California became the first U.S. state to mandate that boards of publicly listed companies include women. India, Germany, Australia, Norway, Spain, France, Italy, Denmark, Finland, Iceland, the Netherlands, Belgium, and Israel had already instituted similar rules or guidelines, following heated debates on the merits of this type of affirmative action.
Here are five reasons California made the right move:
- Women have plenty of intellectual talent and leadership skills, by any measure, yet are under-represented on corporate boards. Boards are recruiting from only half the talent pool; clearly companies can benefit from recruitment that takes into account a wider pool. Better talent on the board can translate into better decisions for the company and better performance. A 2015 study by Grant Thornton estimated that the U.S. could increase GDP by 3.5 percent with more women on boards.
- Women can provide new and important perspectives about a type of business, particularly in consumer goods, given that men are not the only ones out shopping. Studies also show that having women on boards helps protect companies against risk.
- The experiences of other countries have shown that a requirement to recruit women makes everyone stop and think about what qualities are best to recruit, forcing a review of existing board members and often an improvement in the overall skill set on the board.
- Numerous studies have shown positive correlations between board gender diversity and indicators like earnings per share, return on equity, return on sales, and return on invested capital. This is why investment companies have set up portfolios based on gender-balanced boards. The California law cites studies by MSCI, Credit Suisse and the University of California, Berkeley. Other studies have been published by McKinsey and Catalyst.
- Even though there are plenty of qualified women in the U.S., they don't seem to make it onto corporate boards very often. It takes legislation to shake up old habits and encourage boards to actively seek diversity. Maybe one day habits will have changed so much that the legislation won't be needed.
A typical concern is that there may not be enough qualified women, but organizations such as the Thirty Percent Coalition and the Boardlist refute that notion. "It's not a pipeline issue, it's a demand issue," says Shannon Gordon, CEO of the Boardlist, which collects referrals and vets eligible female board candidates.
Gordon adds that she expects an upgrade in board quality in California following passage of the law. "It's good hygiene for a board to have an open conversation about how to be effective," she says. "'Where is our company headed? Do we have all the right skills in the room to navigate the challenges?'" These conversations will occur more frequently as companies in California work to comply with the new law.
Perhaps even more importantly, as cultural norms continue to evolve, we need more women in leadership positions acting as role models. Young women need to know there is a place for them at the top. California will lead the way.