Lack of women on boards ‘added to crisis’

POOR composition of company boards could explain why so many bad decisions were made that led to the current crisis, the European Commission claims.

Despite studies that show boards with gender balance are more successful and profitable, lack of women on boards is also a problem.

Internal Market Commissioner Michel Barnier has launched a review of corporate governance, asking for submissions before deciding if legislation is needed to replace voluntary codes of conduct.

“The theory we have that shareholders keep an eye on the company board does not fit the reality. Shareholders are not active but are passive, free-riding and short-term in their approach, as we saw in this crisis,” a Commission official said.

There has been a lot of emphasis on the rights of shareholders, but it was also necessary to look at their responsibilities, she said.

One problem is that shareholders hold onto their shares for an average of eight months and so, pay little attention to the long-term good of a company.

Big investors frequently delegate asset management to proxy advisory companies who play an important role when it comes to voting millions of shares at annual meetings. There are very few of these companies and, like credit rating agencies, they are very large and offer their services to both sides — shareholders and boards.

The Commission is also looking for opinions on the composition of boards, saying they lack diversity. An average of just 12% of European companies have women on boards, varying from 3% in Italy to 90% in Germany, France, Finland and Sweden.

A lack of expertise on boards such as risk management is also problematic, while some people are on too many boards and cannot give them the time they require.

“Directors failed in their supervisory functions as there was no effective challenge to the management in the boardroom due to the phenomenon of group think,” the Commission said.

Having a voluntary code is not good enough but the Commission will not necessarily prescribe rules that straitjacket companies.

Greater transparency is an essential first step but where to take the matter from there will partly rest on the feedback they get from the consultation that runs from now until July 22.