Board diversity is a hot topic in corporate Canada. With various European countries passing mandatory quota legislation to increase the number of women on boards and our federal and provincial governments calling for a balanced gender complement, regulators have faced increasing pressure to take a close look at the issue.
But recent evidence suggests that Canadian companies are already responding by voluntarily making changes around the boardroom table. Executive search firm Spencer Stuart has released a study indicating that Canadian companies may be surpassing their American counterparts in women's representation on boards.
In 2011, the two countries were neck and neck, with 17 per cent women directors on the boards of Canada's 100 largest companies and comparable U.S. firms. In 2013, Canadian companies were up to 20 per cent, while the U.S. percentage remained unchanged.
This is good news, but should not be confused with the overall picture. For example, of the 445 firms that responded to a recent consultation by the Ontario Securities Commission, nearly 60 per cent did not have a single woman director on their board.
The increase reported by Spencer Stuart is slight and tells us very little about long-term trends. In fact, some might say that we are not likely to see broad-based investor demand for board diversity. But the figures may indicate an upward trajectory, and if so, they speak to the willingness of firms to adopt "best practices" voluntarily, in advance of any legislation.
Should regulators step in even when companies are being pro-active? The answer in Ontario, home to Canada's deepest capital markets, appears to be yes. The Ontario Securities Commission has proposed a comply-or-explain regime to increase representation of women on boards and in senior management.
Of course, comply-or-explain has a long history in Canada, beginning with the 1994 Dey Report. Even after the U.S. implemented the heavy-handed Sarbanes-Oxley Act of 2002, Canada responded with a spate of its own legislative provisions, with comply-or-explain governance remaining as the backbone of our governance law.
With the OSC's move to encourage greater representation of women on boards, gender diversity has quickly become a governance issue. This is so despite the fact that it has not historically fallen within the list of typical governance issues, including: whether directors are independent, whether the chair is separate from the CEO and whether board committees are composed of independent directors. Perhaps empirical data about firms' voluntary compliance with governance mechanisms would be useful in elucidating the merits of comply-or-explain in the diversity context.
Frank Milne, Lynnette Purda and I have examined the extent to which firms adopt TSX corporate governance guidelines and U.S. corporate governance rules, even when they are not required to do so (because, for example, they are not cross-listed in the U.S.).
Our results show increasing compliance rates with both regimes over a five-year period, although adoption rates for U.S. standards exceeded rates for Canadian best practices in later years, even for non cross-listed firms. From this research, we can infer that a comply-or-explain approach could be effectively applied to the issue of gender equality on the boards of Canadian firms.
But the OSC's proposed comply-or-explain regulation is likely necessary even if firms adopt suggested best practices voluntarily. Companies may see regulation on the horizon and aim to comply in advance of its implementation. Thus, their voluntary behaviour may be influenced by the impending legal change. In other words, it may be the threat of having to disclose a current lack of women on their boards that keeps them moving in this direction.
At the end of the day, we need to remember that comply-or-explain is a classically Canadian, middle-ground approach. It says to public companies, "You decide what your gender complement will be, just make sure you let your investors know what you decided and why." Ultimately, this relatively benign legislation is likely to be effective in ensuring that more women are placed on boards.
Anita Anand is a law professor at the University of Toronto. She will be moderating a public panel discussion, "Diversity on Canadian Corporate Boards," at the university on March 3.