women on boards or on teams improves performance on several levels. The economic incentives for including female representation in management and decision-making positions are proven.
Given all this, it remains unclear as to why 25% of the publicly-traded companies in California do not deem it important to include a single woman on their boards.
These companies sell to women, market to women and have female shareholders. What are they missing? What are women missing? Why do corporations need a prod from the legislature to do what is clearly in their best interest?
The real value of such legislation is that it can focus the attention of corporations on the fact that they have been missing something. Their franchise actually depends upon women. And if corporations can begin to see this and if they can recognize that their investors seek diversity and gender representation on boards, then progress can be made.
For example, a 2017 survey by RBC Global Asset Management found that nearly three-quarters of investors believe that gender equality on boards is important. Indeed, many large shareholders engage corporations on this issue and vote in support of diverse slates.
The challenge is to understand why the gap in representation exists at a time when data supports change, investors want change, and customers seek companies that understand their needs. With the preponderance of evidence supporting female representation on boards, it makes sense for corporations and their shareholders to promote an environment that not only attracts women to their organizations but also helps them grow their careers there.
Mandates can lead to success.
Several countries have passed laws mandating diversity, including Norway and France. Today those countries enjoy significantly higher rates of diversity not only on corporate boards but also in executive positions. But this solution has not been universally adopted. The European Union has proposed legislation to address women’s underrepresentation on corporate boards several times, but has been unable to impose these requirements on the member states.
As the research continues to highlight the value – both economic and social – of increasing diversity within corporations, we expect to see further improvements in this realm.
Over the last five years, irrefutable progress has been made: the percentage of women on Fortune 500 boards has gone from 16.4% in 2011 to 22.2% last year. Whether or not this legislation works, whether or not California has the legal right to impose this law on companies, this law shines a light on an issue that will hopefully accelerate an important dialogue in the days to come.
Catherine Banat is institutional portfolio manager with RBC GAM, an asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, the asset management division of RBC Investment Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.