by Rachael Tu
1. INTRODUCTION
Companies everywhere are pushing for more diversity, particularly in the boardroom and senior management. In January 2020, amendments were made to the Canada Business Corporations Act (“CBCA”) in an effort to advance board diversity at the statutory level.1 Diversity under the CBCA is focused on four groups: women, Indigenous people, people with disabilities, and members of visible minorities.2 CBCA corporations have to disclose statistics regarding the number of directors and executives in each designated group. Among other things, they have to disclose whether or not they have targets in place to enhance representation within these four groups, and if they do not have targets, they must explain why not.3 They also have to explain whether they have adopted term limits or other mechanisms of board renewal, and how nominating committees consider diversity when identifying and nominating directors for the board.4 Put another way, in the interest of promoting board diversity, Canada follows a “comply-or-explain” model. Commentators such as Todd Archibald and Kenneth Jull believe that the recent amendments are a good move because of the reputed benefits of board diversity. This includes an association with “lower levels of risk-taking, higher levels of firm innovation, and greater overall firm value.”5
The comply-or-explain model is also seen as a less onerous form of promoting diversity in comparison to other regimes, such as mandatory board gender quotas. However, statistics show that mandatory quotas – as the more aggressive mandate – are generally more effective. The approaches undertaken by four countries who are global leaders in board gender diversity will be compared and contrasted: Norway and France who have mandated quotas, and Finland and Sweden who have not.6 While the comply-or-explain model can be used to effectively promote change, it does not produce results as rigorously as a mandatory quota system would. This paper advocates for a more aggressive regulatory approach in Canada such as the implementation of quotas or in the alternative, board term limits. In both cases, the renewal of the board introduces new ideas and perspectives, which brings value to the company. This stance is supported by empirical research on the positive effects of board gender diversity on risk assessment and compliance. However, this paper will also consider the research on neutral and negative effects of board diversity. This includes some nascent research on ethnic and racial diversity on boards, as well as the arguments against the implementation of mandatory gender quotas.
2. MANDATORY BOARD QUOTAS
2.1 COMPARING NORWAY AND FRANCE
The two most prominent case studies for implementing quotas are Norway and France. For the past decade, Norway had led the charge in gender board diversity after it became the first country in the world to enact gender quota legislation in 2005.7 Commentators noted that their quota approach was fairly aggressive, requiring women to hold at least 40% of the board seats in publically listed firms with nine directors.8 If companies do not comply, they face the severe penalty of court-ordered dissolution.9 Brianne Donovan notes that every company had complied with the regulation due to the harsh consequences, but some companies responded to the legislation by going private.10 Then in 2017, France instituted their own 40% quota for board gender diversity.11 Since then, the quota has ushered in a large change for board composition across the country: in 2019, when looking at a sample of the largest listed companies in the country, women made up 44% of the board members.12 This was a 6.9% increase from 2016.13 In contrast, Norway stood at 41.2%, which was actually a 0.9% decrease from 2016.14
Concurring with Deloitte’s report is the more recent European Women on Boards (“EWoB”) Gender Diversity Index 2020. It positions Norway as the 2nd top country in terms of board diversity, with 42% of their directors being women and 37% of their board and control committees consisting of women.15 France had overtaken Norway with 43% of their directors being women, and 45% of their board and control committees consisting of women.16 On its face, these statistics show that mandatory quotas work, since Norway and France are undoubtedly two of the top countries when it comes to gender parity on boards. In particular, Norway’s approach has been studied extensively. Amanda Packel, when considering how Norway’s quota approach might apply to the United States’ situation, discusses the benefits and disadvantages of the quota system, one of the latter being that “once boards have one or two female directors, they will feel less pressure to continue diversity efforts, stalling further progress.”17 This is a valid concern, since statistics show that Norway reached 40% gender parity in boardrooms after they enacted the mandatory gender quota; however, the percentage of female directors seems to have stalled since then.
2.2 BENEFITS OF THE QUOTA SYSTEM
When considering the benefits of the quota system, Packel turns to Aaron Dhir’s research. Packel recounts how Dhir, after conducting interviews with directors following the quota law implementation, found that there were certain positive outcomes associated with the quotas, including “more effective risk mitigation and crisis management attributed to women’s tendency to be more risk adverse and think longer term” and “higher-quality monitoring and guidance, with a tendency to challenge management and prevent groupthink.”18 As noted by Archibald and Jull, Chris Brummer and Leo Strine advance a similar idea with regard to risk mitigation:
Empirical evidence has also emerged that diversity can serve as a useful risk mitigation tool. Studies have argued that diverse firms, especially those displaying gender diversity on their boards, adopt less risky financial policies than their homogeneous counterparts. Researchers have also compiled data suggesting that diversity is correlated with a lower likelihood of illegal and fraudulent behavior, and fewer irregularities and less opacity and vagueness in public filings and disclosure.19
Studies that canvas these issues will be discussed in this paper, in addition to the existing literature which suggests a more neutral or negative effect of board gender diversity on risk-management and board monitoring.
In addition to these outcomes, Packel discusses how Dhir found quotas useful in Norway because they appeared to increase several positive board characteristics, one of which was diligence.20 From his interviews, he found that women are more likely than their male counterparts to probe deeply into the issue at hand by asking more challenging and counterintuitive questions.21 Despite the associations with these positive outcomes and characteristics not being causal, they should be relevant considerations for companies from a risk assessment and compliance perspective. However, when reviewing Dhir’s research, Archibald and Jull pointed out that this finding is qualified by the fact that these practices may be a product of women being new to board membership, which may change over time as they occupy more positions.22 Packel also discusses certain challenges created by the quota law. Namely, that there may be less initial bonding among directors, and that boards can experience more conflict due to the introduction of different perspectives.23
2.3 AMBIVALENCE IN THE LITERATURE
The evidence regarding the effect of Norway’s quota laws on board outcomes is actually less clear: despite the positive associations discussed above, whether gender diversity affects substantive outcomes related to risk taking, crisis management, and firing the CEO is not definitively made out in Dhir’s research.24 Packel also compares Dhir’s research to Darren Rosenblum and Daria Roithmayr’s research on the effects of the French gender quota. Packel highlighted that Rosenblum and Roithmayr found similar results to Dhir when it came to positive effects on board processes and communication (e.g., women were more willing to ask difficult questions, introduce fresh perspectives, had more civil deliberations and less conflict).25 Unlike Dhir, they concluded that the French quota has not substantively affected corporate governance decisions in the view of directors.26
Interestingly enough, Rosenblum and Roithmayr concluded that the French quota did have a substantive impact, but not because of the sex of the newly added board members. Rather, their interview results suggest that the newly added female directors had a substantive impact because they were outsiders.27 Interviewees suggested that any substantive differences post-quota system could be attributed to their outsider status since new appointees were more likely to be foreign (because firms valued their experience and foreign connections), junior (due to the lack of women with high level executive experience), and less likely to come from the Grandes Ecoles network.28 The last point is one of the main reasons why Rosenblum and Roithmayr’s findings deviate from Dhir’s, since it is so specific to France. Before, a caste of bourgeois men exercised control over France’s corporate culture by establishing a Grandes Ecoles network, which dominated boards and management of large firms. When boards selected new members, the alumnus of the Grandes Ecoles were traditionally sought after since they shared the same worldview and approach as the remaining male board members.29
Another finding of Rosenblum and Roithmayr’s research was that their French interviewees were heavily resistant to the idea that women were more risk averse, an argument which plays a significant role in board gender diversity research.30 They found that, when asked about this theory, participants spoke to the idea that “women are not ‘risk-averse’ per se, but that deliberate consideration (perhaps motivated by lack of experience) might lead to a more accurate assessment of risk.”31 While they are less optimistic about mandatory gender quotas than Dhir, this finding nonetheless has implications for board gender diversity, since accurate risk assessments are an important tool of risk mitigation. To go back to Archibald and Jull’s point though, it may be that this characteristic is only a product of women being new to board membership and will change as time goes on.32
In essence, Dhir’s research indicates that his interviewees associated the Norwegian quota with having positive effects on board processes and communication because they believed that the results had an intimate connection to the gender of the new directors.33 In contrast, Rosenblum and Roithmayr’s subjects connected the results of the French quota to outsider or newcomer status rather than gender.34 Rosenblum and Roithmayr attributed this difference to a few factors, one of them being cultural: they emphasize the fact that the French sex equality indices lag substantially behind Norway, which may account for Norwegian participants’ willingness to attribute to gender what French participants attribute to outsider or newcomer status.35 This is relevant to a comparison with Canada, since the French and Norwegian quota models may not necessarily translate well to the Canadian corporate landscape.
2.4 IMPORTING THE QUOTA MODEL?
Packel issues the same warning for trying to apply the Norwegian quota model to other settings. She notes that the prevailing view in Norway is that boards ought to consider more interests beyond the sole economic interests of shareholders, which includes various stakeholders. Packel hypothesizes that this may have made “equality-based concerns in director nominations more palatable.”36 The most compelling argument to be made against transposing Norway’s quota system into another setting such as Canada’s is the fact that Norway has a relatively homogeneous population in terms of race and ethnicity, so the country was able to focus exclusively on gender diversity when they implemented the quota system.37 As a result of these differences, Dhir concluded that mandatory quotas are not politically viable and would face questions of constitutionality in the United States.38 Canada, though it is distinct from the United States, would likely face similar challenges since its population is also very heterogenous, and the interests of stakeholders do not necessarily have to be considered when directors make decisions.39
Dhir would turn out to be correct with his hypothesis about implementing quotas in the United States: in September 2018, California became the first state to require a specific number of female directors on the boards of public companies through the enactment of Senate Bill 826.40 The law required any publicly traded company headquartered in the state to have at least one female director if the board has up to four members, two female directors if the board has five members, and three if the board has six or more members by December 2021.41 In August 2019, a lawsuit was filed, challenging the constitutionality of the law.42 Some commentators expect more incoming lawsuits as companies fail to comply and get fined $100,000 for a first-time violation, and $300,000 for a subsequent violation.43 Board gender diversity has also gained traction in other parts of the United States this past year. In 2020, Washington passed a law requiring public companies to either have a board that comprises of minimum 25% women, or provide shareholders with a board diversity discussion and analysis as to why the company has not reached this target.44 Similarly, in August 2021 the United States Securities and Exchange Commission approved new listing rules which require Nasdaq-listed companies to have at least two diverse directors, one of which must be female. If the Nasdaq-listed company does not have a female director, it must explain why not.45
3. COMPLY-OR-EXPLAIN: COMPARING FINLAND AND SWEDEN
Washington’s new legislation and the new Nasdaq requirements do not use quotas like California, but are a comply-or-explain approach. Whether they will be as effective is to be determined, but commentators such a Dhir and Packel have already noted that it is a more suitable approach for a country like the United States. In contrast, Canada already uses a comply-or-explain approach to board gender diversity, and it has made some progress thus far. However, it is slow in comparison to countries such as Norway and France.46 Interestingly enough, Finland and Sweden are also countries with top statistics regarding gender parity in the boardroom, but they do not have mandatory quotas. The Finnish Chamber of Commerce views mandatory quotas as inefficient and limiting of shareholder power.47 The Finnish Corporate Governance Code recommends that listed companies have both genders represented on their boards on a comply-or-explain basis, and this has been effective thus far: only 2% of listed companies had all-male boards in 2018.48 Finland seems to prefer tackling this issue culturally and professionally through self-regulation and the encouragement of executive career development for female business leaders.
Sweden also has no quotas. Like Finland, it seems that their approach works because achieving board gender parity has been prioritized by Swedish companies, the government, and regulators. The Swedish Corporate Governance Code requires listed companies to strive for gender balance on a comply-or-explain basis, with the goal of having at least a 40% representation of each gender at all Swedish listed companies in 2020.49 This goal seems to have been largely successful, with Deloitte reporting female directors making up 34.5% of all directors on Swedish listed companies in 2019,50 and EWoB’s report finding it to be 37% in 2020.51 When comparing the data from the Deloitte and EWoB reports, it is evident that countries with mandatory quotas have a higher percentage of female directors. However, it is also true that countries such as Finland and Sweden do quite well without quotas. This seems to be the case because board gender diversity was made a priority and integrated into the corporate cultures of each country. In lieu of progress on the cultural front in Canada, more aggressive regulatory measures may be called for.
4. CANADA’S PROGRESS ON BOARD DIVERSITY
When looking at Canada’s progress on board gender diversity, the results show gradual but slow improvement. As noted by Mariangela Asturi et al, aside from legal disclosure requirements, there are also institutional pressures encouraging companies to diversify their boards. This includes Proxy Advisory Firms, such as Institutional Shareholder Services Inc., who have adopted voting guidelines geared towards the inclusion of women on boards.52 For issuers in the S&P/TSX Composite Index, beginning February 2022 ISS will recommend that shareholders withhold their votes from the election of certain directors if: women comprise less than 30% of the board and the issuer has not disclosed a formal written gender diversity policy, or if the issuer’s formal gender diversity policy does not include a commitment to achieve at least 30% women on the board over a reasonable timeframe.53
Asturi et al also discussed the Board Games report published each year by “The Globe and Mail” which evaluates S&P/TSX companies on their corporate governance practices. Overall, when evaluating the companies on the S&P/TSX Index, the percentage of female directors rose from 29.3% the previous year to 31.5% in 2021.54 Moreover, from 2020 to 2021, changes were made to their board gender diversity criteria. To receive the full marks for board diversity in their evaluation, a company had to disclose certain things in their proxies. For one, whether they had any board members who is Indigenous, a member of a visible minority, or who have a disability, in accordance with the CBCA amendments. They also had to disclose any details of a process used to consider the representation of these groups on the board, such as recruitment practices. For another point, companies had to disclose that they actually had a director who is a member of those groups. A company also needed to have more than 33% of their board consisting of female directors, and to disclose details of their gender-diversity policies with an internal target and timeline for the proportion of women on the board. Only after disclosing all these details would a country receive full marks for board diversity.
When looking at the aggregate data of Board Games, it can be said that the recent amendment to the CBCA and other factors such as institutional pressures have caused boards across the country to change – whether that means their composition or approach to diversity. It was found that:
In 2020, Cameco Corp. was the only company to receive full marks for board diversity. In 2021, it was joined by 10 more: BCE Inc., Canadian Imperial Bank of Commerce, Canadian Western Bank, Element, Fleet Management Corp., Enbridge Inc., George Weston Ltd., Intact Financial Corp., Loblaw Companies Ltd., National Bank of Canada and Telus Corp.55
Put another way, Canada’s approach to promoting board diversity is making inroads. Even so, aside from the question of whether or not Canada’s current legislative measures are aggressive enough, there is the issue of whether board diversity is having a positive and noticeable effect. There have been studies that show gender diversity seems to affect risk management and compliance. The literature is mixed, but the trend is generally positive, insofar as it relates to board processes or imprecise results of diversity on corporate governance. Asking whether diversity results in substantive economic impacts or risk-management leads to more neutral or negative research.
5. THE BENEFITS OF BOARD DIVERSITY
5.1 EFFECT ON CORPORATE GOVERNANCE
To start, Linda Eling Lee et al could not determine causality with board diversity when it came to risk aversion, but found that “companies lacking board diversity suffered more governance related controversies than average.”56 When comparing MSCI ESG Research Inc.’s database of companies implicated in controversial business practices over three years to those with boards who have implemented gender diversity beyond regulatory mandates, Lee et al found “fewer instances of governance-related controversies such as cases of bribery, corruption, fraud and shareholder battles.”57 More specifically, they found that when comparing the board gender diversity of companies against their country’s average gender, the companies in the bottom quartile “suffered 24% more governance-related controversies than average (normalized for market capitalization) between 2012 and 2015.”58 However, despite fewer cases of bribery, corruption and fraud, Lee et al did not find a causal link of having more women on boards to stronger risk management.59 For one, they found largely unsubstantial differences in the aggressiveness of accounting practices between MSCI ACWI companies with more women on the board versus companies with fewer women on the board.60
5.2 EFFECT ON RISK-MANAGEMENT
One way to reconcile Lee et al’s findings regarding risk aversion is to refer to Rosenblum and Roithmayr’s conclusions about women not being more risk-adverse, but that they have a tendency to deliberate with more consideration, possibly because of their inexperience.61 As a result, that led to more accurate assessments of risk overall.62 Dhir, though his research contains more positive conclusions than Rosenblum and Roithmayr’s, also qualified his findings by pointing out that the positive outcomes and associations he found may be a product of women being new to boards and can change over time as they take up more positions.63 However, this premise does not necessarily conflict with research that has more positive conclusions regarding board gender diversity, such as Paolo Saona et al’s. Their initial premise that women are more risk-averse and cautious than men when making financial decisions informed their hypothesis that gender-balance on boards have a beneficial effect on reducing earnings manipulation practices in European countries. They cite one study that examines corporate and financial investment decisions made by female executives compared to male ones; the study concluded that men exhibit overconfidence in corporate decision-making compared to women.64
Saona et al found that gender-balanced boards have reduced earnings manipulation practices because on average, “women are more adept at business ethics and risk aversion.”65 They also found that this effect is stronger in countries with mandatory gender quotas.66 Companies in European countries who undertook the quota approach has produced “less earnings manipulation and more informative financial statements.”67 In addition to their own research, they cited studies that found evidence that female directors on audit committees constrains accrual-based earnings management,68 and that more female directors on different committees increases the likelihood of further transparency by “disclosing audit reports with less uncertainties and scope limitation qualifications.”69 Altogether, Saona et al concluded that “in countries where female quota indications (by law or recommendations) exist, the impact of gender diversity has been more prominent in diminishing earnings manipulation practices than in countries where these kinds of recommendations do not exist.”70 Saona et al does not specifically probe into whether female directors are more risk averse, like Rosenblum and Roithmayr, but their conclusions are consistent with existing literature on the effect of increased female presence on boards.
5.3 LEGISLATIVE VS VOLUNTARY QUOTAS
What is interesting about Saona et al is that they do not look at whether quotas are more effective when they are legislated or recommended. They seem to place more emphasis on mandatory quotas, but their conclusions are directed at quotas in general. In their study on the effect of gender diversity on firm value, financial performance, and compliance, Helena Isidro and Márcia Sobral look at this issue in more detail.71 When looking at data in a sample year, they found that “the highest increase in the proportion of female directors occurs in countries that have legislation with sanctions.”72 Moreover, they found “no statistical difference between the proportion of female directors in countries with board diversity legislation but no sanctions, and countries that have only voluntary initiatives,”73 suggesting that regulation without enforcement has no effect in promoting gender diversity on boards. The dataset that produced these observations is limited, and this paper has already observed that voluntary initiatives do work in countries such as Finland and Sweden – though Isidro and Sobral do acknowledge the fact that Finland and Sweden have a high proportion of female directors, despite their lack of sanctions.74
5.4 EFFECT ON FIRM VALUE AND COMPLIANCE
The implications of this finding for Isidro and Sobral is significant, since their research concluded with many different positive outcomes for having more women on boards. For one, they found a positive and significant effect of board diversity on financial performance, albeit indirectly: they posit that
there is an indirect relationship between women on board and firm value that is captured by ROA [return on assets]. In other words, women on board positively affect financial performance which in turn positively impacts on firm value. But women on board does not have a significant direct impact on firm value.75
ROA is just one of their variables, and Isidro and Sobral found that women on board are positively correlated with not only ROA, but also ethical and social compliance.76 When looking at their data, they found that the “likelihood of a firm having an ethics and social responsibility committee increases by 1.255 if the proportion of female directors increases by 1%. That likelihood increases by 0.232 if there are 30% or more women on the board of directors.”77
Overall, Isidro and Sobral suggest that ROA is positively associated with firm value, while the firm’s compliance with ethical and social standards is perceived by investors as a value-creating activity.78 Although there is no direct link between women’s participation on the board and an increase in shareholder value, Isidro and Sobral assert that there are indirect links between better female representation on corporate boards and firm value through better financial performance and more focus on the firm’s compliance with ethical and social standards.79 They do not explicitly promote mandatory quotas, but in addition to their observations about the difference between voluntary initiatives and mandatory quotas, Isidro and Sobral conclude that their “findings are important for European regulators addressing the introduction of mandatory quotas for women on boards,” and that regulators should consider how promoting the presence of women for top positions in corporations has financial and non-financial implications.80
6. NEUTRAL/NEGATIVE EFFECTS OF BOARD GENDER DIVERSITY
The studies discussed in this paper so far have mostly contained positive implications for board gender diversity, but it is true that the literature is mixed on this topic. The idea of women being more risk averse has already been discussed and qualified, but one study completely rebuts this idea. Vathunyoo Sila, Angelica Gonzalez, and Jens Hagendorff found that there was no evidence female representation affected any of the measures of equity risk they studied.81 They consider the idea that, even if psychological and economic studies show that women are more risk averse than men, these studies investigate the risk attitudes of women in the general population. It may the case that female directors possess different characteristics that help them climb the corporate ladder.82 They cite one study which hypothesized that risk aversion in women may vanish once they have broken through the glass ceiling and adapt to a male-dominated corporate culture.83 In their Swedish sample, they actually found that that female directors are more risk-seeking than their male counterparts. These findings led to their conclusion that having women on boards will not necessarily lead to more risk averse decision-making.84
In addition, Archibald and Jull discuss Barbara Casu and her co-researchers’ findings on board and leadership diversity at large European banks. They found that banks with more female directors faced lower and less-frequent fines for misconduct, leading to the conclusion that “banks with more women on their boards commit less fraud.”85 However, in their study, Allen Berger, Thomas Kick, and Klaus Schaeck found that “an increase in the proportion of female bank directors resulted in increased portfolio risk.”86 While these results do not necessarily conflict with one another since one is about fraud and the other about risk, they demonstrate the danger of drawing definitive conclusions about the causal effects of female representation on boards – whether it is a negative or positive effect.
Sila, Gonzalez, and Hagendorff takes this argument further: they assert that when estimating the gender-risk relationship, the fact that a firm may consciously choose gender diversity has to be taken into account. The literature on corporate social responsibility (“CSR”) supports the idea that a firm’s desire to act as a responsible corporate citizen could be linked to risk and gender diversity. Sila, Gonzalez, and Hagendorff hypothesize that CSR can be positively related to gender diversity through a greater willingness to appoint women, or through an increased pool of female candidates for board positions since firms with a CSR agenda may be more attractive to them.87 During the course of their study, they found that female representation on boards is a choice firms make, and that firm risk influences this choice.88 However, they conclude that there is no evidence increased female representation affects an operating measure of risk, and that ultimately a higher proportion of female directors is no more or less risk-taking than a more male-dominated board.89 Sila, Gonzalez, and Hagendorff do not dispute the need for greater gender diversity, but they base it on a sense of fairness rather than economic considerations. After citing research which shows that the implementation of the gender quota law led to losses in firm value in Norway, they advocate for the more cautious route of increasing diversity disclosure and having stakeholders demand more diversity rather than implementing mandatory quotas.90
7. NEUTRAL/NEGATIVE EFFECTS OF BOARD ETHNIC DIVERSITY
One interesting study looks into the results on board monitoring once ethnic diversity is introduced. Paul Guest concluded that ethnic diversity actually has neutral or even negative effects.91 They explored a range of outcomes such as CEO compensation, accounting misstatements, CEO turnover-performance sensitivity, and acquisition performance. However, they found no evidence to support stronger board monitoring outcomes with ethnically-diverse boards, or ethnic diversity on the compensation and audit committees.92 They provide some context by citing studies that produced neutral and negative effects of board ethnic diversity on monitoring.
To explain neutral effects, they discuss how the perspective and experience of minority directors could be closer to that of Caucasian directors than the general population.93 Moreover, Guest points out that minority directors are often selected after a thorough vetting process to ensure that they will fit in with the rest of the board.94 This is reminiscent of Rosenblum and Roithmayr’s finding that before the quota law was enacted in France, boards looked to the Grandes Écoles network due to the similar worldview the alumni would share with the remaining directors.95 In this regard, any possible benefit of having an ethnically diverse board member would be cancelled out by virtue of them having a similar mindset with their Caucasian counterparts. Guest also hypothesizes that the theory of tokenism plays a part. He reasons that minority members may feel subject to heightened visibility.96 As such, they may feel pressure to conform by not outperforming Caucasian directors, to censor any conflicting opinions, or be reluctant to take a tough stance in monitoring situations.97
For negative effects, Guest mentions similar obstacles as Packel did in her article on gender diversity: namely, that the introduction of ethnic diversity may lower group communication and cohesiveness, lowering board effectiveness and the monitoring function.98 Guest also hypothesizes that there are situations where majority group members might exclude minority directors, hindering the individual and group ability to be strong monitors.99 Ultimately, Guest concludes that “whilst monitoring could be strengthened, it could also be unaffected or weakened by ethnic diversity.”100 With this in mind, Guest lands on a similar conclusion to that of Sila, Gonzalez, and Hagendorff’s – that increasing ethnic diversity should be done out of fairness and equal opportunity rather than financial or business considerations.101 Since ethnic diversity will not improve the performance of an average firm, Guest states that his findings do not support ethnic diversity quotas that past studies have proposed.102
8. CONCERNS WITH IMPOSING MANDATORY QUOTAS
While Guest’s study was about ethnic diversity and this paper largely focuses on gender, it makes inroads into a nascent area of research that has important implications for board diversity as a whole. Namely, the need to consider how and why diversity may or may not change the performance or processes of a board. As Guest’s study shows, introducing diversity may not change much if the board member feels like they are merely a token, or if they fear disrupting the status quo. Some commentators claim that this was the case with India after legislation was amended to make it compulsory for all publically listed firms to have at least one female director. Ruth Aguilera, Venkat Kuppuswamy, and Rahul Anand looked at the data on board composition, which showed that companies largely complied.103 Examining the top 500 firms ranked by market capitalization on India’s National Stock Exchange, they found that:
303 (60.6%) firms had no women on their board in 2013 but needed to appoint at least one female director by April 1, 2015…By 2017, 82.8% of previously non-compliant firms appointed a single woman to their board, while 13.6% of these firms had appointed two or more women to the board.104
On its face, these statistics show that there is greater board diversity in India. However, probing deeper, Aguilera, Kuppuswamy, and Anand found that on average, the new directors were less likely to be appointed to key board committees such as the compensation or nomination committees.105 The majority of the new female appointees were independent directors, which may have played a factor in the decreased chance of sitting on a prominent committee since they were appointed without any connection to the firm. However, independence was not the sole factor: Aguilera, Kuppuswamy, and Anand also found that “the probability of an independent female director serving on the audit committee was nearly 40% lower than it was for an independent male director on the same board.”106 They concluded that firms who seem to be complying with the gender quota at face value are actually relegating the new female quota fillers to less consequential committees.107
Aguilera, Kuppuswamy, and Anand make it clear that they are discussing India’s specific situation. They state that there is a need to acknowledge the fact that “many firms – particularly in emerging markets – are obfuscating the process by over-conforming on the surface, but limiting substantive change with less visible, harder to track internal decision-making.”108 Moreover, EWoB’s statistics show that countries with quotas such as Norway and France have a high number of women in control committees, so how these issues play out are largely dependent on a multitude of factors. As was the case with Norway’s quota legislation, this situation consists of too many complex factors to simply import into Canada’s corporate landscape. However, tokenism and relegation is a valid concern when pushing for more diversity. It is one of the reasons why various commentators recommended against mandating quotas.
9. IN THE ALTERNATIVE: IMPOSING BOARD TERM LIMITS
Another alternative is imposing mandatory term limits, which was suggested by Rosenblum and Yaron Nili in their study on the effects of term limits on board diversity.109 They found that:
when boards lose more directors than they normally would, they subsequently experience improvement in their sex-diversity ratio…While we do not endeavor to identify causality, we do add color to the finding of a negative correlation between tenure and diversity, showing that “following” a tenure shock, diversity improves.110
Even though Rosenblum and Nili did not found a causal connection between term limits and diversity, their proposition makes sense since it forces new perspectives to be added to boards. Rosenblum and Nili reason that when boards reduce their tenure, they may experience a positive culture jolt as a younger generation of directors are added, one that is likely to be more inclusive of women and outsiders.111
When canvasing countries with term limits, Rosenblum and Nili use the United Kingdom and France as models, since they impose a term limit for independent directors. In the UK, after nine years, an independent director must leave or become an insider – or the board must demonstrate why the individual’s tenure has not undermined their independence.112 In France, directors lose their independent status after twelve years, and they cannot perform tasks that require independence such as serving on the audit committee.113 As Rosenblum and Nili point out, Canada has no term limits for board members.114 The Canadian Securities Administrators adopted a comply-or-explain policy for firms regarding mechanisms they have in place for board renewal, where boards have to disclose reasons for noncompliance.115 However, when looking at the data, the voluntary regulation of term limits does not go very far: Blake, Cassels & Graydon conducted an examination of 722 firms listed on the TSX, and found that only 19% disclosed the adoption of term limits, and 56% disclosed that they adopted a mechanism for board renewal other than term limits – the most common one being board assessments.116
Rosenblum and Nili conclude that regulating term limits – whether by policy or legislation – charts a new course for diversity remedies. They reason that rather than “fixing sex diversity ratios for all boards, increasing the supply of board positions could better foster sex diversity. High turnover on boards, as we demonstrate, links to an improvement in board sex diversity.”117 Rosenblum and Nili provide various suggestions, such as encouraging regulators to establish stronger reporting requirements which would force firms to shed more light on how they refresh their board.118 Another stronger approach they set out is imposing an average tenure requirement, where firms meet certain tenure terms or explain their noncompliance.119 In any case, regulating term limits would be an alternative to mandatory quotas for introducing more diversity into boards. Unlike gender or ethnic diversity quotas, it is less likely to fall prey to problems such as tokenism, or being appointed as quota fillers.
10. CONCLUSION
When looking at the overall data, even though the literature is mixed, it is evident that there are some benefits to be gleaned from board gender diversity when it comes to risk-management and compliance. This paper has given an overview of the benefits, problems, and efficacy of implementing gender quotas. Even though the Norwegian or French model may not translate into Canada smoothly, it is clear that within the European context, the quota approach has aggressively increased board gender diversity. The amendments to the CBCA – though they are effective – are comparatively slower in making progress. As an alternative, the regulation of term limits offers an indirect way of revitalizing boards and introducing more diversity organically.
Endnotes
2 The Hon. Todd Archibald & Kenneth Jull, “Profiting from Risk Management and Compliance” (Thomson Reuters, 2021) at 4:20.
3 Prusinkiewicz,
supra note 1.
5 Archibald & Jull,
supra note 2.
6 Deloitte, “
Women in the boardroom” (2019) at 68,52,50,80, online (pdf). The information in this report is more dated (from 2018-2019), but is more comprehensive than other reports. The dataset covers nearly 8,648 companies in 49 countries (more than 136,058 directorships) spanning Asia Pacific, the Americas, and Europe, the Middle East and Africa.
8 Brianne Donovan, “From the Exception to the Rule: A Realistic Analysis and Approach for Advancing Board Diversity” (2021) 24:2 Rich Pub Int L Rev 115 at 119.
11 Deloitte,
supra note 6 at 52. The statistic is from the European Institute of Gender Equality’s gender statistics database in February 2019.
14 Ibid at 68. This statistic also came from the European Institute of Gender Equality’s gender statistics database in February 2019.
15 European Women on Boards, “
European Women on Boards Gender Diversity Index” (2020) at 33, online (pdf). The information in this report is accurate as of October 2020. The dataset consists of 668 European companies which represent the largest companies across the EU, the UK, Norway and Switzerland. The majority of these companies (599) are companies that are publicly quoted and listed in the STOXX Europe 600 index. The remaining 70 companies are selected from national stock listings.
17 Amanda K. Packel, “Government Intervention into Board Composition: Gender Quotas in Norway and Diversity Disclosures in the United States” (2016) 21 Stan JL Bus & Fin 192 at 197.
19 Archibald & Jull,
supra note 2 at 3:15.
22 Archibald and Jull,
supra note 2, at 4:2.
23 Packel,
supra note 17 at 210.
27 Darren Rosenblum & Daria Roithmayr, “More Than a Woman: Insights into Corporate Governance After the French Sex Quota” (2015) 48 Ind L Rev 889 at 891.
32 Archibald and Jull,
supra note 2, at 4:2.
33 Rosenblum & Daria Roithmayr,
supra note 27 at 928.
36 Packel,
supra note 17 at 218.
39 See the
Canada Business Corporations Act, RSC 1985, c C-44, s. 122(1.1). This provision states that when directors are acting in the best interests of the corporation, they may consider the interests of various stakeholders, the environment, and the long-term interests of the corporation, but it is not required.
40 Deloitte,
supra note 6 at 14.
47 Deloitte,
supra note 6 at 50.
51 European Women on Boards,
supra note 15 at 49.
52 Asturi et al,
supra note 44.
54 David Milstead, “After new federal rules came in, how many Canadian companies increased diversity on their boards?” The Globe and Mail (6 December 2021).
57 x
Ibid at 6. For this part of their analysis, Lee et al looked at data from the broader MSCI ACWI Index universe consisting of over 2,400 developed and emerging market companies.
61 Rosenblum & Roithmayr
supra note 27 at 915.
63 Archibald and Jull,
supra note 2, at 4:2.
64 Paolo Saona et al, “Board of Director’s Gender Diversity and its Impact on Earnings Management: An Empirical Analysis for Select European Firms”, (2019) 25:4 Technological and Economic Development of Economy 634 at 636.
68 Ibid at 637. See also Sheela Thiruvadi & Hua-Wei Huang, “Audit committee gender differences and earnings management” (2011) 26:7 Gender in Management at 483.
69 Saona et al
supra note 64 at 637. See also MarÃa Consuelo Pucheta-MartÃnez, Inmaculada Bel-Oms & Gustau Olcina-Sempere “Corporate governance, female directors and quality of financial information” (2016) 25:4 Business Ethics at 363.
70 Saona et al
supra note 64 at 655.
71 Helena Isidro & Márcia Sobral, “The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance” (2015) 132 J Bus Ethics 1.
81 Vathunyoo Sila, Angelica Gonzalez & Jens Hagendorff, “Women on board: Does boardroom gender diversity affect firm risk?” (2016) 36 J of Corporate Finance 26 at 27.
84 Ibid. See also Renée B. Adams & Patricia Funk, “Beyond the Glass Ceiling: Does Gender Matter?” (2011) 58:2 Management Science 219.
85 Archibald & Jull,
supra note 2 at 3:15.
86 Sila, Gonzalez & Hagendorff
supra note 81 at 29. See also Allen N. Berger, Thomas K. Kick & Klaus Schaeck, “Executive Board Composition and Bank Risk Taking” (2014) 28 J of Corporate Finance 48.
87 Sila, Gonzalez & Hagendorff
supra note 81 at 30.
91 Paul M. Guest, “Does Board Ethnic Diversity Impact Board Monitoring Outcomes?” (2019) 30 British J of Management 53.
95 Rosenblum & Roithmayr
supra note 27 at 921.
96 Guest
supra note 91 at 56.
109 Darren Rosenblum & Yaron Nili, “Board Diversity by Term Limits?” (2019) 71:1 Ala L Rev 211.