Review The Case of Women Directors found on pages 91 -96 in the textbook Boards, Governance and Value Creation.Review the case using the Graduate Case Study Format to structure acomprehensive analysis. The case is below.
The case of women directors
This in-depth summarizing case concerns the Norwegian lawdesigned to increase the number of women on corporate boards.Norway has received attention in the international corporategovernance debate because of the introduction in 2006 of a lawrequiring at least 40 per cent of the board members in corporationsto be women.
Background
Norway has been at the forefront of moves to include employeesin the governance of corporations. Laws regulating co-determinationhave been enacted as a result of wide-ranging discussions that tookplace in the 1960s. One of the debates centered on the question ofwhat corporations are and what they are for. The other area ofdiscussion concerned the workers’ role in business development.42The outcome of the debate was that employees received the legalright to be represented on corporate boards at the beginning of the1970s. The Company Act of 1976 was a result of joint Nordic effortsand cooperation.
In 1988 the Nordic Council of Ministers issued a statement tothe effect that Nordic cooperation with respect to company lawshould continue. As the need for a new Company Act became apparentat the beginning of the 1990s, there was also a desire to makeadjustments and to harmonize this Act with company laws andregulations in the European Union. At that time Denmark was amember of the EU but the other Nordic countries were not; as aresult it was difficult to achieve the same kind of inter-Nordicharmonization and cooperation as there had been in 1976, as Denmarkhad also to obey EU law.
There were several features in the development of Norwegiansociety that made it urgent to have a new company law. One coreaspect was the adjustments to EU regulations. This adjustment led,as expected, to a separation between big ‘public’ companies andsmall ‘private’ firms. Another aspect was the development ofeconomic crime and the misuse of the corporate form. This wassignificantly more extensive at the beginning of the 1990s than ithad been in the 1970s: the extent of bankruptcies, including‘black’ bankruptcies, had increased considerably.
Proposals for new company laws were given to the Ministry ofPolice and Justice in March 1996, and the laws were ratified inJune 1997, coming into force in January 1999. There were two laws:one dealt with private companies, with the suffix AS, and the otherwith public companies, ASA.43 The major advance in these lawscompared to earlier laws was that they spelt out theresponsibilities of the board. This led to renewed discussionsabout liability insurance for board members, and concerns that inthe future it would be difficult to get qualified boardmembers.
The laws also had other concrete stipulations, includingrequirements for CEO working descriptions, board instructions,voting rules and financial reporting to the board. The requirementfor board instructions was only for companies with employeerepresentatives on the boards. The intention of the boardinstruction stipulation was to ensure that employee-elected boardmembers had real – rather than only nominal – influence on boarddecision-making.
Women on corporate boards
One aspect of the laws that created considerable debate was theproposal to have a quota of women on corporate boards. The subjectof having quotas of women on boards was originally an equalopportunity issue, and rules concerning gender representation onboards were introduced in 1981 in the Act about Equal Opportunity.Becoming effective in 1988, paragraph 21 of the Act of EqualOpportunity had the following wording: ‘When a public body appointsa committee, board or council, etc. with four members or more, theneach gender must be represented with at least 40 per cent of themembers. Both genders must be represented in committees with two orthree members. These rules are also valid for subsidiarymembers.’
The requirement concerning gender representation was motivatedby social justice and a societal need. It was also argued that theparticular interests of women would be better taken care of bywomen than by men, and that women had different backgroundexperiences from men. The objective was to accelerate thisdevelopment by a quota system. This regulation had major effects.Between 1979 and 1987 the ratio of women board members in publicboards and councils increased from 22 per cent to 40 per cent;since then this figure has been constant.
In 1992 there were 764 board member positions in the companieslisted on the Oslo Stock Exchange. Only twenty-six of thesepositions, or 3.4 per cent, were held by women. In some industriesthere were no women at all as board members. In 1996 the ratio ofwomen board members increased to 7.5 percent, but the increase wasmainly due to the acceptance of new types of firms on the OsloStock Exchange: savings banks were now allowed to enter. Aroundthis time, however, attention became focused on this issue oncemore, input to the discussion coming from the NHO (theConfederation of Norwegian Enterprise), the government’s EqualityCentre, various feminist groups and the debates in other countries,in particular Sweden. The motivation for increasing the number ofwomen directors changed from an equality and societal issue to afirm profitability issue, as newspapers started to report researchfindings about positive relationships between the ratio of women onboards and board performance.
Programmes to increase the number of women directors started tomushroom. Various programmes designed to train women as boardmembers were introduced, mentorship programmes and women’s net-works were established, and databanks, registers or archives ofwomen board candidates were launched.
Since the mid-1990s the political situation in Norway has beenquite volatile, with frequent changes of government between asocial democratic Labour administration and one headed by aChristian Democratic or Christian People’s Party Prime Minister,Kjell Magne Bondevik. In 1999 the Equality Department in theMinistry of Children and Families in Bondevik’s first Cabinetsubmitted for hearing a proposed reform to have at least 25 percent female board membership in all companies – private and publicalike. The proposal involved a change in the Equality Act betweenthe genders, and it led to a strong reaction from men as well asfrom women. In 2000 the ratio of female board members fell to 6.4per cent in the companies listed on the Oslo Stock Exchange. In2002 the ratio of women board members in all public companies (ASA)was also reported to be 6.4 per cent.
This proposal, which had originated with the first BondevikCabinet, was acted on by the first administration headed by JensStoltenberg (Norwegian Labour Party). The changes in the Act ofEquality were implemented without the requirements for boardrepresentation, but a new proposal for quotas for women oncorporate boards in public companies was submitted in 2001. In thehearing, it was suggested that the ratio of women to men could beas high as 40 per cent in public companies (ASA companies). Theproposal received only mixed support, however, with the NHO and thefinancial community the most negative in their reaction.
In 2002 the Minister of Industry in the second Bondevikadministration presented a law proposal, derived from the twoprevious hearings, to the effect that each gender should have atleast 40 per cent representation in all public companies. Therewere no exceptions to this rule for board members elected byemployees; the gender representation rule was to apply to the wholeboard. The law proposal was ratified by the Norwegian Parliament in2003. However, the implementation rules for the Act dictated thatthe law did not need to be enforced if the mandatory 40 per centrepresentation for each gender had been achieved on a voluntarybasis before 1 July 2005. As this was not achieved, the lawrequiring 40 per cent of corporate board members to be women wasput into effect in January 2006 – by which time the actual figurehad increased to around 13 per cent. However, the representation ofwomen on boards in corporations with more than 5000 employees hadrisen to more than 20 per cent by then. All companies were giventwo additional years’ grace before any sanctions would beimposed.
The Norwegian debate about women directors was characterized bymany simplistic and partially wrong arguments. Nevertheless, thediscussion and the law proposal have probably had a greater impacton the development of good board practice than was suggested in thepublic discussions themselves. In the Norwegian corporatecommunity, probably no single event has contributed as much to athorough rethinking of the contribution of boards, board tasks andboard composition as the debate regarding women directors –probably more so even than the waves of shareholder activism andthe evolution of codes of best practice. The contribution fromthese discussions has been that board member selection has, by andlarge, moved from being an informal and often unconscious searchthrough professional and social networks to a professional andrational search process containing specifications of competence andqualification requirements of board members.
Summary
This chapter has looked at board members’ characteristics andcompensation and board composition, which constitute the coreconcepts of the chapter. I relate characteristics to eachindividual board member, whereas compensation refers to theindividual board member’s incentive structure and composition is adescription of the board members as a group. It is important toidentify the three concepts and to distinguish between them.However, characteristics, compensation and composition should notbe viewed separately from each other when exploring boards andvalue creation, as the three attributes interact. Both competenceand motivation are needed at the individual level, and thecomposition of the board should reflect the need to balance thevarious task expectations.
Board member characteristics is a broad term. A sub-group iscompetence. Seven types of board member competence criteria werepresented based on arguments from theory and board taskexpectations:
Firm-specific knowledge may, for example, be about the mainactivities of the firm, the firm’s critical technology and corecompetence, the weak points in the firm and in its products andservices, the development of the firm’s customers, markets,products and services, the bargaining power of suppliers andcustomers, threats from new firms or new products or services inthe industry, etc.
General and function-oriented competence may, for example,be in finance, accounting, law, marketing, human resources,organizational behavior and design, strategy or just generalmanagement experience.
Process-oriented competence may include knowledge about howto run a board.
Relational competence includes the abilities the boardmembers have to build relationships with internal and externalactors.
Competence is related to the personalities and personalcharacteristics of the directors.
Negotiation skills.
Ownership.
Characteristics are also related to who the board members are,where they live, their age, etc.
We have used the term ‘compensation’ to describe the boardmembers’ incentives and motivation. Included are internal as wellas external incentives, and the incentives go beyond independenceand share- holding. Motivation arising from liability, reputationand personal and professional standards were also introduced.Composition is about the size and configuration of the board withrespect to the board members’ competence, characteristics andcompensation. Board size, out- sider ratio and diversity were themain types presented. The discussion and arguments aboutcompensation and composition were also based on competingtheoretical perspectives and board task expectations.
