04/01/2013 05:08 pm ET | Updated Jun 01, 2013

A Free Market Solution to Women on Boards?

Morgan Stanley Promotes the Power of Three

Getting more women on boards is a hotly debated subject in financial circles around the globe. Some countries have regulated quotas, such as Norway, the country that let the way with a quota requiring that 40 percent of the board members of publicly listed companies had to be female.

The UK has taken a different tact, The Thirty Percent Club has set a goal that 30 percent of the seats must be filled by women, and leading corporations there have signed on to the initiative.

The European Commission passed a plan last November that approved a proposal requiring listed companies to have 40 percent of the board seats be filled by women. This plan still needs each country to approve, but the momentum is headed in that direction.

So what about the US? After many years of debating the issue, women still only hold 16 percent of the Fortune 500 board sets with little advancement in recent years. All talk and no action is what we have seen.

Now Morgan Stanley is going to test a free-market solution to supporting more women on corporate boards. Today they are launching the Parity Portfolio, which will include only companies with at least three women on their boards. Eve Ellis, a financial adviser with the Matterhorn Group at Morgan Stanley Wealth Management and a portfolio co-manager with Nikolay Djibankov, stated, "I'm frustrated by the fact that there are so few women on boards".

There is plenty of evidence that boards with more women outperform the market norms. The Credit Suisse Research Institute report released last year, found that over a six year period, companies with at least some women on the board did better in share price than those with none. Catalyst reported that:

• On average, companies with the highest percentages of women board directors outperformed those with the least by 53 percent.
• Return on Sales: On average, companies with the highest percentages of women board directors outperformed those with the least by 42 percent.
• Return on Invested Capital: On average, companies with the highest percentages of women board directors outperformed those with the least by 66 percent.

Just this March in Canada, the International Journal of Business Governance and Ethics found some very interesting qualitative facts in a survey of 624 board directors. The findings were definitive: women were more likely to use "cooperation, collaboration and consensus building when dealing with complex issues". Male directors, on the other hand made decisions by using "rules, regulations and traditional ways of doing business".

According to Chris Bart, professor of DeGroote School of Business at McMaster University in Hamilton, Ontario and co-author of the study, evidence was clear that women were more likely to take into consideration the interests of multiple stakeholders and viewed fairness as an important factor in decision-making." Women seem to more inquisitive and see more possible solutions", he said. "This quality makes them more effective corporate directors."

The newly launched Morgan Stanley fund will avoid tobacco, firearms and oil, and will overweight consumer discretionary and health care companies. Investors in the portfolio of companies will be required to invest a minimum of $250,000.

Is this a free-market solution to more women on boards? Only time will tell, but I applaud their effort to put money where the evidence shows better corporate performance -- with those companies having at least three women on their boards.

As Chris Bart offered, "It's no longer the right thing to do ... it's the bright thing to do."