Ontario Premier Kathleen Wynne and her Liberal government’s 2013 budget signalled their intention to initiate policies to increase gender diversity on the boards of directors of public companies. More recently, in an interview with the Globe and Mail, Laurel Broten (Ontario’s Minister Responsible for Women’s Issues) confirmed that the Ontario government and the Ontario Securities Commission (OSC), plan to motivate public companies to set goals for increasing the number of women in roles such as corporate directors and senior management.
It is time for action. According to the March 2013 TD Economics Report1 (TD), women only make up 11% of board members for Canadian companies listed on the S&P/ TSX Composite Index. Canada is not making progress and as a result, continues to fall behind other countries.
Women bring unique perspectives and value to boards. A study of Fortune 500 firms found that companies that have women directors have more economic growth.2 These companies have a higher return on invested capital, sales, and equity. Therefore, increasing the number of women on boards does not only lead to gender equality, but also leads to higher returns.
The Ontario government and the OSC are considering a ‘comply or explain’ approach, which would require companies to either disclose their policy, goals and progress on diversity, or explain why no such policy exists. Companies would be left to set their own targets but would be forced to publicly engage in the debate. The assumption is that requiring disclosure will result in greater attention to diversity and ultimately lead to more women on boards.
Interestingly, in 2008, the Canadian Securities Administrators proposed abandoning the current “comply or explain” model for corporate governance disclosure because of concerns that it was viewed as too prescriptive and that guidelines would be treated as mandatory requirements.3 The proposed change to more a principles-based approach to corporate governance disclosure was abandoned in 2009 in view of the more pressing economic issues created by the credit crisis. However, the fact that the OSC is considering adopting the “comply or explain” model for board diversity may indicate a change in its views.
According to TD, there has been increasing success internationally with the ‘comply or explain’ policies on diversity. Finland and Sweden both use the ‘comply or explain’ approach and are ranked in the top three for having the largest percentage of women on boards. Accordingly, there is reason to believe that this approach could be effective here.
Other jurisdictions have adopted mandatory quotas. For instance, Norway mandated that 40% of board members be women. Whether quotas are an effective method or not is debatable. Critics argue that quotas act as a glass ceiling, with most companies not hiring more than the required amount of women. Also, while the number of women on boards may increase, the number of women in CEO or Chairman positions may not necessarily improve. In Norway, despite the increase in women on boards, the number of women in CEO or Chairman positions remained below 5%. Furthermore, mandatory quotas prove to be burdensome for many companies, especially small and medium sized enterprises. There is also evidence that mandatory quotas in Norway were detrimental to working environments and morale.4
Clearly, Canada needs a push in the right direction. The fact that the OSC is working with the Ontario government to come up with a model that works for Ontario is definitely a step forward. It will be interesting to see if the comply or explain approach will have the desired effect in Ontario or whether something further will be required.