Fortune magazine's annual "Most Powerful Women" list arrived on newsstands last week. With it comes inevitable chatter from the business press about who is in and who is out, who moved up a few notches and who has been knocked down a few pegs. Yet perhaps what is most striking about the list is not the jockeying among the boldface names. Rather, it is the fact that even amid a lingering financial crisis that has highlighted poor governance and the scarcity of senior women at big corporations, the total number of female CEOs in the Fortune 500 is only 15, up from just two when the list debuted in 1998.
Indeed, at a time when women have gained more standing in politics and society, they have not made equal progress at the top of corporate America. Women comprise half of the workforce but hold only 16% of the board seats in Fortune 500 companies. More than 10% of those companies have no women serving on their boards.
In many countries, the numbers are even starker. Women hold approximately 12% of the seats on corporate boards in Germany, the United Kingdom, and France. In China, women hold 8.5% of board seats; in India, that figure is 5.3%, and in Japan, only 0.9% of directors are women, according to data compiled by Catalyst, a nonprofit group seeking to expand opportunities for women in business.
Efforts to change this, however, have been under way for several years. Norway in 2003 passed a quota law requiring that by 2008, 40% of all board members at state-owned and publicly listed companies had to be women. Today, women represent 37.9% of corporate boards in Norway, according to the European Professional Women's Network. Other countries, including Spain and the Netherlands, have passed similar laws.
But while quotas accomplish one very big goal, they have unintended negative effects. For one, companies looking to appoint new board members end up choosing from a smaller talent pool. Because the pool is narrowed, the candidates are less experienced. Second, quotas could perversely perpetuate discrimination; companies might purposely appoint less competent women to the board as tokens, but not take their views seriously. Instead, rules that encourage companies to foster diversity on their boards -- rather than coerce them into all looking the same -- may be a better way to get more women in U.S. boardrooms, experts say.
"The problem with quotas is that they are a one-size-fits-all solution," notes Wharton finance professor Alex Edmans. "Shareholders have an incentive to appoint the best people to a board. It is true that, in some firms, there may be discrimination, but it is very difficult for regulators to know which firms these are. The best solution [to eliminate] discrimination is market forces. If a firm is not promoting the best people -- some of whom are invariably women -- it will lose business. It's just like a baseball team that refuses to hire ethnic minorities: It will be less effective on the field and lose its league position."
According to Wharton management professor Michael Useem, board composition mattered when it came to which banks, for example, had greater or lesser tolerance for taking on large quantities of subprime loans. "The question is, did we learn anything from the financial crisis in corporate governance? The answer, hopefully, is yes. ... Boards are becoming more directly engaged in setting strategy. The more diverse the background, expertise, and experience of the board members, the better they will be at issuing guidance."
That's a good argument not just for gender diversity, but also for bringing in board members of different races and nationalities, and from different industries, Useem notes. "You want somebody in the room who, on any given issue, is going to say, 'Hold on a second. Are you sure you want to do this?'" he says. "You want people from outside the U.S., you want people familiar with other countries and people who can think about how consumers, male or female, view the company."
A different skill set
Any study purporting that a minority group has superior traits and powers is often viewed with a degree of skepticism. At the same time, it is hard to ignore the vast body of academic research indicating that men and women take different approaches to management and that sometimes the feminine skill set -- which includes attributes such as empathy, communication, and flexibility -- is optimal. According to the literature, women tend to be more risk-averse. Women also tend to be more collaborative and interested in consensus-building, whereas men have a more command-and-control leadership style. Female leaders are more relationship-oriented and democratic, while male leaders tend to be more task-oriented.
Given these differences, it follows that the inclusion of women on a given management team can have a meaningful impact on a company's bottom line. One recent study, conducted by researchers at the MIT Sloan School of Management and Carnegie Mellon's Tepper School of Business, found that teams that included more women tended to perform better than those with fewer women. The study, which was not originally designed to look at the role of gender in teams, found that groups whose members had higher levels of "social sensitivity" -- an attribute often ascribed to women -- were more collectively intelligent.
Or, as Wharton management professor Nancy Rothbard puts it, some research shows "that when women are on a team, the collective intelligence of that team is greater because people treat each other better. People are politer and more respectful, which leads to better outcomes. When women are on a team, the environment changes. There's less of the old boys' club."
A number of studies also suggest a difference in the ways in which mixed teams behave. For example, teams with functional diversity -- where members have varying perspectives, opinions, or expertise -- generally perform better than homogenous teams. "With some diversity, there can be better decision-making," says Monica McGrath, a human-resource consultant specializing in leadership development and an adjunct professor of management at Wharton. "If everyone has the same background, socialization, and personal and professional experience, a strategic decision, while easier, might not be as powerful."
Other research indicates that men and women vary in their approaches to board membership. A study by professors at the University of Queensland in Australia and the London School of Economics found that women take the monitoring role of the board more seriously than men do. The same study showed that female directors have better attendance records than male directors, and that male directors have fewer attendance problems when the fraction of female directors on the board is greater. In other words, women show up more often at meetings, and their very presence on the board makes the men show up more often as well.
These findings have important implications for how and when companies appoint more women to their boards, says Wharton accounting professor Wayne Guay. "The decisions that boards make when there is a greater proportion of women are very different from the decisions that boards make when there are few or no women."
According to Guay, boards need to make additions based on qualities or specific expertise they desire, which in some cases might naturally predispose them toward hiring women. "For example, evidence suggests that women are more risk-averse. So for a company that has come under scrutiny for excessive risk-taking, it might be wise to appoint more women to its board," he notes. "You can imagine a setting where one of the shareholders' biggest concerns is that management is going to ... engage in behavior that may not be in the best interest of shareholders. That company may be better off appointing women to the board because they tend to take the monitoring aspect of board work more seriously."
But simply appointing more women (or men) to a board is not a cure-all for a company's problems. For example, increased scrutiny from a board "might cause management to get defensive," Guay says. "The point is that appointing more women to a board doesn't make them function better in all cases."
The trouble with quotas
Many feminists hold up the Norway quota law as a shining example of how to swiftly break through barriers to gender equality in the male-dominated business world. The trouble is that while firms have made it to the 40% mark, they did so under duress; companies were going to be dissolved if they did not comply with the law. In that sense, it is not easy to tell whether the strictly imposed quota has done much to improve the reputation of women in Norway's corporate boardrooms.
What's more, there is little sign that appointing large numbers of women to company boards has improved either the competence of the boards or boosted performance. In fact, there is evidence to the contrary. University of Michigan finance professors Kenneth Ahern and Amy Dittmar have examined the effect of the Norwegian law on boards and firm value.
They found that, on average, the board changes resulting from the quota led to companies taking on more debt and making a greater number of acquisitions, and a greater number of underperforming acquisitions. Post-quota, firms also experienced drops in operating performance and higher costs. Dittmar speculates that the results came not because the firms added women to the board, but because they put less experienced directors on the board. The female candidates that boards appointed were less likely to have been CEOs and were less likely to have been in upper management at all. "They were more likely to have been at the vice president level," she notes. "Norway is a progressive country when it comes to gender issues. But if you look at statistics, it, like the rest of the world, doesn't have a lot of women in upper management. Based purely on the population, there is a small pipeline" of qualified candidates.
Other Scandinavian countries opted not to impose quotas "but did have very public discussions about increasing board diversity, and it seems to have had an effect," Dittmar says. "In Sweden and Finland, for example, corporate boards are now 26% women."
Quotas aside, a number of private-sector projects are currently set up to improve board diversity. In the U.K., for instance, there is the FTSE 100 Cross-Company Mentoring Program, an initiative to increase female presence on boards, which has been copied in a dozen countries. In the U.S., groups including the Alliance for Board Diversity and the Directors' Council have similar objectives.
Still, the effectiveness of these organizations is not yet evident, according to Jayne Barnard, a professor at William and Mary Law School who has done extensive research on measures to appoint more women to corporate boards. "There have been a lot of self-help efforts, a lot of training sessions, and a lot of well-intentioned organizations with initiatives around diversity," she says. "These are often well organized, but I don't know if they are having any success in placing women on boards. I don't think we have seen any evidence that these initiatives have made an impact. It's a very hard door to kick in."
There is some hope, she notes, in new SEC regulations that require companies to disclose detailed qualifications of their board members. "This will have two effects. Over time, it will decrease the number of placeholders -- men and women -- who are not qualified to serve on a board. It will also open up spaces for people who are qualified, some of [them] women."
The SEC has also recently begun to require public companies to disclose their policy, if one exists, regarding diversity in the selection of board members. Those rules, which took effect in February of last year, stipulate that companies with such policies must explain how the policy is implemented, and how the board gauges its effectiveness.
But regulators could go one step further. The SEC could, for instance, take a cue from Australia and issue a formal requirement for firms to institute a board diversity policy that consists of measurable objectives. Companies would have to disclose the policy and also provide an assessment of progress toward achieving those goals. "The goals and objectives need not be the same across firms, which preserves the ability for each firm to assemble the most effective board it can. But, nonetheless, [such a move] ensures that all firms at least have a carefully considered goal regarding board diversity," says Guay.
There is another possible answer to improving the number of women on corporate boards -- patience. "The root of the problem seems to be a lack of a pipeline [of talented women who are qualified for board seats, because of] differences in educational opportunities several decades ago, which may have indeed been due to discrimination," Edmans notes.
But times are changing. Consider this: Women have outnumbered men on college campuses globally for the past five years. In Europe and North America, there are a third more women than men enrolled in universities, and in a number of countries, there are at least two female graduates for every male. Women make up about 47% of law students and 32% of students in full-time MBA programs; that percentage is even higher at elite schools. Still, it will take some time before these women are seasoned enough to be considered for a directorship at a top company.
"Now access to education seems to be much fairer, and so there should be a very strong pipeline of qualified women and other minorities in the future," says Edmans. "We need to be patient."