Board Diversity and the Norwegian Experience

We have discussed from time to time the sad state of board diversity in the United States.   Boards in the US are often mirror image boards, with membership looking much like the CEO.  The boards tend to be male, with members having similar experiences, and tend to be undiverse in age.  The number of women and people of color remain around 10%. 

It's not about the need to have the board include a cross section of humanity.  Rather, it's about the board's role.  To the extent that the board is there to provide CEOs with necessary and sometimes difficult advice, it needs to have a variety of viewpoints.

The government in Norway, as we have discussed here before, became fed up with the corporate excuses for not diversifying boards.  The government mandated that, with respect to gender, boards include at least 40% women.  Even in Norway the approach drew objections.  In general, CEOs and boards don't want different viewpoints.  It is easier when everyone operates with the same perspective.  They complained that it would make boards less effective and that there were not enough "qualified" women candidates.

The data on effectiveness remains to be fully developed.  Yet an article in the Financial Times indicates that, anecdotally, the requirement has benefited boards and that, with work, it turns out that there are plenty of qualified women candidates.  First, Norway now has the highest percentage of women directors on boards, with the percentage at 44%.  Second, with men dominating traditional professions used to screen board nominees, companies had to expand the pool and the criteria for board membership.  As a result:

• nomination committees have been forced to look in different areas for suitable female candidates. “They have turned to areas where there are lots of women such as lawyers, academics – and even ministers,” laughs the former energy minister, who now sits on nine boards. Early research on the law suggested many of the women were either economists or lawyers with plenty of ex-ministers too. 

Nor have Norwegian boards had to resort to the use of a small number of women who sit on a large number of boards.  As the Financial Times notes:  "More strikingly, it seems there are more 'golden trousers' than 'golden skirts': according to the Center for Corporate Diversity in Oslo, only two in 10 women hold more than one board position while four in 10 men have multiple directorships."

Third, their presence has had some impact on the decision making within board rooms, consistent with studies showing that the presence of women on federal appeals courts alters the decision making dynamic.  As the article notes:

• Academic studies are divided but Grace Reksten Skaugen, one of the country’s most prominent directors, who is on several Norwegian and Swedish boards, says female directors are less bound by convention and unembarrassed to admit they do not know something. “Women are more willing to ask questions without regard to whether they may be perceived as stupid or awkward questions,” she says.

• Ms Skaugen was herself involved in one of the most prominent examples of that questioning approach: she was among female directors at Statoil who did not accept answers about a corruption probe and called an extra board meeting that led to the resignations of both the chief executive and chairman of the oil company.

• Ms Berdal says the quota law coincided with a debate on corporate governance in Norwegian companies and the combination has led “to a much better discussion”. Ms Breiby agrees, saying that directors no longer “sit” on the boards but “work” in them: “We have really raised the level of discussion in boards.”

Fourth, a collateral consequence is that boards are becoming younger.  The data in Norway shows that "38 per cent of female directors are aged 45 or under, against only 20 per cent of men, while 71 per cent of women non-executives have higher education versus 62 per cent of males."  

The only serious problem expressed in the article was the inchoate concern that somehow these women would be inexperienced enough to be controlled by management.  While of course this can happen (it can happen to men, even with the right "experience"; after all, no one knows the company like management), the lawyers and ministers selected to sit on these boards would not seem to pose much systemic risk of this.  Moreover, it is an interesting criticism since boards in general have a reputation of being captured by management, even with members who have the right experience. 

Here is another example of government interference in the market, something ordinarily to be eschewed.  Yet the market (including the one in the US) seems incapable of putting more than a marginal number of women on the board.  Remember that it is management that nominates directors and management that apparently does not want the diversity that would come with a greater number of women (and perhaps a greater number of diverse view points).  It is, in the end, the promise of shareholder access and the removal from management of the exclusive right to control board membership that contains the promise of greater diversity.

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