11/04/2014 06:20 pm ET Updated Feb 09, 2015

Tapping the Potential of Boardroom Diversity

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Thomson Reuters recently hosted a panel presented by the Women's Bond Club called "Trading on Diversity: New Investment Vehicles Target Women's Leadership for Progress and Profit." The panel, of which I was a member, met to discuss new and emerging diversity on corporate boards, specifically looking at financial vehicles that center their investment strategies around gender diversity in leadership.

Gender diversity in the boardroom has been a topic of interest for some time, and in recent years I've seen more focus in financial services on using gender equality as an investment concept. I've long believed that having women leaders is good for business. Thomson Reuters recently weighed in on the topic with a research report, "Climb to the Top--Tracking Gender Diversity on Corporate Boards." Using our Asset4 database, the study looked at 4,255 public companies around the world. The takeaway is mixed. Of those companies, 64% have women on the board, but only 20% of them have boards comprised of more than 20% women. The trend towards diversity on boards is moving in the right direction, but there's still work to be done.

The study also found that indices made up of companies with mixed boards generally outperform their benchmark. Indices of companies with no women in the boardroom had slightly higher tracking errors than those with mixed boards, a sign their portfolios may have more volatility. On average, these indices underperformed compared to those tracking firms with mixed boards. Perhaps no surprise there for those of us who are engaged in the issue of women's leadership.

Another key trend is the growing number of countries embracing the concept of legislation to foster board diversity, with Europe, the Middle East, and Africa leading the way. Many countries, such as Norway, have adopted a 40:40:20 rule mandating that boards be comprised of at least 40% of each gender, with the remaining 20% open to men or women. Some observers say quotas may be one solution, and that this type of framework is necessary to turn the tide on centuries of bias, while others suggest this strategy will backfire on women. Personally I favor the approach pursued by my home country, Australia, where the percentage of women on listed ASX 200 companies rose to 18.9% after a governance framework was established. But while quotas may be unlikely to take hold here in the States, we should at least consider term limits as a strategy to make sure board seats are regularly opened up for new talent.

With this increasing focus and momentum around women on boards; the challenge will inevitably turn to the issue of the board-ready talent pool -- a good problem to have, perhaps.

To serve on a board, a candidate needs experience running a P&L business within the company. That means if women are to be prepared for the demands of board membership they must first be given opportunities farther down the organizational chart. It's a matter of investing in talent early--building a pipeline, as it were--so that it will pay off for the long haul. If there aren't enough women getting line experience, there won't be enough female board candidates. It's that simple.

Doing the Math: Diversity on the Board Equals a Diversity of Ideas

My personal view on this is straightforward: Businesses should no longer see equal opportunity as a matter of choice, but as a matter of good governance. The female perspective is not necessarily better or more insightful than the male perspective, but it is different. Board diversity is about combining alternate and complementary views to arrive at a winning result.

One idea in particular resonates for me. It's called the "Power of Three": One woman is a token, two are a presence, and three are a voice. Some would argue that company boards--which, after all, exist to offer insight on important strategic decisions--need that power because of the potential it offers. In today's competitive market, businesses must be nimble if they are to successfully tackle globalization, unanticipated competition, and an ever-changing landscape, and they need to be prepared to understand the cultures of new markets into which they're expanding. And lest we forget the obvious - they need to understand the behaviors of their customer base, which in most businesses does have a large and increasingly influential female constituent.

Diversity of gender brings a diversity of thought. Getting more women involved reduces groupthink, unlocks fresh perspectives and fosters innovation and organizational creativity -- ultimately emulating a diverse customer base. Only with a broad range of viewpoints can a board make governance and advisory functions meaningful and offer a balanced approach to risk management.

Women should also view board membership as an opportunity to drive change and make a difference.

A number of financial firms, including Barclays, Pax World, and Morgan Stanley, are "walking the talk" by launching funds focused on investing in companies that have a strong roster of female executives and/or board members. A recent Talent for Innovation study found that 52% of women in the U.S. want to invest in organizations with diverse leadership. These investors want both a fair return and to have an impact.

Doesn't everybody?

Debra Walton is currently the Chief Content Officer at Thomson Reuters and an executive sponsor of the Thomson Reuters Women's Network. All views expressed are her own.

Follow her on Twitter @DebraAWalton