10/17/2012 08:07 pm ET Updated Dec 17, 2012

Women in the Boardroom: Will Quotas Work?

Let's face it -- the number of women on boards is a problem, and everyone knows it. Even old-school companies with homogenous leadership understand the business case for increasing the number of women on boards. Recently, business icon Richard Branson raised his voice in support of promoting more women to prominent leadership positions, further proof that this conversation has moved from the voices of a marginalized few, to a more mainstream dialogue.

Quick refresher: in the United States, women hold only 16.1 percent of board seats in Fortune 500 companies. In Europe, women make up only 13.7 percent of the seats on boards of publicly listed companies in the European Union.

Furthermore, statistics strongly support the business need for balanced leadership. Research from Catalyst, McKinsey and others reflects that companies with a strong female representation at top management level perform better than those without. Gender-diverse boards have a positive impact on performance including a 35 percent higher return on equity, and stronger stock market growth. Why then, do we see such a slow growth in the number of women on boards? It's clear that what we're doing isn't working -- or it isn't working fast enough.

The European Perspective
A new initiative in the European Commission, led by Viviane Reding, proposes taking control of the issue. Ms. Reding argues that voluntary efforts have failed, and that waiting for the number of women in leadership to rise organically would take 40 to 50 years before reaching parity -- 40 to 50 years that we simply don't have.

Her plan calls for women to hold at least 40 percent of nonexecutive director positions in listed companies by 2020 (the measure would apply two years earlier to publicly owned companies). The proposed plan is particularly divisive, with companies coming out strongly in favor or in opposition to the measures. A main concern is that quotas will diminish merit-based promotions and will therefore result in weaker leadership.

Do Quotas Even Work?
Technically, yes. Quotas work in terms of getting numbers up to where they should be. If a company needs to get their female leadership to 40 percent or face significant economic sanctions, you'd better believe they'll turn those numbers around in record time. A more salient question is: By leveraging quotas, will companies continue to see the same successes reflected by previous statistics?

Remember that the statistics, which show more stable governance and higher return on equity with more women, are situations in which women were voluntarily named to the board due to merit and achievement. An inherent danger in quotas is the possibility of bad behaviors emerging that are either a backlash to the policy (we'll show you this doesn't work) or done without thought to be expedient -- putting warm bodies in seats, promoting women to a position just to avoid penalties.

Norway is an example of a good idea causing bad behavior: Boards were 9 percent female in 2003 and were ordered to become 40 percent female within five years. While it's true that the enforcement of quotas has made a drastic difference, we're only now beginning to understand the implications of such rapid change:

To obey the law, Norwegian firms promoted many women who were less experienced than the directors they had before. A recent study found that firms that were forced to increase the share of women on their boards by more than ten percentage points saw one measure of corporate value (the ratio of market capitalization to the replacement value of assets, known as Tobin's Q) fall by 18 percent.

This is clearly the opposite of how higher gender representation on boards voluntarily promotes financial success!

I believe quotas are critical in some circumstances (such as the affirmative action issue that the Supreme Court is facing) but are not the solution for getting more women on boards. The answer is complex and requires change from boards of directors, corporate executives, and from women.

Take Action, Without Quotas

Widen your lens -- and your options. The first step is for boards to examine the job descriptions they create and how they recruit board members. They should not compromise their standards, as was done in Norway to comply with quotas, but should look at the requirements of sitting on a board. The common standard is experience as a CEO, or at minimum C-suite and P&L (profit and loss) experience.

The fact is that a very small percentage of women (or minorities) are in the C-suite or CEOs, and many women who are in the C-suite are in fields that are not P&L carrying. This eliminates most women without examining equivalent experience that might enhance the board.

We all understand that diversity is healthy particularly when it comes to innovation and ensuring there isn't "group think." We also know that the financial crisis was anticipated and raised by a woman, but as a lone voice, she was not listened to. The BODs of the failed financial institutions all met the qualifications that are still held as sacrosanct -- this suggests that voices from multiple perspectives and disciplines is much healthier.

Wouldn't a woman with top-level executive experience be as qualified to see financial gaps even if they did not carry P&L experience? For example, a Chief Human Resources Officer doesn't carry P&L, yet has to be closely partnered with the CFO to run a company, develop policy on salary, stock options, and benefits. When we rule out anyone without P&L, we are losing great talent, and many of them women.

Leaders of the future. Corporate executives need to look within their ranks and at their bench strength to see if they are leaders for today or are leaders of the future. Leaders of the future have a different skill set, and are inclusive of many of the characteristics traditionally attributed to women. Then corporate leadership teams need to sponsor -- to use Sylvia Ann Hewlitt's model, and ensure that talented women are put in positions where they can have greater exposure.

Invest in yourself. Women need to find sponsors, evaluate their network to see if it will help them achieve their career goals, and take advantage of board development programs. Programs like the Watermark Institute Board Access Program™ can connect them with opportunities to serve on boards. Women need to invest in themselves the way they invest in those who are still climbing the corporate ladder.