German Boards Need Women Not Quotas
On Friday, Germany joined Norway, France, Spain and a growing list of other countries requiring corporations to meet a quota for women board members. Corporate Germany needed a kick in the pants: Years of voluntary efforts had failed to significantly boost the number of women directors.
Despite a woman chancellor and rising female college enrollment, the top jobs in corporate Germany are mostly held by men. The strong pull of tradition for decades has kept women tending to kinder, kuche and kirche (kids, kitchen and church).
Under the new law, about 100 of the largest German companies must award at least 30 percent of board seats to women by January 2016. Another 3,500 companies must come up with a quota plan, with binding targets, showing how they will add women to their boards by Sept. 30.
All boards have a role -- a fiduciary obligation, even -- to improve diversity. An increasing number of studies show that boards with greater-than-average gender diversity are better at managing risk and suffer fewer scandals. Companies with at least one woman board member have faster revenue growth, greater returns on equity and higher multiples of price-to-book value. And reports have found that companies are more innovative when they have women in the boardroom.
But placing more women on boards is good for business -- except when it's done by quota. When companies in other countries have been forced to include women, they often complied with the quota -- then found creative ways around it. A favorite tactic is to dilute a new female director's influence with the addition of two male directors.
Other countries' experiences also show that quotas haven't trickled down to help women on the lower rungs of the ladder, which should be the real goal. They haven't led to more women in executive suites and upper management jobs, for example, or even to more family-friendly policies to help working mothers. Wage equality between the sexes hasn't improved.
Germany's law could even have negative repercussions. It will increase the number of women on German boards, where only about 19 percent of the seats (about the same as in the U.S.) are now occupied by women. But if companies haven't been grooming women for top jobs already, they will have to scramble to find qualified outsiders.
When thousands of companies must act at once, the shortage of board-ready females will result in some women occupying seats on multiple boards -- and taking on too great a work load. Some companies will replace more senior, seasoned directors with younger women who aren't ready for board duty.
That's exactly what happened in Norway, according to University of Michigan economists. A quota raised female representation on boards, but the women were younger and less experienced than male colleagues. Companies forced to add women showed a significant increase in failed acquisitions, higher borrowing levels and steeper losses in market value compared with others. Also, about half of Norway's publicly traded companies delisted or moved away to avoid the mandate.
What's the solution? With so much research concluding that women directors improve results -- not because they are smarter but because they lead to both sexes monitoring management and each other more -- shareholders and exchanges should demand more diversification. Outside pressure can help. The 30 Percent Club, which began in the U.K. and has spread to the U.S. and elsewhere, is pushing for 30 percent female board representation by the end of this year. It seems to be working: In five years, the number of women directors has grown to 23 percent from about 12 percent. More aggressive recruitment of female talent would also help -- especially if officers' and directors' bonuses depended on it.
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