Quo(ta) vadis, Canada?

Jul 10, 2014
<p>Main securities regulator proposes comply-or-explain board diversity that some believe will inevitably lead to quotas</p>

This summer, as every year, Toronto’s financial and business elite will flock to their cottage retreats and gather at sunset around their new Kalamazoo hybrid grills. Between swigs of Muskoka Craft Lager, evening conversation may flit from critical assessments of local farmers’ markets to the wisdom of the Bank of Canada’s latest interest rate pronouncement.

But any idle wag intent on provoking truly spirited debate could likely do no better than to toss the subject of gender diversity on Canadian corporate boards onto the conversational carousel. The question of how to handle overwhelming male over-representation evokes strong free-market ideological passions and challenges core social values and intellectual assumptions. Done wrong, efforts to balance board representation could wreck Canadian companies. Done right, greater gender diversity ultimately threatens many of the current owners of power and control within the Canadian establishment. 

Perhaps the most repellent solution is the notion of quotas. Indeed, the essential thrust of the Ontario Securities Commission’s (OSC) proposed voluntary comply-or-explain regime, which would require boards of Toronto Stock Exchange-listed companies to develop and disclose policies and targets aimed at improving gender diversity on their boards and in executive officer positions or else explain why they haven’t, has garnered near-unanimous public praise and assent from those whose business it is to care about such things. ‘Quotas are particularly undesirable,’ wrote Lynn Beauregard, president of the Canadian Society of Corporate Secretaries, in a comment letter last year. ‘Quotas may result in under-qualified directors being appointed merely to comply with regulatory requirements.’ 

Even organizations that one might expect to support a sanction-enforced quota system, such as advocacy group Catalyst, the Women’s Executive Network and the Canadian Institute of Diversity and Inclusion, have lined up, with caveats, behind the OSC’s comply-or-explain solution. 

Quotas still on the table

Still, notwithstanding the fraction of firms that will probably always be unimpressed with any level of regulatory meddling in business judgment, many of the 92 first-round comment letters had, nested somewhere within an overall endorsement, phrases like ‘this is a logical first step’ or ‘a really good start’. That may be because that’s just what it is. 

Without broader action, possibly even mandatory quotas, some see little hope for speeding up what has to date been change at a glacial pace. Despite years of advocacy and discussion, a Catalyst survey shows the proportion of women on publicly traded company boards inching up to 12.1 percent in 2013, while female presence on private company boards has actually declined. Four out of 10 firms have no women on their boards at all. 

At the same time, help from those peering down from above the glass ceiling appears less than forthcoming. A KPMG survey of board members and senior executives published last December reveals that nearly two thirds are ‘satisfied’ with the number of C-suite women and more than half are happy with the number of women on their boards. A corrective market response also seems a long shot, with few demands from asset owners for bold action. 

One shareholder, however, has stood out. The Ontario Teachers’ Pension Plan has called for TSX-listed companies to be compelled to have at least three women on their boards by 2020 or face de-listing. At an OSC-sponsored forum last fall, Jim Leech, then CEO of the C$140 billion ($128 billion) fund, said the comply-or-explain model wasn’t likely to work and would probably end up being turned into a quota. ‘Let’s skip this intermediate step we don’t think is going to work,’ he proposed. 

Minority report 

Leech’s opinion is echoed by Senator Céline Hervieux-Payette, a long-time advocate of board diversity, accountability and accelerated renewal. ‘Give me a break,’ she laughs. ‘You don’t have to be a rocket scientist to know companies won’t move at tremendous speed because of [comply or explain]. They have tried it elsewhere and it didn’t work.’ 

Indeed, Hervieux-Payette, sponsor of a Senate bill that would see quotas ensuring at least 40 percent representation of each gender on public company boards, believes the OSC’s plan merely delays the diversification process, a corporate culture change she deems urgent and critical to Canada’s global competitiveness. ‘Some talk as if everyone now on Canadian boards is a champion,’ she says. ‘But their track record does not always support that idea.’ 

Hervieux-Payette points to Norway, where companies that were given the chance to voluntarily meet gender diversity targets failed utterly despite firm government messaging that quotas were on the table. Norway legislated quota requirements in 2006 and at least a dozen other countries have since mandated varying degrees of gender representation, including Italy, France, Spain and the UAE. 

Hervieux-Payette notes that Norway’s quota law has not been the disaster some predicted. ‘Its boards steered firms to relatively good performance during the 2008 recession,’ she observes. ‘Quotas would serve us well. Power sharing is not a trend in our society. People who have it don’t want to give it away.’ 

‘We initially saw considerable resistance to quotas from both men and women,’ recalls Liv Monica Stubholt, a partner at Oslo-based law firm Hjort, whose résumé includes a stint as state secretary of the Ministry of Petroleum and Energy. ‘But all that has since melted away. Today, most people I speak with are quite comfortable with the status quo.’ 

Norway’s new status quo also came with an unexpected bonus. ‘It prodded firms to professionalize recruitment,’ says Stubholt. ‘Many companies are now discovering that not only are they finding more than enough good female candidates, but they are finding better men as well.’ 

Today, as firms broaden their search horizons, internationalizing boards while tapping fresh parts of Norwegian society for talent, dithering debate about supply pipelines and demand characteristics has been left behind. ‘Quotas were the only tool that worked,’ concludes Stubholt. ‘Those who said there weren’t enough female candidates hadn’t been looking in the right places.’ 

Bucking the status quo 

Stubholt adds that director-hunting companies in English-speaking Canada have ‘the whole world at their fingertips. There’s a huge country just to the south where you could find so many qualified women you wouldn’t know what to do with them.’ 

While the specter of armies of competent American women pouring over the border may rattle some bones at the old boys’ clubhouse, occupants entrenched in its most conservative chambers may perhaps derive a modest tonic from two thoughts. Firstly, although the moral case for fair gender representation resists debate, the business case is shakier than most people think; secondly, Stubholt may be wrong about Canadian boards’ access to high-quality female candidates. 

‘The academic evidence that adding women to boards increases performance isn’t much to write home about,’ says Beatrix Dart, associate dean at Rotman School of Management. ‘Studies have shown correlation but not causality.’ In other words, it may simply be that successful companies are more likely to hire more women directors. 

Nor is Dart entirely confident in the alleged depth of Canada’s female talent pool. ‘There is a pipeline issue,’ she asserts. ‘While there’s no shortage of businesswomen who want to be on a corporate board, it remains uncertain whether, especially under a 40 percent quota, nomination/selection committees would find a match [for their needs].’

Unconvinced gender quotas would lead to better boards, Dart believes merely shining more light on diversity will do little to move the needle. ‘If we conclude that we want a certain number of women on boards, the soft approach won’t result in much
movement,’ she says. ‘For that, you need quotas.’ 

Alternatively, she adds, Canada would likely require a complete social makeover before women could have a fair shot at naturally growing into senior corporate positions. ‘Companies are not at fault here,’ she says. ‘They have actually done much over the last 30 years [to promote opportunities for women in senior roles]. It’s a social problem. We would need to change our understanding of the roles of men and women.’ 

A new role

Embarking on a full-scale social engineering binge may not be in the cards, but until then, another role may need changing – that of the corporate secretary. As keeper of both the evergreen list of prospective directors and the candidate competency matrix, the corporate secretary can play a pivotal role encouraging diversity. There are two problems with this. The first is that most corporate secretaries lack HR qualifications. The second is self-interest. 

‘Even the most progressive corporate secretaries are handcuffed because they are accountable to management and not the board,’ says Richard Leblanc, associate professor of law, corporate governance and ethics at York University. ‘Corporate secretaries should either have less control over the process or be given even greater stature and authority to be able to stick their necks out with recommendations to the nominating committee that management hates. That would mean bringing corporate secretaries under the umbrella of independent oversight functions like risk and internal audit.’ 

OSC officials say they’ll revisit the issue in 2017. Meanwhile, wheels are turning at other levels of government that may even overtake the regulator’s initiative. In the end, however, even guided by the most thoughtful regulation, reporting alone seems like a slow horse in the global race to capture diversity’s transformative potential. Jo-Anne Archibald, president of DSA Corporate Services, isn’t betting on it. She says while no woman is eager to risk being labeled a ‘token’, quotas are inevitable. ‘In that case,’ she concludes, ‘trailblazing women directors may just have to take one for the team.’  

ONE TINY SHIFT

‘What if one single change – one tiny shift – doubled the number of diverse directors on North American boards in the next 10 years?’ So asks Sylvia Groves, formerly chief governance adviser at Canadian oil company Nexen and now a consultant in Calgary working under the name Governance Studio.

Last October, Groves issued a concept paper and then a website under the banner Diversity One. Taking inspiration from the NFL’s 2003 Rooney Rule, Groves simply proposes that for every board seat that needs to be filled, an organization should interview at least one woman. The Rooney Rule had an unexpectedly dramatic impact on ethnic diversity in professional football, and Groves suggests it could do the same for gender diversity in Canadian boardrooms. 

The Diversity One website is preparing to post examples of diversity disclosure from leading-edge S&P/TSX 60 companies, along with a draft memo and board resolution ready to download and send to directors. ‘The OSC is asking firms to talk about diversity,’ Groves says. ‘Diversity One gives them something concrete to talk about.’ 

– Neil Stewart

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