Corporate governance: Bring on the quotas!

November 27, 2013

This week, Germany’s ruling coalition announced that it’s set to institute a quota for the number of women involved in corporate governance at German companies. Lawmakers are set “to introduce legislation requiring German companies to allot 30 percent of their non-executive board seats to women from 2016,” Reuters reports. The European Union as a whole is moving closer to instituting a similar 40% quota.

This way of getting women into the upper rungs of the corporate ladder is relatively new, and somewhat controversial.

Norway instituted a board quota back in 2005, which requires that at least 40% of boards of publicly listed companies be comprised of women (it’s actually slightly more complicated than that, depending on the number of people on the board, but for larger boards it is 40%). According to the European Commission, Norway’s female board membership reached 40% in 2009 — up from just 6% in 2002 — and has stayed roughly constant since then. Here’s the chart from the report:

According to a 2011 Deloitte study on corporate governance, Norway’s gender diversity in this respect is the best in the world by 10-15 percentage points.

Initial (rather limited) research suggests that forced board diversity in Norway wasn’t necessarily a good thing for firms’ profits. However, the study found that this had more to do with the corporate governance experience the new female board members had (not much), rather than their gender. This rule wasn’t instituted with short-term corporate profits in mind. It was instituted by the state, with equality in mind. And being as women are not innately incompetent at governance, there’s unlikely to be any long-term harm to corporate profits by requiring more women at the top.

A few months ago, Peggy Drexler argued that quotas don’t work because, in addition to not helping corporate profits, women are seen as token hires (“golden skirts” as they are called in Norway). However, this is about as short-sighted as the company profits argument. When Norway’s rule was instituted in 2006, there weren’t many women qualified to meet the quota, so the few women that were got put on a lot of different boards. But that’s changing, and will continue to change as companies develop new hires knowing that it is in their interest to invest in promising young women.

Drexler also argues that the quota system discounts the achievements of women who work hard and are successful — women get viewed as tokens, in other words. But the crux of the problem is there aren’t enough women achieving success, and it’s not because they don’t work hard. That’s exactly why the quota system was put in place. Making women a larger percentage of corporate boards means fewer men will be. Some men who are left out will of course grumble at this. There is no reason their grumbling should be allowed to produce results.

As IMF head Christine Lagarde mentioned last March, the hope is that the quota system is effective enough that it eventually gets phased out. “Once a threshold has been reached… we can do away with quotas and demonstrate on our own merits that we can be trusted, that we can contribute, that we deserve to be elected, hired or promoted”.

In the years since the study was done, Norway has added training programs that help women climb more quickly up the corporate ladder. And guess what? It’s working. From the NYT:

When Torhild Barlaup joined Female Future in 2008, she did not think she had the skills to be a director. Although she was a senior manager at a Norwegian car importer, Ms. Barlaup, 44, said she lacked the self-confidence to approach her superiors about such opportunities.

Soon after finishing the course, Ms. Barlaup told her managers that she was ready to take on board positions. While she said her bosses were initially surprised, they quickly found roles for her at subsidiaries that faced challenges similar to those that Ms. Barlaup had addressed in her own division.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see