What’s not to like?

Canadian regulators are starting to mandate board and executive diversity. Considering the strong business case for new blood and fresh ideas, you wonder why they have to
By Paul Brent

If you want a glimpse of what corporate Canada looked like 50 years ago you don’t have to invent a time machine. A far easier method would be to sit in on the directors’ meetings of at least half the country’s publicly listed companies. Old, white, male will be the prevailing characteristics, pretty much unchanged from the corporate boards and executive teams of yesteryear.

RBC chair Kathleen Taylor: Comply or explain a "very good first step"

If you’d rather see what most Canadian corporate boards, at least, might look like in five, 10 or 15 years from today, be a fly on the wall the next time the boards of any of Canada’s big six banks meet. All of them, along with a small handful of other larger Canadian firms, have at least four women directors. One of them, Royal Bank of Canada (TSX:RY), has a female chair, Kathleen Taylor, the former CEO of Four Seasons Hotels and Resorts, who became the first woman chair of a major Canadian bank when she took over this January.

Diversity’s not a new concept. That there’s virtue, value and security in having a mix of men, women, different ages and different cultural and professional backgrounds sharing leadership is a central tenet in the good governance handbook. Neither is it news that men of similar ages and backgrounds remain predominant in Canadian boards and C-suites. In 2013, according to research by the Canadian Board Diversity Council, women held just 15.6% of directors’ position at Financial Post 500 companies. Visible minorities meanwhile, who make up 16% of the nation’s population, declined to 3.4% of board slots in 2013 from 5.3% of board slots in 2010, based on FP500 self-reporting issuers.

What is different today, however, is that the tide of reform is set to overtake the status quo. A nation of immigrants that grows more diverse with each passing year, Canada had been lagging much of the developed world in the diversity of its senior ranks and, more pointedly, in its reluctance to embrace voluntary targets, let alone quotas, to create better gender balance in boards and senior management. There have been modest gains. For example, according to the latest Canadian Spencer Stuart Board Index, in the past three years, 30% of directors appointed to the boards of Canada’s 100 largest companies have been women, a 50% increase over the three years prior. But such incremental gains no longer cut it; due to federal and provincial pressure and stepped up regulator and shareholder scrutiny, much of corporate Canada is in line for targets of its own.

An important early political signal came in the 2012 federal budget, when Finance Minister Jim Flaherty served notice of the government’s intention when he said “increasing opportunities for women to serve on corporate boards makes good business sense for Canadian women and for Canada’s economy.”

The bigger game-changer, however, came from Ontario’s premier Kathleen Wynne and finance minister Charles Souza in 2013. The Ontario Securities Commission heard their remarks about the lack of corporate diversity at major public companies and promptly made the issue a chief action item. Fast-forward to this April, and the OSC is just concluding the public consultation process on proposed new rules to increase diversity at senior levels among listed firms. Those rules, announced in January, after earlier consultations with market, industry and investor/shareholder groups, will require TSX-listed companies to report on their term limits (if any) for directors and to “comply or explain” their practices with regard to increasing women’s representation in board and senior management positions. Three years after implementation, these measures’ effectiveness will be reviewed.

At this point, it is fair to say that the majority of parties with a direct stake in the outcome are in favour of the coming changes. In a CBDC survey last year, 54% of directors said they were willing to go along with comply or explain policies while 23% supported the status quo. (Just 8% supported mandatory gender quotas.)

The majority support for comply or explain, which University of Toronto law professor Anita Anand describes as a “classically Canadian, middle-ground approach,” comes with one elephant-sized dissenter. Last fall, before the rules were tabled, the Ontario Teachers’ Pension Plan, unconvinced that voluntary measures will be effective, put forward an alternative prescription to putting more women on boards: all TSX non-venture issuers appoint a minimum of three female directors or face the threat of delisting. The pension fund, which boasts a $129-billion investment portfolio, a 94%-funded plan and a member base that is 65% female, cites a 2006 study which found three is the minimum number of women necessary to create real diversity on a board. (Teachers, for its part, has four female directors out of nine including its chair.)

Whether or not Teachers is right will become clear in fairly short order. But careful watchers might note that the biggest takeaway from its position is already on display. Specifically, that one of the country’s biggest investors not only doesn’t fear diversity, but it embraces it to its return-maximizing core. There is a business case for diversity, in other words. And as it undergoes further study and scrutiny and becomes more widely known it could move the needle every bit as effectively as any target or quota.

Wider recognition that diversity is a bottom-line boosting business imperative would be music to the ears of Chris Bart, a professor at the DeGroote School of Business at McMaster University.

In his view, the need to get enough women on boards may one day be as commonly accepted as separation of chair and CEO duties is today. Last year, Bart co-authored a study entitled, “Why Women Make Better Directors.” It looked at 624 board directors (75% male, 25% female) and their reliance on three reasoning methods (Personal Interest, Normative, and Complex Moral Reasoning, or CMR) to make management decisions. The study found women directors were superior at the complex moral reasoning necessary for “making consistently fair decisions when competing interests are at stake.” Since directors are compelled to make decisions in the best interest of their corporation while taking the viewpoints of multiple stakeholders into account, having a significant portion of female directors with highly developed CMR skills on board would appear to be an important resource for making these types of decisions and making them more effectively.

Bart’s study also serves as a useful entry point into other scholarly research that reinforce his study’s claim that companies with women directors outperform those without: one study, for example, (Joy et al., 2007) found that boards with high female representation experience a 53% higher return on equity, a 66% higher return on invested capital and a 42% higher return on sales. Another one demonstrated that having just one female director on the board cuts the risk of bankruptcy by 20%. Others studies show female directors spur quicker adoption of new governance practices, such as director training, board evaluations and director succession planning structures (Singh and Vinnicombe, 2002), reduce “game playing” (Singh, 2008) and ask more questions rather than nodding through decisions (Konrad et al., 2008).

Anecdotal experiences support some of these results. For example, take the board at HSBC Canada, which has quasi-public standing because it has preferred shares listed on the TSX. It recently achieved a 50/50 gender balance on its 10-member board and, according to one of those five women directors, Beth Horowitz, the former president and CEO of Amex Canada, the board dynamics have been changing positively, as a result. “I think what we are seeing is what I have heard has happened at other boardrooms as you get a critical mass of women, the conversation seems to change. Certainly men ask the tough questions but women seem, and the research backs this up, to have less reticence doing so on a regular basis,” says Horowitz.

The “business case” takes on further complexity when the company workforce is mostly female. This is clear at RBC, which is 65% female, and where chair Kathleen Taylor says, “RBC has been focused on diversity for a long time now, both in the executive ranks and at the board level.”

Over the years, the bank has adopted a ‘buck stops here’ approach to propelling women and minorities up through its ranks. Bank president and CEO Gord Nixon chairs RBC’s Diversity Leadership Council, which measures internal benchmarks such as the percentage of women in executive roles (36%) and visible minorities in executive roles (15%). Gender diversity is currently getting more attention from government and regulators but “non-gender diversity is just as important” to the bank, says Taylor. “If you look at the changing complexion of Canada, major cities in Canada, our clients, our shareholders, our employees, all represent a very diverse group of cultures and backgrounds.”

Taylor calls the OSC’s proposed comply and explain regime a “very good first step” to promote senior-level diversity. She bases that on corporate Canada’s past embrace of new regulatory measures such as Sarbanes Oxley. “I’m hopeful that a comply or explain regime will make a difference and I think anecdotally that it already has” citing an increase in searches for female board candidates among executive search firms.

Not every company with a progressive policy and track record on diversity is as supportive of regulations that impose it. Case in point: Suncor Energy Inc. (TSX:SU). There’s no disputing its commitment to diversity. The company has two female directors and one First Nations’ director on its 14-person board. As well, Suncor’s chair John Ferguson is part of a federal advisory council to promote the participation of women on public and private corporate boards (its initial report is expected to be released shortly); meanwhile, Suncor’s president is a founding member of the CBDC. Even so, Suncor says it favours a voluntary approach rather than quotas. “Board diversity is not about tokenism or quotas,” says Janice Odegaard, Suncor’s senior vice-president and general counsel. “It’s about finding the appropriate mix of skills and knowledge to best govern our companies. Diversity for diversity’s sake is not the answer. It’s only when diversity is combined with other critical skills that we can see a real and meaningful impact.”

It’s here again, however, where the business case appears to make the point. If the appropriate mix of skills and knowledge is the goal to a better governed and better performing company, then the fastest way to achieve that is by hiring and recruiting from the widest possible array of candidates.

One of the most compelling studies to date on the relationship between bottom-line corporate performance and diversity (in this case gender diversity) was published in 2012 by Credit Suisse. There, researchers looked at the share-price performance of 2,360 companies globally over a six-year period, from 2005 to 2011, comparing returns for companies with one or more female board members with those with no female board members. The result: using a sector-neutral methodology, it found that for large-cap stocks (market cap greater than US$10 billion), returns for the companies with women on their boards were 26% higher and for small to mid-cap stocks (market cap below US$10 billion), some 17% better (see charts).

Click to enlarge

As much of the differences were achieved in the post-2008 period, when the global macro-economic environment was in bad shape, the authors suggested that boards with women tend to take sounder defensive positions. “They tend to perform best when markets are falling, deliver higher average [return on equity] through the cycle, exhibit less volatility in earnings and typically have lower gearing ratios,” the study’s authors stated.

There is less scholarly research on the subject of ethnic diversity among senior corporate ranks and directors and performance than that for women but it also supports the notion that it is a positive for performance. A 2003 study (Erhardt et. al.) using 1993 and 1998 financial performance data (return on asset and investment) and the percentage of women and minorities on boards of directors for 127 large U.S. companies found that board diversity is positively associated with these financial indicators of firm performance.

The OSC’s focus on term limits for directors could also speed the creation of more diverse boards. According to the Clarkson Centre for Board Effectiveness at the University of Toronto, the average tenure of Canadian directors is 8.6 years. York University law professor and Listed columnist Richard Leblanc noted in a 2013 article that if “boards do not solve their lack of renewal, regulators will do it for them.” That trend has also taken hold, he added, as regulators in the UK, Australia, India, Hong Kong, Singapore and other countries are imposing term limits on directors of between nine and 10 years, beyond which independence is questioned.

Peter Dey, chairman of Paradigm Capital and author of the influential Dey Report that set the stage for the modern corporate governance movement in Canada, remains less convinced. He worries that term limits and quotas could backfire against those they are intended to help, insisting that change is afoot even without the OSC’s assistance. “The boards I am on and the people I talk to that are engaged in governance, I think their sensitivity has been heightened and their willingness to address the issue is strong,” he says. “This isn’t about political correctness, this is about going deeper into our talent pool and finding some very capable candidates for boards who, lo and behold, may come from a different gender or some minority group.”

Dey is a director of Goldcorp Inc. (TSX:G), which counts two female directors on its 10-member board and list women in 25% of senior management positions—significant accomplishments in a male-dominated industry like gold mining. A former chairman of the OSC, Dey has a piece of advice for his former colleagues following the implementation of its comply and explain policy on diversity. “Give it a couple of years and if they feel there is no progress, then we have to revisit the issue of doing something more.”

If bottom line results tell the story, the case is already being made.

Photography: Jeff Kirk.

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