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Changing The Faces Of Corporate Boards

In Norway, more than 40 percent of all company board members are women, compared to just about 15 percent of American board members.

Are Norwegian women more ambitious than American women? Is the business culture there more welcoming to women? Maybe, but the real reason there are more female directors in Norway is because the government said there had to be.

In 2002, when women held less than 7 percent of private-sector board seats, Ansgar Gabrielsen, the country’s trade and industry minister, decided that it was time for things to change. He proposed a law mandating that all state-owned and publicly traded companies increase the number of women on their boards to 40 percent.

“There were, literally, screams. It was a real shock treatment,” Arni Hole, director general of the Equality Ministry, told The New York Times, remembering the business community’s reaction to the announcement. But, a few months later, the law was passed, giving state-owned companies until 2006 and publicly listed companies until 2008 to make the shift.

Proponents of the bill argued that it would increase the caliber of board members by prompting companies to draw on untapped female talent. Supporters also hoped that greater diversity on boards would lead to more innovative thinking and decision-making. “More diversity - in gender, [in] age, in background - leads to better overall competence in the leadership team, and therefore to better strategic choices,”said Benja Stig-Fagerland, a Danish economist who helped lead an effort by the Confederation of Norwegian Enterprise to find female leaders.

This thinking has caught on. Spain and the Netherlands have already passed similar laws. In France the National Assembly has approved a quota bill that is now being debated in the Senate. Belgium, Britain, Germany and Sweden are all thinking of hopping on the bandwagon as well.

But the mandate has yet to show any benefit. A study by the University of Michigan reported that, since the quota went into effect, the average amount of senior executive-level experience on Norwegian boards has declined. Using a common market-based measure of corporate valuation known as Tobin’s Q, the study found that Norwegian companies performed an average of 20 percent worse the year after adopting the quotas than they had the year before.

Fortunately, in the United States, the government does not tell us who we can and cannot have on our companies’ boards. Americans are more likely to view corporations’ primary purpose as being to earn money for shareholders, and to view shareholders, rather than the government, as the party entitled to decide who to place on corporate boards.

But, when it comes to picking directors, we don’t exactly have meritocracy on this side of the pond, either. Instead of the government constraining shareholders’ choices, corporate management plays that role.

Directors at publicly traded companies are supposed to be accountable to shareholders. In reality, incumbent managers effectively control many public companies. While shareholders get to vote on directors, management generally fills the slate of candidates with its own nominees, giving shareholders little real choice. Though management and shareholder interests converge on most points — both want to make sure the company sticks around and stays in good health — they are not always completely in line. For example, company executives are probably more likely than shareholders to favor spending lots of money on big salaries for executives.

A director’s decisions are far more likely to be influenced by how he or she got nominated than by gender. Although more directors these days are awakening to their responsibility to shareholders, directors nominated by management will always be to some degree beholden to management. To promote real accountability on company boards, governments, including the United States, ought to support measures to make it easier for shareholders to propose nominees.

The Securities and Exchange Commission is currently considering such a measure. Its proposed Rule 14a-11 would grant shareholders the ability to add their own nominees to company proxy cards, the ballots for shareholder elections. Companies would also have to give nominating shareholders up to 500 words of space in the company proxy statement to support their candidates. Currently, shareholders who want to nominate directors must conduct their own proxy campaigns, which, for most, are cost-prohibitive.

Under the proposed rule, to make a nomination, a shareholder or group of shareholders would be required to control at least 1 percent of the company’s stock, with the exact threshold depending on filing status, or, in the case of registered investment companies, on net asset value. To gain access to the company proxy statement and ballot card, shareholders also would have to have held the stock for at least one year.

Companies could limit the number of shareholder nominees appearing in proxy statements to one or to 25 percent of the seats on the board, whichever is greater. If at least 25 percent of currently serving board members were nominated by shareholders originally, then the company would not be required to include further shareholder nominees in proxy statements. (For some reason, giving shareholders control of their board does not seem to mean giving shareholders the right to control a majority, in the eyes of the SEC.)

In a speech at Northwestern University School of Law, SEC Commissioner Elisse B. Walter said, “I believe that our proposed approach...provides a reasonable way for us to unfetter a shareholder's franchise right.” The SEC is still considering possible revisions to the rule, including the question of whether shareholders should be able to override the proxy access provision through bylaw changes. A decision is expected early this year.

While I am thankful that my government does not tell me who I can elect to my company's board, I do not mind if it helps me have a chance to vote for someone I might actually want to elect. Rule 14a-11 would be a useful step in that direction.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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