Want More Female CEOs? Then Put More Women on Boards

After a highly successful career on wall street, Jane DeFlorio retired from Deutsche Bank USA at the age of 43 to turn her attention to serving on corporate boards.

The decision was mostly a personal one: she was raising twin boys and, after 16 years of working 80-hour weeks in investment banking, DeFlorio wanted to slow down. She viewed board service as a way to do that while still staying actively engaged in corporate decision-making.

She also saw it as a chance to encourage top executives at public companies to think more about diversity in their boardrooms. In her years of experience advising retail and apparel companies, she witnessed many boards and chief executives limit director searches to their own internal networks, resulting in vacant seats being filled largely with white men.

The numbers are improving, but women and minorities remain underrepresented, to the frustration of women like DeFlorio and Linda Rabbitt, the CEO of Rand Construction in Washington, D.C., and a director at the consulting firm Towers Watson.

In 2012, Rabbitt was named by the Washington Business Journal as corporate director of the year, but at the awards ceremony all she could think about was that only two of the 10 honorees were women. The other eight were white men.

"This is so wrong," Rabbitt recalls saying to the others at her table after receiving her award. "The best and the brightest board members can't be 80% white males."

They aren't just frustrated with the composition of boards. C-suites at public companies still remain overwhelmingly male and a growing number of women are coming around to the idea that real change starts in the boardroom. A study from Catalyst, a nonprofit whose mission is to expand opportunities for women in business, has shown that companies with higher percentages of females on their boards tend to have a higher-than-average number of female corporate officers.

"It's a broader thing than just being on a board," DeFlorio says. "It's about women as CEOs, women being in senior positions at companies and feeling like they have an opportunity [to advance] and that there's not this glass ceiling in place."

DeFlorio is now in position to exert such influence. Less than a year after she retired from Deutsche in 2013 she was named to the board of the apparel company Perry Ellis. It was the company's only other female board member, Alexandra Wilson, who put DeFlorio on the board's radar.

Six months later, in May of this year, DeFlorio was named lead director on the seven-member board.

DeFlorio is in the minority not only on the Perry Ellis board, but on boards in general: only about 19% of directors at S&P 500 companies are women, according to Catalyst. But the push for greater diversity on corporate boards has gained momentum in the United States and other developed countries over the last several years.

In some countries it's become a public policy issue: France, Belgium, Norway, India and several others have passed laws in recent years that require corporations to improve the gender balance on their boards — with mixed results.

But mostly it's been a grassroots effort spearheaded by women of influence. In the United Kingdom, a group of female executives, led by Helena Morrissey, the CEO of Newton Investment Management, formed a nonprofit called the 30% Club in 2010, with the aim of boosting female representation on corporate boards to 30% or more by the end of 2015. An offshoot of the U.K. organization launched in the United States last year, setting its 30% goal for 2020.

In 2013, the International Women's Forum and George Washington University established a program whose sole mission is to prepare women to serve on corporate boards. Its graduates include DeFlorio and at least two bankers in our Most Powerful Women rankings, Barclays' Barbara Byrne and Zions Bancorp.'s LeeAnne Linderman.

Firms with higher percentages of female directors tend to outperform their less diverse counterparts, but that issue is beside the point for many women who serve on or want to join corporate boards. As they see it, a more diverse board will make better decisions that affect not just the bottom line, but also the company's reputation, its standing with employees and its stature in the communities it serves.

"We all have a different perspective that we bring to any table because of our birth experiences, our educational opportunities, life experiences, business risks we've taken," says Linderman, the executive vice president for retail banking at Zions. "When you add gender and ethnicity into that, it's going to be an even richer, more inclusive conversation that will lead to better decisions." (See more from Linderman on the importance of gender diversity in this video.)

TOUGH CHOICES

A good example of a company putting reputation above profit was CVS Health's decision last year to stop selling tobacco products, and Anne Finucane, the head of global strategy and marketing at Bank of America, was right in the middle of it.

The pharmacy chain stands to lose as much as $2 billion a year in revenue by no longer selling cigarettes, cigars and smokeless tobacco, but Finucane, who has been a director at CVS since 2011, says the board concluded that selling tobacco was inconsistent with CVS' mission.

Though a big believer in board diversity, Finucane downplays any link between her gender and the positions she takes as a director.

"I don't think it's gender as much as it is my professional background," says Finucane, a former advertising agency executive and a longtime bank marketing chief. "I've been dealing with consumer and client research, public policy, marketing communications all my life. That's my strength: to look at things from a reputational point of view."

As Finucane and other female directors suggest, gender is no substitute for professional experience. And nobody – male or female – is advocating for unqualified directors to be added solely on the basis of gender.

But any company that wants to achieve its full potential should be striving for board diversity, according to Edward Kamonjoh, a researcher at Institutional Shareholder Services. In a report he authored last year on gender diversity at the board level, Kamonjoh concluded that there's a "positive correlation between more diverse boardrooms and superior company performance" on financial and nonfinancial measures. He pointed out that firms with higher board representation not only generate higher returns for investors, they tend to have stronger corporate governance and ethics practices, a better feel for consumer preferences and are more likely to consider sustainability factors when setting corporate strategy and making business decisions.

THE 30% RULE

The ISS study also found that female representation on boards of S&P 500 companies increased three percentage points between 2008 and 2014, with the greatest gains occurring in 2013 and 2014. Roughly three in 10 board vacancies were filled by women in 2014 — an all-time high — and ISS says that if the pace holds up, women should hold 25% of board seats by the end of the decade.

That's progress, but still short of the 30% Club's stated target. Why 30%? It's widely believed to be the figure at which women's voices are truly heard at board meetings, says Morrissey, the founder of the 30% Club (and, coincidentally, the mother of nine children).

Morrissey based the 30% figure on a finding by Deutsche Telekom in 2009, which at the time had a ratio of 12% women in senior and middle management but had planned to raise it to 30% by the end of 2015. "Thirty percent does seem to be the tipping point where you're heard as a person," Morrissey says. "Below 30% and you're considered part of a minority."

Linderman says she's seen that first-hand on a nonprofit board on which she serves. She was the second woman added to the board but says that it wasn't until a third was added that she gained the confidence to speak more freely at meetings.

"It's as if I no longer think of myself as the female board member," says Linderman, who is also seeking to join at least one public company board. "I just feel more valued."

The diversity push is helped by the fact that many older male board members are retiring and are being replaced by younger ones. Linderman says that she's never felt mistreated by men in their 40s or 50s because they are so accustomed to working with female executives. Older men are a different story. When Linderman first joined the nonprofit board she noticed that one older man interrupted her repeatedly but didn't interrupt other men. She brought it to his attention after one meeting and, to his credit, she says, he apologized and has not interrupted her since.

PREPPING FOR SERVICE

It's one thing for a woman to say she wants to serve on a corporate board, it's another to be board ready.

Despite her years in investment banking, DeFlorio didn't feel she could pursue a corporate board seat immediately after retiring from Deutsche, so she joined the board of the New School, a university in New York that houses the renowned Parsons School of Design and four other schools in the arts, sciences and humanities. She immediately asked to be chair of the audit committee, an admittedly "thankless" job, but one that she believed would best prepare her for a corporate board seat.

Next she applied for a fellowship with On the Board, the program jointly run by the International Women's Forum and George Washington University.

Rabbitt, who is Towers Watson's lead director, founded On the Board to provide talented women with an opportunity to position themselves for board seats. Her opportunity came just by chance — a woman who was leaving the Towers Watson board recommended her — but she knows full well that many other women, no matter how accomplished, don't have those types of connections.

"Serving on boards has been so fascinating, so enriching that I wanted other women to have those experiences," says Rabbitt, who funded the two-year pilot program with shares of Towers Watson stock that she received as compensation for her board service.

It's a competitive program — only 15 of roughly 100 applicants are accepted — that gives highly accomplished women who have never served on a corporate board a crash course on what they need to know. Topics include spotting corporate fraud, contending with cybersecurity threats and understanding the duties of an independent auditor. (The program is currently on hiatus as it transitions to another university.)

Armed with these new experiences, DeFlorio put word out late last year that she was looking to join a corporate board and it wasn't long before she heard from Perry Ellis, whose management team she knew from her investment banking days. She has since turned down chances to serve on other boards that she says weren't the right fit, but she expects opportunities to continue to come her way.

"Getting that first one is the hardest, but once you get one directorship down, you're going to find that other opportunities will come along," she says.

The "fit" is an important consideration for aspiring directors and the board itself. Boards need to be conscious of maintaining good chemistry when adding new members, says Deborah McWhinney, a former Citigroup executive who left her job because she wanted to serve on a corporate board.

"There are so many things that could happen — like the tech bubble bursting or the financial crisis — that can stress a company," says McWhinney, who now has two board seats, one at the engineering company Fluor and another at the analytics company IHS Corp. "You'd better like and respect the people you are serving with because your ability to work well as a group will really be tested in bad times."

THE C-SUITE EFFECT

Manisha Girotra, the CEO of Moelis India, can attest that one directorship will often lead to more opportunities. Before being asked to launch an Indian operation for her New York investment bank in 2012, Girotra worked for UBS, where she was unable to serve on corporate boards. Moelis has no such restrictions and now Girotra sits on the boards of four companies in four different industries: manufacturing, technology, pharmaceuticals, and oil and gas.

Girotra has long been interested in serving on corporate boards for two reasons.

First, she believes that being on the inside of companies that resemble the types of companies she advises helps her make better decisions as a banker and offer better counsel to clients.

But perhaps more important, Girotra wants to do her part to discourage women from leaving the workforce once they have families. It has long frustrated Girotra that many talented women put careers on hold or even quit work entirely when they hit their mid-30s and she believes that trend will slow if more women pursue board seats.

Women on boards are not just role models, she says; they can facilitate real change within organizations that could help female managers stay on their career paths. That's especially important in countries like India, where boardrooms and executive suites are even more dominated by men than in the United States.

"Boards and CEOs aren't doing enough to retain talented women, and I feel strongly that by getting onto these boards I can facilitate real change," says Girotra. "Bottom up it can happen, but not fast enough because women don't speak up enough. We need a top-down approach."

Studies have shown that there is a positive correlation between the number of women on boards and the number in senior executive positions. According to Catalyst, companies with 30% female board members in 2001 had, on average, 45% more female corporate officers five years later compared to firms with no women on their boards.

The proportion of women in the boardroom matters too. Companies with two or more women on their boards in 2001 had 28% more female corporate officers by 2006 than companies with just one female board member.

Anecdotally, Girotra says, when women are added to a board, female employees at that company notice.

"It inspires them to believe that the company they work for believes in diversity and is acting on it," she says. "That's very powerful for young women."

WHAT ABOUT QUOTAS?

Policymakers in India are trying to improve gender balance by now requiring that all public companies there have at least one woman on their boards. Until that law took effect at the start of 2014, Girotra says you could count on one hand the number of female independent directors — those who aren't family members — at public companies.

There was a time when Girotra would have opposed such mandates, but her position has changed. "For 15 years, if I was asked this about quotas, I would have said they were terrible; it should all be equal and based on performance," she says. "But frankly, companies aren't thinking about this and you can see this from the abysmal representation of women on boards. I've changed my view to now say that quotas are good."

Still, meeting quota requirements can be difficult — just look at companies in Italy, where many of them fell well short of a mandate to have females hold at least 33% of board seats by the start of 2015. Or in Norway, where many companies have delisted from the public markets rather than try to comply with a 2008 law stipulating that their boards be made up of at least 40% women.

Many women in the U.S. financial services sector oppose quotas. More important, they say, is to get buy-in from investors, other board members and senior male executives.

"I'm not sure that I would put a number on it," McWhinney says. "It really depends what your market is and what your talent pool is."

But, she adds, "If you don't have the best team and your competition does, you lose. If you're not representing the global population, you will not react as fast as you need to react. You need that diversity of thought in order to be a top-notch company."