Equity, Diversity and Inclusion

Quotas are a diversity quick-fix, but companies must dig deeper

Recent studies claim that greater diversity could improve operating results by 55% and increase return on equity by 35%.

Gender diversity in corporate leadership isn't just the right thing to do – it's good for business.

Eric Cantor
Vice-Chairman and Managing Director, Moelis & Company
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Gender Inequality

This article is part of: World Economic Forum Annual Meeting
  • Many companies have instituted quotas to address gender diversity.
  • Companies are more diverse at the entry level, but they must work to maintain it higher up the corporate ladder.
  • It's ultimately impossible to achieve gender diversity without changing the corporate culture.

What if a staffing and leadership change could improve your company’s operating results by 55%, and increase return on equity by 35%?

Two recent studies conclude greater gender diversity on boards and in management yields such results.

While other studies produce slightly different numbers, the unmistakable conclusion is that gender diversity in corporate leadership isn’t just the right thing to do, it is good for business. The question is not whether to work towards greater diversity, but rather, how.

Have you read?

Many European countries have instituted hard or soft quotas for female representation on corporate boards. California recently followed suit, and legislation is pending in other states. As the chart further below shows, quotas have improved board diversity, though such quotas risk becoming a ceiling rather than a floor. However, greater boardroom diversity has not carried over into senior management, where it's obviously harder to impose numeric targets.

Quotas may be a quick fix to boosting female representation on boards, but they do nothing in and of themselves to remove barriers preventing many women from rising up the corporate ladder in the first place. We are in need of a broader, more comprehensive approach.

With little fanfare, Republicans and Democrats in the US House of Representatives recently showed what a better approach might look like. The House passed a bipartisan bill, supported by the business community, which focuses on diversity disclosure for boards and executive officers. The legislation also requires the development of best practices for obtaining greater diversity. In short, it is an input-focused approach with disclosure of outcomes to encourage accountability.

While the legislation has not yet been enacted into law, and studies are still to be carried out, such an approach can help company leadership focus on the diversity of their pipeline for senior management and directors. Ideally, this includes the whole of the enterprise, starting with initial hiring and carrying through to CEO selection.

A recent McKinsey study looked at the pipeline within law firms for seven positions, ranging from junior associate to board of directors. The diversity achieved at the junior, mid-level and senior associate levels dropped significantly at the next two rungs: non-equity partners, and counsel and equity partners. Similar trends hold in other industries. A constriction of the pipeline of female talent in the middle of an organization means fewer women are available to promote into the C-suite and ultimately to corporate boards.

To achieve greater diversity at the top, companies have to answer the following questions:

1. Are we initially hiring a diverse workforce?

2. Is our initial diversity breaking down somewhere in the promotion process? And if so, why?

The increase in female representation among college graduates, combined with specific recruitment goals, has helped many companies achieve a more diverse entry-level workforce. Once a company has achieved diversity in new hires, it is important to maintain it. One key element is employee support and benefits.

While the number of American companies offering paid parental leave has increased in recent years, it still only stands at 40%. It's even more dismal from the employee perspective, as just 17% of the civilian workforce has access to paid family leave. Expanding the availability of paid leave is a key step to help women, in particular, stay in their job and on their career track. However, just having the right policy in place will not close the gap. Senior executives must create an acceptance around both men and women exercising family-leave benefits, and participation must be reinforced at a senior level. Otherwise, when women utilize the benefit, it could come at the cost of future career advancement.

Representation of women at differing stages within the talent pipeline
Representation of women at differing stages within the talent pipeline Image: McKinsey

Even if company leadership gets everything right around paid leave policies, if future promotions are based on factors such as “face-time” in the office, that likely punishes the mother who puts in just as many hours but needs the flexibility to do so outside the office. Similarly, other factors that often go into consideration for promotions, such as relocating or working abroad, can disproportionately impact women.

The challenge goes beyond official policies related to benefits and promotion to corporate culture. Effective business management requires collegiality and trust. How is that built in your company? If it's built through the proverbial happy-hour networking, it's obvious how that can penalize women. But it's equally possible programmes designed to promote women inadvertently silo them, preventing them from forming the broad internal relationships critical to success.


What's the World Economic Forum doing about the gender gap?

Cultures are one of the hardest things to get right in any organization. Strategies that work in one firm may not work in another, but it's virtually impossible to achieve greater gender diversity without getting the culture right. Ultimately, a strong corporate culture will recognize the strengths and talents of individual employees, ensuring that everyone is able to provide their maximum contribution and output and creating a “win/win” for the company and the employee.

Ultimately, to achieve greater gender diversity in leadership, company leadership must focus on the entirety of their talent pipeline, recognizing the problems are likely different at each rung of the ladder. Although this approach is harder than the quick fix of a quota, there is little doubt that it is more likely to result in success both for the cause of diversity and for the cause of improving business performance.

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