Women rising

Walking the talk: North American diversity policies failing to deliver

As of this year, most corporations have a formal diversity policy, but that doesn’t necessarily translate into higher levels of women at the top.  Case in point: 92% of North American companies have adopted diversity policies, 5% more than European firms. Meanwhile, Canadian and American companies lag behind their European and Australian peers in terms of gender diversity in leadership. It’s a clear sign that having a diversity policy is far from enough.

Target practice: Australian and European firms seeing results with gender targets

Canadian and American companies seem be reluctant to set quantifiable internal gender targets at the risk of being held accountable. Targets continue to remain a more European and Australian practice. Australia, in particular, has shown that even in the industries most traditionally perceived as male, such as mining, these targets produce results by attracting more women in the workforce with management and leadership roles.

% of women in leadership and management positions by country

Canadian corporations at the back of the global pack

To be blunt, Canada doesn’t fare well in LeaderXXchange’s global rankings conducted. First, LeaderXXchange only focuses on the largest publicly-traded companies in North America; it doesn’t rank the entire public company universe. However, it’s pretty clear from LeaderXXchange’s research that Canadian companies are more closely correlated to their American neighbors than they are to Australia (which has a similar industry base to Canada). While 93% of Canadian companies adopted gender policies, just 20.5% of board directors are women(versus 32.5 % in France). While three quarters of French companies disclose the number of women in management, only 31% of Canadian companies do (for more details on the Canadian scene read Don’t Fear the Gender Quota).

“If Canadian companies and regulators were to replicate what Australian companies have accomplished, it would rapidly move from laggard to leader,” says L’Helias. France and Australia adopted similar objectives using different strategies. France and Australia adopted similar objectives using different strategies. France adopted a 40% gender quota for boards and requires reporting on gender pay gaps, promotion gaps and more. Australia adopted the “comply or explain” model.

Changing board rooms, lagging C-suite

It’s become clear that having diversity in leadership and management is critical to attracting and retaining talent – as well as investors. Institutional investors have actually been the driving force behind gender shifts in boardrooms, particularly in Canada and the US. In fact, gender diversity on boards has become the leading issue investors want directors to address, alongside executive compensation and climate change. To hincentivize laggards, several large institutional investors, including New York’s State Comptroller, have adopted strict voting guidelines to vote against nominating committee members of boards that have no women. It’s no wonder that as the proxy season approaches, a number of highly visible companies – particularly in the tech sector – have added women on their boards.

The diversity advantage: Studies are revealing that diverse groups make better decisions. Researchers are finding that diversity brings a level of complexity to the decision-making process that reduces blind-spots and increases the probability of better identifying and assessing risks and opportunities.

Regardless of progress at the board level, the glaring reality is that the world’s largest corporations are stalled in second gear when it comes to hiring women in C-suite leadership roles. Top senior executive officers with the letter C in their title (CEO, CFO, CIO, COO, CSO) lag behind on gender in all markets.

It’s a problem that’s not going to fix itself. Says L’Helias, “Companies need to expand their efforts to fix the leakage in the gender leadership pipeline if they aim to close the gender gap in those critical roles.”

Average % of women in leadership and management positions by region

Some sectors are leading the way

Sectors can and do change. Once a notorious “boys club,” the financial sector now has the largest number of companies that outperform LeaderXXchange’s median score. What gave? For one, L’Helias points out that the 2008 financial crisis created a crisis of confidence. Investors and regulators used their new leverage to focus on improving the industry’s governance, particularly the banking industry. Employees and clients were also adding pressure.

After massive layoffs, the sector had became less attractive to young recruits. Moreover, clients (institutional retail and high net worth) voiced their concern about the lack of gender diversity.  Finally, in the United States in particular, the financial industry was subject to a number of class action lawsuits for racial and gender discrimination.

Number of companies performing above the global average

by sector

Percentage of companies performing above the global average

Nonetheless, while the financial industry has made great strides, and exceeds the median score, few financial institutions land in the top 50. That’s because there is significant room for progress for the C-Suite.

Notably, utilities and manufacturing have also statistically outperformed LeaderXXchange’s median grade.  The sectors are fighting to attract and retain talent at a time of intense competition and new disruptive technologies.

“By creating cultures that are more inclusive and closing the gender gap, these industries are signaling to female candidates, who may not have thought of working in these sectors, that they are welcome,” says L’Helias.

“Perhaps that is what the data is telling us: companies that want or need the change – make the change.”

The LeaderXXchange Gender Diversity in Leadership ranking uses a proprietary methodology created by Sophie L’Helias, President of LeaderXXchange, an international corporate governance expert, experienced board director, former managing director of an activist hedge fund and international M&A attorney in New York and Paris.

LeaderXXchange is a change-driven organization that promotes diversity and sustainability in governance and leadership with investment methodologies and other solutions – most recently the Gender Diversity Exchange, the award-winning search engine dedicated to Gender Diversity in leadership.

The proprietary data used for the ranking is provided by Vigeo-Eiris, a global provider of environmental, social and governance (ESG) research to investors and companies. Based in Paris, with offices around the world, the Vigeo-Eiris team is composed of a diverse team of more than 200 experts from 28 countries dedicated to bringing high quality data.

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The law requires listed companies headquartered in California to have at least one woman on the board by 2019, and at least two or three women – depending on whether boards have more than five members – by 2021. Companies that don’t meet the quota face a financial penalty that would vary from US$100,000-US$300,000 depending on whether the company is facing a first or second violation.

Home to the largest technology, entertainment and venture capital firms, many of which have recently come under intense scrutiny on their treatment of women, the board gender quota could bring the transformative change many investors have sought.

It should also come as no surprise that California is home to CalPERS and CalSTRS, two of the world’s largest pension funds. They have been among the strongest advocates for increased board diversity.

The pension funds point to academic studies which make the investment case that gender diversity on boards – and in leadership more generally – can lead to better financial returns. Moreover, lawsuits and penalties – as well as loss of reputation with customers or employees – can have a major impact on a company’s financial performance.

Since the adoption of board gender quotas in several countries, North American companies have gone from being leaders to laggards against their European peers, a fact that did not escape California’s legislature when it debated the board gender quota bill.

But there is still limited progress for women on boards throughout North America.

The Canadian Securities Administrators’ latest Women on Boards and in Executive Officer Positions report, released on Sept. 27, found that 34 percent of the companies surveyed had no women on their board, while 35 percent had only one woman.

That puts Canadian listed companies behind their Californian peers, where 25 percent have no women.

Though the California law is expected to face many legal challenges, the strong pushback from the American business community against California’s quota follows the same pattern observed in other markets threatened with a board gender quota.

Academics have identified a shift once quotas in place. Directors of companies not subject to quotas were hostile to them, while their peers in companies subject to quotas held a positive view, a survey published in the Harvard Business Review said. Directors where quotas were enforced found their boards had more diverse backgrounds and experiences than in the past and witnessed increases in the number of women in the leadership pipeline.

Recently, our work at diversity research and advocacy organization LeaderXXchange found that board gender quotas could be having an even broader impact.

Applying the LeaderXXchange methodology to track companies’ intentions and outcomes on gender diversity in leadership, we compared 1,385 listed companies in the United States, Canada and France, which adopted a board gender quota several years ago. France has a larger number of listed companies than Norway, which is often used as a board gender quota benchmark since it was the first country to adopt quotas.

Using data from ESG data provider Vigeo-Eiris, our research resulted in three significant findings.

First, the existence of a formal diversity policy does not appear to increase the number of women on boards. While 95 percent of Canadian companies and 85 percent of American and French companies adopted such policies, Canada had 20.5 percent of women on boards, the United States 17.8 percent and France 32.5 percent.

Second, companies without quotas are less transparent on their quantitative results than their peers with quotas. We found that 74 percent of American and 69 percent of Canadian companies do not disclose the number of women in management, compared with only 23 percent of companies in France.

Third, companies without quotas avoid setting internal targets to promote women throughout the leadership pipeline. Once quotas are passed, they are more inclined to adopt their own targets and show better results.

Our research also found that companies don’t necessarily need quotes to set their own internal targets. Fewer than 0.5 percent of American companies and three percent of Canadian companies adopted quantified gender targets for boards, the C-Suite or management – even if there are no quota laws in those countries.

If companies don’t want quotas to get on the legislative agenda or be subject to investors’ wrath, they should walk the talk. Companies could begin managing what they measure by setting internal targets and making the results public so investors, employees and other stakeholders can assess whether their intentions match their outcomes.

Sophie L’Hélias is president of LeaderXXchange, a board director and senior fellow at the Conference Board Governance Center in New York.

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The financial windfall is expected to be enormous. According to Point Carbon, a carbon consultancy owned by Thomson Reuters, the carbon derivatives market is estimated to reach $3 trillion by 2020. That would make the carbon market larger than the subprime mortgage market and hedge fund industry combined – before the 2008 financial crisis.

Already, carbon rights are issued and traded in more than 30 markets, without common quality standards, effective regulatory oversight, almost no transparency and varying degrees of verification.

The perils of carbon derivatives have led to comparisons with subprime mortgage derivatives that were at the root of the financial crisis. But carbon derivatives are even riskier because carbon is not a tangible asset. Unlike holders of mortgages who can claim physical homes, carbon investors acquire rights to … well, air. Tracing air back to a specific issuer or a country of origin is a huge challenge. And since carbon rights are not printed on paper, but registered electronically, there’s a real risk that registries can be hacked and carbon stolen.

Reports of fraud and malfeasance tarnished European carbon markets that remain the world’s largest. The European Commission does little to police it: a Belgian court denied an Italian manufacturer’s request to enjoin the commission to identify the entities that had stolen its carbon permits from the registry.

Wall Street anticipated that President Barack Obama’s election would boost the carbon market. New players and leading financial firms invested and acquired businesses to issue, register, audit, certify and trade carbon rights. But the immediate turmoil of the 2008 financial crisis supplanted the long-term need to reduce carbon emissions.

Meanwhile, the continued economic, social and political ramifications of uncurbed carbon emissions are rekindling countries’ interest to act, with Australia playing a key role. Already, in 2012 Australia and Europe agreed to develop a two-way linked carbon emissions trading system.

A joint Chinese-Australian press release on March 27 announced the development of carbon trading markets “as a first step towards a broader Asia-Pacific carbon market.” Government authorities confirmed that New Zealand, parts of Canada and California would join the regional initiative. Only weeks after this watershed announcement, South Korea announced that it too would adopt a national carbon cap and trade scheme, adding momentum to the initiative.

China’s carbon trading pilot program will occur in two provinces (Hunan and Guangdong) and five of China’s largest cities (Beijing, Chongqing, Shanghai, Shenzhen and Tianjin). The seven pilot cities and provinces have a total population of 250 million people. That’s 10 times Australia’s population and amounts to twice the carbon emissions covered by Australia’s trading system.

Any regional carbon market without China, the world’s largest net carbon emitter, was doomed to flounder. With China’s announcement, Australia now becomes the carbon kingpin that offers traders a pathway to accessing and flooding European, American and Asian markets. Faced with a difficult re-election, Australia’s former prime minister Kevin Rudd dropped the country’s unpopular carbon tax and doubled down on efforts to boost cap and trade. (Ed note: due to the subsequent election of cap and trade opponent Tony Abbott after this article was published, the future of Australian climate policy has grown cloudier.)

All of this activity around cap and trade in the Asia-Pacific region has renewed efforts in North America.

California, the only American state with a mandatory cap and trade scheme, announced on April 19 that it would link its carbon markets with Quebec and expand joint investments in low carbon technologies. Later, during an official visit on July 10, Chinese and American government officials announced that the two countries would jointly develop carbon-capture technologies and take other steps to combat climate change.

That announcement came only days after Obama’s historic speech on climate change at Georgetown University on June 26. And on July 31, officials in California and Australia announced they would work to link their respective carbon markets.

Business is ready to reap the rewards of this new financial frontier. Firms such as Bloomberg and Thomson Reuters have acquired carbon businesses and developed carbon products and services for traders. Financial institutions and hedge funds will trade to see profits grow.

But few will immediately profit more than Atlanta-based IntercontinentalExchange (ICE). Founded in 2000 by the who’s who of oil, gas, and commodities trading, ICE rapidly became a leading owner and operator of exchanges trading energy commodity derivatives.

Benefiting from a loophole that virtually eliminated all regulatory oversight, ICE morphed into a multi-billion-dollar cash machine and went on a global buying spree, recently acquiring the New York Stock Exchange Euronext. ICE is now positioned to become the trading platform of preference as the momentum for cap and trade grows.

While governments have their eyes set on the next United Nations Climate Change Conference in Paris in 2015 with a potential global agreement, they must be mindful of the recent economic and social havoc caused by poor regulatory oversight.

Wall Street will not wait to flood the market and our portfolios with unregulated carbon derivatives that could easily turn toxic. If we don’t want to pay for others’ financial recklessness, the industry’s opaque veil needs be lifted: a new body of rules to oversee carbon derivatives and the industry is needed. Otherwise, we risk having a bitter replay of the subprime mortgage crisis, but on a much larger global scale.

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It’s not what one would call healthy diversity, but there is reason to believe the demand for women directors is growing as CEOs around the world are increasingly threatened with gender quotas. While quotas are not an issue in the United States, business leaders are increasingly feeling pressure from women rights advocates, consumers and investors who seek greater board diversity.

In the recent book Leaning In, author Sheryl Sandberg draws upon her personal experience to offer reasons why even highly educated women tend to lag behind, while their male peers reach positions of economic leadership and power.

The unyielding problem, Sandberg argues, is that women hold themselves back; they are locked into social or behavioural norms, and locked out of the DNA of most businesses. Tackling these barriers requires leadership by example. As chief operating officer of Facebook, Sandberg’s views triggered a national conversation, and for many were considered quite controversial.

The irony was not lost upon the New York Times as it described Facebook’s forced appointment of Sandberg to its male-only board in June 2012. It came after women advocates used Facebook’s social media tools to stage protests at the company’s headquarters, launch a user petition, threaten to boycott the social networking site, and crash Sandberg’s Harvard Business School’s commencement speech. Investors joined the movement as well.

The Facebook firestorm follows years of engagement by institutional investors who have worked behind the scenes to get companies to make boards more diverse. Some business leaders asked for patience. They agreed that board diversity needed to be addressed, but also pointed to the limited talent pool of qualified candidates as a reason for not rushing. Others said there was a lack of empirical evidence proving the economic value of board diversity. They preferred to wait.

In so doing, many business leaders seemed oblivious to the reputational risks they were exposed to as public opinion and investors drew inferences of their positions and a growing number of studies provided empirical evidence that companies with diverse boards outperformed their peers.

With these studies in mind, CalPERS and CalSTRS, two American public pension funds, commissioned the Diverse Director DataSource (3D) initiative, which is owned and operated by GovernanceMetrics International. It is a director database designed as a clearinghouse for corporate director candidates with a more diverse range of backgrounds, perspectives, skills and experience.

In other countries where cultural norms have held women back, legislators have opted for gender quotas. In 2003, Norway led the way by instituting a 40 per cent quota for women within a two-year window. Other European countries such as Spain, France, Italy and Iceland have followed, while Britain and more recently Germany held quotas at bay, after much heated debates.

Corporations in Germany, which has one of the worst records in Europe when it comes to diversity of leadership, are beginning to feel the pressure from politicians, investors and activists.

Deutsche Bank in particular has become a “lightning of criticism” for dragging its feet on leadership diversity, according to a recent Wall Street Journal report. Women represent just 18 per cent of senior management at the German bank, compared to a rate of 42 per cent across the company.

France, by contrast, is the largest market in Europe to have adopted gender quotas that apply to more than 2,000 companies. Boards of all companies, publicly listed or in private hands, with more than 500 employees or €50 million of revenues must have at least 40 per cent women directors.

European CEOs are not alone in feeling the pressure of quotas: Malaysia requires companies to have 30 per cent women in decision-making roles, and the province of Quebec in Canada has also adopted quotas.

While there is debate on the merit of quotas, having them on the table has led CEOs to take the issue more seriously and find ways to narrow the diversity gap.

We are reaching a time when global demand for qualified female directors is resulting in global searches for candidates. French companies, longtime laggards in geographic and gender diversity, are now leading.

American CEOs are aware that international governance trends promoting values shared by American investors and public opinion have crossed the Atlantic. It was not so long ago that the European practice of “say on pay” regarding executive compensation became the most hotly contested and widely covered business issue.

Other initiatives that widen director search, identify skill sets and promote globally diverse director networks will add to the supply pool of exceptional diverse board candidates. Business leaders will tap that pool as global demand for diversity balloons.

American CEOs should not drag their feet too much if they want to build diverse boards and senior management teams out of the best and brightest candidates. If such people are in short supply now, they’ll been in even shorter supply as this diversity trend gathers momentum.

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On May 27, Canadian media and data conglomerate Thomson Reuters announced it would acquire Point Carbon. Founded in 2000, Point Carbon is a Norwegian-based carbon consultancy that provides news, data, and analysis to hedge funds, financial institutions, businesses, and governments. Backed by investors such as Schibsted ASA, Norway’s largest media company, JPMorgan Chase & Co., and Mizhuho Financial Group, Point Carbon has a staff of 137 and offices in Asia, Australia, and the United States.

Thomson Reuters is following rival Bloomberg LP’s acquisition last December of New Energy Finance, a Point Carbon competitor. The news and data conglomerates will provide technology, marketing power, global scale, and a client base that neither New Energy nor Point Carbon could have developed on their own.

Thomson Reuters and Bloomberg made these strategic acquisitions because they saw increasing demand for carbon news and data services and large dollar signs on the horizon.

The real game changer may be the $603 million all-cash friendly tender offer announced April 30 by Atlanta-based IntercontinentalExchange (ICE) for London-based Climate Exchange. The merger could result in the creation of the first global exchange of carbon derivatives.

Derivatives are widely used financial tools that allow investors to trade an asset without actually having to own it. They are attractive because investors can leverage their investment to intensify gains as well as losses. The value of a derivative can rise significantly while the underlying asset barely changes in price, so investors use derivatives to speculate, but also to manage risks.

The target company, Climate Exchange (CLE), was founded in 2003 and is the leading owner and operator of environmental financial electronic exchanges around the world, trading products such as carbon derivatives. CLE operates the Chicago Climate Exchange, the European Climate Exchange and the Chicago Climate Futures Exchange and has affiliated exchanges in Canada, Australia, and China. Richard Sandor, the renowned cap and trade pioneer, is CLE’s Chairman and one of its largest shareholders.

ICE, a leading owner and operator of exchanges trading energy commodity derivatives, was founded in 2000 by the who’s who of oil, gas, and commodities trading. Initial investors include affiliates of BP, Royal Dutch Shell, Total, Duke Energy, Goldman Sachs, Morgan Stanley, Deutsche Bank and Société Générale. It operates in the U.S., the U.K., and Canada.

With 830 employees and a market capitalization exceeding $8.5 billion, ICE is exceptionally profitable. The company reported its sixth consecutive year of record revenues, totaling $994 million in 2009, a 22 per cent increase from 2008. In the first quarter of 2010, ICE’s earnings jumped 40 per cent over the previous quarter.

While some believe the 56.9 per cent share premium offered to CLE shareholders may be too high, the acquisition gives ICE global market share in carbon trading. Moreover, the merger will give ICE a monopoly in certain markets and increase its market power to impose its practices. The combined entity will be the market leader with the technology, know how, and resources to develop and operate carbon and environmental electronic trading exchanges on a global scale.

ICE’s Chief Financial Officer said in a recent Wall Street Journal interview, “The more time we spend with money managers, the more they come to understand our model, and the more interest we get.” Markets seem to believe ICE could once again benefit from the regulatory environment.

The same year ICE was founded, lobbyists representing Enron and other large energy market participants quietly inserted a provision in the Commodity Futures Modernization Act that later became known as the “Enron loophole.” The loophole exempted energy commodity derivatives from being traded on regulated exchanges and virtually eliminated regulatory oversight.

During those years of deregulation, ICE went on an acquisition spree and morphed into a multi-billion dollar cash machine.

It was not until 2008, after public outcry against high gas prices and allegations of speculative oil trading and price manipulation, that Congress closed the Enron loophole. Only then did the Commodities Futures Trade Commission (CFTC), whose hands had been tied, begin to oversee and regulate energy commodity derivatives.

It may not be a coincidence that ICE’s announcement to buy CLE came only days after the CFTC voted against regulating carbon derivatives in a widely reported unanimous 5-0 vote. The CFTC’s decision sent a signal to the market it had not ended the era of low regulatory oversight, giving a boost to innovative carbon financiers.

As public concern about global warming and rising energy needs increases, investors will seek to profit from these trends. In an age of high budget deficits, markets are betting carbon trading will become more appealing to governments that aim to curb greenhouse gas emissions without increasing their deficits.

Yet, if we don’t want to trigger another round of bailouts and want to limit the risk of a crisis provoked by deregulation, legislators and regulators need to step in to oversee the highly innovative, virtual, and increasingly global carbon trading industry.

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