The Consultant’s Tale
The New York Times and Washington Post find it more appealing to write about gender bias in the boardroom than what really happens in that dark corner of the business world called corporate governance. Yet, their reporters never reach out to actual board directors for insights based on experience. Instead, they refer to consultants who make a living selling services to the board. That seems curious, right?
The reason is very simple. Journalists prefer talking to consultants because they will talk back. They always speak for the record, which directors are not allowed to do, or would be subject to legal proceedings if they did. That makes consultants a more reliable source for a deadline quote.
Then there is the career incentive. An army of consultants trying to eke out a living at $1000 per hour makes them only too happy to confirm a reporter’s angle in return for a nice plug. Because few people are really interested in hearing about the mechanics of the boardroom because the dirt is more intriguing. So journalists have little choice but to walk down the same path to the same conclusion.
In principle, I have no problem with any of that, especially if it helped fix the gender imbalance. As it happens, by focusing on an imaginary bogeyman, we ignore the real challenge, which is why nothing has changed.
An Inconvenient Truth
Journalists portray the board of directors as a monolithic group of men fighting for status quo, limiting women to token roles. It all flows from an inescapable statistic — women represent only 21% of board directors. But the stark reality is boards of directors are not able to choose a director based on gender, even if they wished it. This is where boardroom mechanics come into play.
The job of proposing a nominee is delegated to the independent Nominating Committee of the board. If there is a gender bias trap, that is the place it has to be set. Yet, the Nominating Committee has the highest representation of women and women chairs of any committee. If women aren’t on the slate, it is the Committee making that decision, not the full board. So why aren’t more women on the list?
The challenges get even thornier when women are fully in charge. According to Spencer Stuart, of the 24 companies run by female CEOs, only two have female equality (or more) on the board.
It becomes obvious looking at these data, gender imbalance is caused by something other than reluctance, because the will is there. So we must ask, why not the way?
Nevertheless, It Persists
Getting at the root of the problem will require actual boardroom expertise to challenge corporate governance conventional thinking, and that type of experience is not found among consultants. (Disclosure: I have served on 10 public company boards).
When we muster the courage to have an honest debate, we find the arrow points at a different set of issues: board culture, regulation, and director liability. The hammerlock of corporate governance is designed to make sure the board does not act precipitously, but in this case, it keeps it from acting altogether.
As you’ll see, the fixing the problem won’t happen by storming the gates. What we need is to find a way to open them wider and get them to remain open.
So what are the real reasons vs. the myths that prevent women from serving on boards?
Bias: False. The average big company boardroom is nearly 100% compliant in placing a few women on their boards. According to Spencer Stuart, only 1% of S&P 500 boards do not have a women director. The challenge is getting them to go from one to many — and fast. To remedy this, we need to deal with the problems below.
Vetting: True. The process of bringing on a new director takes a year or more while the candidate meets every director and members of the C suite. Directors are just as busy and have to travel great distances to interview. The turnstile moves slowly if your goal is to increase the flow of women. The answer is to have a squad of capable women candidates lined up in advance, just like a sports team drafting a player from the minor league.
Qualifications: True and False. You don’t need to be an accountant or an MBA, which in theory opens the boardroom door to women from different backgrounds. Ironically, it can cut the other way. Lacking objective criteria, the board becomes tentative and will often go with people it knows. Men know men. Changing perception from business credentials to what Warren Buffett calls business savvy will help.
Hierarchy: True. If a CEO is rated superior to a CFO or a computer expert is rated higher than a marketer, more men will serve on boards. Not surprisingly, these skills are obsolete after a few years, so they should not be used as benchmarks. This is a holdover of both a military and an academic mindset and has no bearing on the capability of a board director.
Litigation: True. With unlimited liability for directors, any sudden change in the boardroom — including bringing on a number of new directors at one time — catches the watchful eye of plaintiff lawyers. It isn’t coincidental the plaintiff bar is a huge contributor to political campaigns. Every time a board is sued, the politicians’ cash registers ring. Bring this to the attention of your Congressperson or Governor.
Turnover: True. Despite the fact that female representation among new directors rose to 32% in 2016, average director tenure is in the range of 10–0 years. The answer to increasing the flow of new directors is either term limits (I suggest a maximum of 10 years) or board directorship limits (maximum of 2 outside boards per director).
Minority: False. (As in a voting minority). While it’s true that a minority of women on a board can be outvoted, boards operate on unanimity, and they won’t stop debate until there are no dissenting votes. Even as a minority, women have a strong say.
Seasonality: True. Directors are appointed once a year, only so many can be added on that occasion. This is one we may have to accept. Annual meetings aren’t likely to be held semi-annually.
Cost: True. The cost of a single board recruitment can run high as $100,000 or more. Spending a half million dollars to recruit 5 new directors is a nonstarter. Having that squad of candidates in my second point above is the answer.
Experience: True and False. Succession and compensation plans are pre-packaged by consultants. This lessens the need for specific experience and theoretically, diverse backgrounds should be welcomed. The flip side is when boards choose women, they draw from a very small universe of former CEOs and CFOs. Most of them are ‘star directors’ who hold several board seats, reducing the opportunity for more diversity. Board limits would help, more creative selection criteria would be good, too.
Size: True. Yes, it does matter when it comes to boardroom gender. Average board size is about 8 directors to 10. It means turnover is complicated by tenure and the fact directors don’t leave boards prematurely. In fact, they may never leave until retirement, which hovers around age 75. Term limits and earlier retirement ages are answers, but expanding boards and developing a two tiered board structure would help as well.
Regulation. True. After Sarbanes-Oxley, boards no longer have lawyers and bankers associated with the company as independent directors. Women make up half the lawyers today and many investment bankers. That eliminates them if their firm has done any work for the company. Boards have to grapple with having more non-independent directors, which is highly controversial in orthodox circles, or set up a two tiered board that accommodates people with close working relationships with the company.