Women in Asset Management: should corporate diversity be mandated?

After years of discussing the benefits of diversity in the workplace, why have more companies not achieved meaningful progress?

With the Women in Asset Management New York Virtual Summit on the horizon, Heidi Ridley and Kathryn McDonald, Co-Founders of Radiant ESG, discuss why decades-long efforts to promote diversity have met with only moderate success.

Companies are keenly aware of the adapt-or-die nature of capitalism, but despite years of pledges and well-intended initiatives, progress on corporate diversity and inclusion has been scant. Is mandated diversity now a possible remedy to inaction?

Hard and soft laws

The most obvious examples of mandated diversity are the ‘hard’ and ‘soft’ laws governing board-level gender representation adopted over the last 10+ years, says Kathryn.

“Norway was the first to enact such laws, followed by France, Germany, Italy, the UK, and many others, including notably, California, the first US state to adopt such laws. The ‘hard’ laws take the form of quotas expressed as a quantity requirement for companies. They typically come with clear penalties for non-compliance that can be severe (e.g. delisting).” 

Demonstrable proof

Quotas, because of their unambiguous nature, have proven to be a quick and effective way to increase board-level female participation. The ‘soft’ laws are often in the form of diversity targets set by regulatory bodies. Companies typically must ‘comply or explain’ by revealing their diversity policies and detailing their progress toward achieving the target. 

While target-based systems do not have the immediate effect of forcing diversity in the same way as quotas, they have worked to increase board diversity over time by applying a different kind of ‘force’. 

Target-based systems effectively act as a pricing mechanism allowing firms to weigh the costs and benefits to choose an optimal gender mix. To date, companies under these systems have clearly viewed the ‘benefit’ of being aligned with the diversity target as more remarkable than the ‘cost’ of making changes.

Says Heidi: “There is demonstrable proof that countries with both the ‘hard’ and ‘soft’ approaches to top-down diversity initiatives experienced greater increases in the proportion of female corporate board members relative to countries with no such initiatives.”

A slightly dated, but compelling, exhibit illustrating this point appeared in the Harvard Law School Forum on Corporate Governance a few years ago:

Source:Institutional Shareholder Services, January 2017

Has mandated diversity worked?  It depends…

The good news is that both the ‘hard’ and ‘soft’ diversity laws have worked in the sense that they have increased the percentage of women in board-level positions. 

Says Kathryn: “We would like to believe that female board representation would have happened naturally, stemming from a management awakening to the economic benefits of diversity even in the absence of such laws.”

Also, it is important to note that some countries with the largest increases in female board representation generally have stronger gender equality making the ‘cost’ of being perceived as ‘anti-diversity’ particularly steep. This suggests that greater female board representation may have happened in the absence of any laws.

“Still, the paltry growth rate of female board participation experienced by US companies works to undermine these arguments; therefore, we attribute an increase in board diversity to the laws, at least in part,” Heidi feels.

The knock-on effects

The bad news is that several of the expected knock-on effects of appointing more high-profile women have not materialised. Studies of the impact of the laws have met with inconclusive results concerning company financial performance; this flies in the face of the body of research demonstrating improved economic outcomes associated with diverse teams.

“Other anticipated benefits specific to women in the workplace have not come to pass either,” says Heidi. “For example, more women on a company’s board has not necessarily led to greater female representation within the ranks of management.”

In France, Germany, and the Netherlands (all countries with diversity laws) women held just 10-20% of senior management jobs according to data from Korn Ferry reported in 2018.

Similarly, based on a recent analysis of the Norwegian quota system, there was no meaningful closing of the wage gap within the management ranks of companies. However, the wage gap did narrow for the female board members themselves

The upshot is that the ‘hard’ and ‘soft’ laws did meaningfully increase female representation on corporate boards, providing a powerful signalling effect and certainly benefitting the women chosen for board spots. Still, there is not much evidence of a ‘trickle-down’ effect extending those benefits to others.

 Have we been focused on the wrong thing?

Until now, the collective focus has been on increasing diversity at the corporate board level. While both Heidi and Kathryn believe it is important to continue to increase female board representation, the real benefits of diversity are yet to be felt by most companies and by the economy more broadly because diversity needs to be improved at every level of a company.

Says Heidi: ”Organisational diversity and the policies and practices that make it manifest are associated with greater employee retention, greater productivity, ability to attract new talent, and improved innovation and problem solving – through a reduction in ‘group think’. 

“Now, a focus on the organisation is arguably as important, if not more, than the focus on the board.”  

Kathryn adds: “If we are to work to improve organisational diversity, we need to start with data.”


Diversity data

While there are a few data vendors who are offering a much more comprehensive view of company-level diversity than has been available historically, it is still challenging to get a broad set of diversity data for a broad set of companies.

While this goes well beyond what is covered by the ‘comply or explain’ requirements, standardised disclosure of a robust set of diversity measures would be enormously helpful for level-setting and engagement. And, as the saying goes, if you can’t measure it, you can’t manage it.

There is also a need to acknowledge that some diversity initiatives simply work better than others. An HBR study from 2016 of US firms demonstrated that programmes that attempt to strong-arm employees to forget their biases through negative incentives like grievance systems were shown to reduce diversity over time. 

In that same study, the authors showed that programmes framed around engagement, contact between groups, or people’s desire to look good to others work well. Mentoring, college recruitment targeting women, diversity task forces, and other programs anchored on positive reinforcement led to increased female representation. But we know that increasing the diversity numbers is merely the first step– what needs to happen next is inclusion.

A firm commitment to inclusion

“Without a strong, firm-wide commitment to inclusion, diversity does not yield meaningful benefits and can even result in additional expense to the firm as disillusioned workers leave and must be replaced,” says Kathryn. 

“Culture – specifically a culture of inclusion – can be the bridge between aspirations and tangible results by working to transform, then maintain, and even accelerate the benefits of diversity.

“Leadership plays a critical role as an inclusive culture cannot be mandated, but it can be modelled. Even if organisational diversity could be forced on a company from outside pressures, a culture of inclusion is something that must be endogenous.“

Should diversity be mandated?

The ‘hard’ and ‘soft’ laws that are in place now exist for a reason – until their enactment, there was little progress on improving female representation at the board level. But these laws have not resulted in much meaningful change for companies as a whole or the economy more broadly. Says Heidi: “For this reason, it is difficult to be enthusiastic about mandated diversity going forward.”

More recently, and in step with a greater asset owner focus on diversity, there has been mounting evidence that collaborative investor initiatives like the Thirty Percent Coalition, and even large individual investor activism, are moving the needle toward greater gender parity at the board level

Unlike the ‘hard’ and ‘soft’ laws that are top-down and country/region-specific, these are bottom-up activities that tend to be more company-specific in focus and have the potential to be more nuanced and outcome-oriented. 

Says Heidi: “While we acknowledge that these initiatives also represent exogenous pressure working on companies to elicit change, we believe that they have a better chance of giving rise to more broad-based benefits especially if there were to be a widening of scope to include other aspects of organisational diversity. 

“Regardless, diversity is hollow and potentially expensive in the absence of inclusion. This may be the reason that mandated diversity has not lived up to its potential.”

Hear more from Heidi Ridley and Kathryn McDonald, Co-Founders of Radiant ESG, by joining them at the Women In Asset Management New York Virtual Summit on September 9-10. Register Now.

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