In order to accelerate the transition to a better representation of women on boards, a number of European countries such as Italy, France and the Netherlands have taken to impose mandatory quotas for women in board positions. France, for example, passed a law in 2011 requiring women to hold 20 percent of board positions by 2014, and 40 percent by 2017. In November 2012, the European Commission adopted a proposal for European Law requiring female representation of 40 percent on company boards. The proposal still needs to be approved by the European Parliament and a majority of member states to become European law. If adopted, the law will not be mandatory but introduce a range of administrative burdens to coerce companies to appoint more female non-executive directors.

Companies will have to prove they are trying their best to increase the number of women in top management positions to at least 40 per cent. They will have to try pretty hard. According to EU data from January 2012, women represented 13.7 percent of board positions in large listed companies.

A new study “Why women make better directors”, published in the International Journal of Business Governance and Ethics, offers compelling support for proponents of greater female representation on boards, whether achieved by quota or not.  The study surveyed 624 directors over nine years, almost all in Canadian companies, including large listed corporations. 75 percent of the survey participants were men and 25 percent were women. The study used a standardized test called the Defined Issues Test (DIT).  The test was taken by directors who participated in the Directors College training course for corporate directors in Canada

Prof. Chris Bart and his research partner Gregory McQueen of A.T. Stills University in Arizona used the DIT analysis to determine to what degree directors relied on three basic reasoning methods in deciding a series of hypothetical cases:

• Personal Interest: “What’s in it for me?” The decision maker is motivated by ego, selfishness, and the desire to avoid trouble for self.
• Normative: “Don’t rock the boat.” The decision maker adheres to existing group norms, rules, or the status quo.
• Complex Moral Reasoning: “What will be most fair to everyone concerned?” The decision maker considers all stakeholder perspectives, and uses cooperation and consensus building, consistently applied in a non-arbitrary manner.

As can be expected from individuals serving on a board, most strongly relied on complex moral reasoning. But women did so to a much higher degree than men, who relied relatively more on the normative approach. This suggests women may be better on average at applying “complex moral reasoning” factors in decision-making, which involves considering viewpoints of multiple groups, using co-operative and consensus-building approaches. Men on average rely more on making decisions based on rules, regulations, or traditional ways of doing business.

Given these finding, “companies may actually be shortchanging their investors” if they have no women around the table, Prof Bart suggests. Indeed, a 2007 study of Fortune 500 companies across five industries by Catalyst, an organization dedicated to expand opportunities for women and Business, found that companies with women on the board recorded:

• 53 percent higher return on equity
• 66 percent higher return on invested capital
• 42 percent higher return on sales

So getting more women on boards should be a priority for any business, but change is slow to come around. And contrary to a popular argument, in most parts of the world, the underrepresentation of women on boards is not due to a shortage of qualified women. Prof. Bart argues that men are reluctant to have women enter boards because they have a more challenging decision-making style and are less deferential to tradition or defined power structures. His reasoning is supported by a study by the World Economic Forum, the “The Corporate Gender Gap 2010”, based on a survey of 600 heads of human resources at the world’s largest employers. The two biggest barriers for the advancement of women to leadership positions identified in the study were “general norms and cultural practices in my country” and “masculine/patriarchal corporate culture”.

So while quotas may not be most companies’ favorite solution to increase female representation, it may be the most effective way forward to break through those cultural barriers. As Viviane Reding, the EU Justice Commissioner responsible for the EU quota proposal is quoted: “I don’t like quotas, but I like what they do.”

This continues the strong performance on this issue in 2012, where 38 of 40 such proposals were passed. Of course, management still needs to follow through on these proposals and put them forward as their own at the next annual meeting.

Classified boards are definitely declining as company practice as ISS’s 2012 annual Board Practices study points out. While a decade ago, more than 60 percent of S&P 500 companies had boards with staggered board terms, today two-thirds have boards where all directors are elected annually. SmallCap and MidCap firms still have this practice prevailing, however, being subject to less public and investor scrutiny. 48 percent of S&P 1500 companies have classified boards, caused by a majority of SmallCap and MidCap cap companies having boards with staggered terms.

At least among the S&P 500, the number is bound to fall further. SRP has 74 proposal for declassification out, up from the 40 such proposals last year.

Drawing on a survey of 1,597 corporate directors in June 2011, the McKinsey authors underline some of typical challenges today’s boards face.

• Time shortage

Two thirds of the interviewed said they would like to spend more time on the company’s strategy, but this proves difficult since most boards have only about six to eight meetings a year. Predictably, these meetings are mostly dominated by compliance-related topics with little time available for developing strategy.

• Expertise gap

The survey also pointed to one of the reasons why strategy discussions at the board level are not a common occurrence. Only 10 percent of the directors surveyed by McKinsey felt that they fully understood the industry dynamics in which their companies operated and only 21 percent of them stated that they had a complete understanding of the current strategy.

Time and room for strategy review at the board level is often left to an annual board-level strategy, which tend to be mechanistic in their repetitive nature. The McKinsey authors instead propose to “throw out the annual process and replace it with a much more intense but less frequent form of engagement—roughly every three years in this case—while still devoting some time at every board meeting to pressure-testing the strategy in light of its progress and changes in critical variables.”

Crucially, the article puts forward three key questions that an organization should attempt to answer in order to enhance the quality of board engagement on strategy.

1. Does the board understand the industry’s dynamics well enough?

Boards need time to not just review plans but to fully understand the structure and economics of the business the company creates. Ideally, time should be spent without management present at the meeting as well, so the board can get deliberate freely and get up to speed on critical issues. Such practice also helps to avoid simply accepting management bias and step away from ingrained patterns of thought.

2. Has there been enough board–management debate before a specific strategy is discussed?

Based on the better understanding of industry and company economics, the board should embark on an open and informed dialogue with senior management. The article points out that during such debates, management’s role is to introduce key pieces of content: a detailed review of competitors, key external trends likely to affect the business, and a view of the specific capabilities the company can use to differentiate itself.

3. Have the board and management discussed all strategic options?

In the view of the article, most discussions between board and management end after business, economics and competition are covered. After this type of discussion, management develops a plan, which is then merely presented for approval. To break with this standard practice, the McKinsey authors instead argue for management to formulate a set of strategic options, each thoroughly thought through to its logical end state. Board and management should then discuss and decide on these options.

To be sure, this is a time-consuming strategy, and requires management and the board to fully commit to interact and engage. In complex and challenging times, however, it seems like best practice for strategy development.