The key purpose of a board of directors is to look after the affairs of and maximise a company’s business by collectively directing its affairs and simultaneously meeting the interests of its shareholders and stakeholders. This includes a range of business and financial issues such as determining the business strategies and plans that underpin the corporate strategy, ensuring that the company’s organisational structure and capability are appropriate for implementing the chosen strategies, and issues relating to corporate governance, corporate social responsibility and corporate ethics.
The law imposes various duties, burdens and responsibilities upon directors which by and large attempt to provide a balance between allowing directors to manage the company’s business to maximise profit and preventing them from abusing this freedom.
For example, directors must act in good faith to further the reason for their appointment by the shareholders and to act in the best interests of the company and not for any collateral purpose. They must also act with due skill and care and consider the interests of employees of the company.
The question we need to ask therefore is: if a key role of a board of directors is to increase business performance, leading to maximising shareholder value, why then are capable women not appointed to more boards in Malta despite the clear evidence?
We know from well-quoted data that Malta is more significantly underrepresented in both corporate boards and management positions compared to the EU average. The female share equals three per cent in Maltese boards (EU-27 average 14 per cent) and 20 per cent in management positions (EU-27 average 33 per cent).
Over the last few years, an extensive but inconsistent body of research has investigated the financial impact of women serving on corporate boards of directors. Supporters of gender-diverse boards could cite research demonstrating that companies with women board members boasted stronger financial performance than those with boards composed solely of men.
However, the most recent informative research undertaken and published in August 2016 by Kris Byron and Corinne Post examined conflicting research about whether the presence of women on company boards improves financial performance.
More women translated to higher profits
They conducted a meta-analysis of the research in which they combined 140 studies spanning 35 countries and 90,000 firms, the results of which were published in the Academy of Management Journal.
The key finding? Firms with women on their boards were indeed more profitable. Byron and Post uncovered two reasons why: “Boards with female directors tend to make stronger efforts to monitor the firms. They spent more time in board meetings and were more likely to make efforts to monitor the CEO and the firm in general.” They also concluded that “boards with more female directors are more likely to be concerned with and involved in influencing the firm’s strategy”.
They suggested that “efforts to ensure director accountability and to open educational and employment opportunities to women may provide the conditions that will motivate firms to select female directors for their performance-enhancing potential”.
A further huge study in February 2016 found that companies with more women leaders were more profitable. New data from the Peterson Institute for International Economics and EY strengthened that case. The groups analysed results from 21,980 global, publicly traded companies, in 91 countries from various industries and sectors and showed that having at least 30 per cent of women in leadership positions, or the “C-suite”, adds six per cent to net profit margin.
The evidence on women in the C-suite is robust: no matter how we examine the data we get the “same result: women in the C-suite are associated with higher profitability”, according to Marcus Noland, from the Peterson Institute. The C-suite results were clear: “More women translated to higher profits.” And Noland argues that “having more women on boards is associated with having more women in leadership, otherwise known as the pipeline effect”.
Should shareholders be concerned that profits are not being maximised by the board directors? The answer to that is yes. So why is there a clear contradiction between the composition of boards in Malta and their ability to achieve the best results for shareholders and stakeholders?
There is an obvious clue in that advocates for gender equality have argued largely on the basis that this is not just about fairness, less so about better business results. This can be summed up by Laura D’Andrea Tyson, who told a panel at the 2016 World Economic Forum that the gender parity debate is wrongly focused on fairness. Women, she argued, improve innovation and complex decision-making. “We have failed to make the business case.”
This is what Women Directors Malta believe is the key issue for women at board level. The debate about more women directors on boards should focus on the business arguments, not those primarily on gender. Shareholders need to be educated on the correlation between gender composition and profitability and organisations that promote gender equality, need to focus more on this issue if men who control boards are to be persuaded to appoint women to boards.
Louis Naudi is the Chartered Institute of Marketing ambassador for Malta. Michelle Gialanze is president of the Women Directors in Malta.
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