Corporate Governance and Diversity

Aaron A. Dhir is an Associate Professor of Law at Osgoode Hall Law School in Toronto, Canada. The post is based on Professor Dhir’s book, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press, 2015).

Earlier this year, Germany joined the ranks of countries such as Norway, France, Italy, Belgium, and Iceland by enacting a quota to increase the number of women in its corporate boardrooms. Starting in 2016, both genders must make-up at least 30 percent of specified German companies’ supervisory boards.

The news from Germany provoked decidedly negative reactions in major media outlets. In the New York Times, the Washington Post, and the Economist, critics questioned the soundness of pursuing positive discrimination in the corporate governance arena. The reality, however, is that we actually know very little about how corporate quotas have worked in practice. Advocates and detractors each suggest that these measures will alter the effectiveness and dynamics of firms in some way—whether for better or worse. But the speculation remains largely uncorroborated and our knowledge is incomplete at best.

In my new book, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press, 2015), I attempt to remedy this knowledge gap and to open up the typically closed doors of the boardroom. I conducted detailed, semi-structured interviews with Norwegian corporate directors, men and women, regarding their lived experiences under Norway’s contentious law—the very first corporate quota adopted. I strive to replace the conjecture with an inside account of real-life boardroom reality.

Under the Norwegian law, public companies are required to comply with varying degrees of gender representation depending on the size of their boards. If, for example, the board has more than nine directors, both genders must constitute 40 percent of the total makeup, at a minimum. For smaller boards, the required level of representation can reach up to 50 percent. Noncompliant Norwegian firms face the possible sanction of court-ordered dissolution.

The Norwegian quota, as an instrument of economic governance, boldly intrudes into the marketplace. Because corporate law does not traditionally concern itself with matters related to identity-based representation, it is rather striking that Norway’s quota is located not in human rights or equality-related regulations, but rather in the heart of the legal regime that gives life and personality to corporations—Norwegian corporate law. So what do those who are directly affected by the law have to say about mandated gender balance and the forced repopulation of boards? Some of my salient research findings include:

  • The societal acceptance of Norway’s quota law, after a difficult adjustment period, has been to some degree a function of Norway’s political culture and commitment to egalitarianism—what one director I interviewed referred to as the “philosophical underpinnings of the culture.”
  • Over time, support for the quota law among directors has increased. As I have reported elsewhere, many of the participants in my study were originally against the quota. Directors’ views changed, however, after they witnessed the law in operation, experienced its effects, and came to the realization that change in the boardroom would require legal intervention, given the dynamics of in-group favoritism and closed social networks that thwart diversity. As one Norwegian director told me, “[I]t’s too tempting to … give [a board position] to someone that understands you, that will not necessarily ask those difficult questions; someone that … is a little bit similar to you, and that you get an advantage from [by] putting there.”
  • The dominant narrative my interviewees conveyed was that quota-induced gender diversity has positively affected boardroom work and firm governance. Generally, respondents emphasized the range of perspectives and experiences that women bring to the board, as well as the value of women’s independence and outsider status. They also stressed women’s greater propensity to engage in more rigorous deliberations, risk assessment, and monitoring.
  • Most directors provided concrete examples of how, in their view, diversity had made a difference to Norwegian firms. These examples included a range of outcomes, from helping boards make difficult decisions (such as firing the CEO and handling crises), to having an impact in more functional areas (such as redesigning product marketing strategies).
  • The presence of a critical mass of women appears to matter to the achievement of diversity-related outcomes. And, in part because of the critical mass the law requires, women overall reported that they did not feel marginalized by other board members because they had obtained their positions via the quota. Though their stories are complex, the majority characterized the quota as a positive mechanism, one that facilitated their entry to the upper echelons of the corporation.

Overall, the dynamics brought to light in these interviews suggest that Norway’s law has had a profound effect on Norwegian companies. Seen through the eyes of the participants in my study, the quota has affected the social fabric and decision-making culture of the boardroom and has shifted the landscape of existing gender-related power arrangements.

That said, the lived reality of the law also raises a number of difficult questions and unresolved issues regarding the value of board diversity and how best to achieve it. These questions include: whether quota laws essentialize gender; whether the benefits of outsider status will disappear as women gradually assimilate onto boards and into the networks of male directors; whether quotas have a negative relationship with firm financial performance; whether boardroom diversity will enhance diversity in the management suite; whether quota regimes can be successful in countries with socio-political cultures that are different from that of Norway; whether the benefits of diversity are tied to particular features of corporate governance cultures; and whether publicly traded firms will attempt to avoid quota requirements by becoming private.

The research design and overall approach of my book are decidedly socio-legal. I explore the regulation surrounding board diversity in action and in its institutional and socio-political contexts. Scholars do not typically use qualitative inquiry in corporate law and governance research. And yet interview-based research, which draws from personal identity narratives, can highlight important dynamics in the operation of the corporation. To be sure, my analyses are suggestive, rather than conclusive, and qualitative data can only provide one piece of the larger puzzle. But it is an integral piece. It is only through collecting primary data on how the law has translated into the day-to-day existence of directors that we can begin to understand the deeper complex meanings of corporate diversity mandates.

We are living in a fascinating time of regulatory ferment, as policymakers around the world wrestle with crucial questions that lie at the intersection of market activity and social identity politics. Challenging Boardroom Homogeneity offers insights into some of the most salient issues under debate. An excerpt from the book is available here.

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