Boards are integrating, slowly. But so far the proportion of women on corporate boards is still minuscule.

This is the second article in our series on Diversity. The first one looked at the high cost of discrimination.

Slowly—and in some countries, very slowly—women are gaining more power in business. Even today, however, it’s still lonely at the top: in the US, for example, although women earn over a third of all the MBAs, only 5.2% of Fortune 500 CEOs are women.

About 10 years ago, frustrated by their lack of progress at the top, some businesswomen’s groups began calling on governments to mandate that companies set aside seats for women on their boards of directors. The theory was that by breaking up the old boys’ clubs, the new directors would encourage the advancement of female executives generally.

The argument persuaded policymakers in some of the world’s most advanced economies. A decade later, 13 countries have either passed or are phasing in seat quotas for their largest public companies, including most of the Scandinavian countries, Belgium, Italy, and the Netherlands. Twenty-four have put in place some kind of public shaming, such as requiring companies that haven’t reached a voluntary target to give the regulators a reason, and the European Union as a whole has passed a resolution calling for 40% female membership of non-executive board members by 2020, according to Catalyst, an organization devoted to expanding women’s role in business.

Yet the debate over quotas hasn’t changed since Norway passed the first quota law in 2003. Opponents still argue that a shortage of experienced capable women will mean that the caliber of boards will go down, reducing productivity. Proponents, meanwhile, say that quota naysayers are still making the same old sexist arguments. If adding women members has not made much difference yet, they say, the problem is that the numbers of women are still too limited.

Northern Lights

The data from Norway, the first country to adopt a quota law, should settle some of these questions, but in fact Norwegian data provides ammunition to both sides.

On the negative side, a 2013 study led by Marianne Bertrand, a professor at the University of Chicago’s Booth School of Business, found that the 2003 law “had very little discernable impact on women in business beyond its direct effect on the newly appointed female board members”. Bertrand’s paper shows that the wage gap between male and female workers stayed the same, the number of women in top positions was unchanged, and a decade after the law’s adoption, Norwegian businesswomen in general faced the same challenges they had faced before.

Bertrand did find some good news for quota supporters: one core argument against the policy, a lack of qualified women, did not hold water. At least on paper, the new girls were on the whole better qualified than the old boys. She also noted that the reforms may have a broader impact ultimately than can be seen right now.

However, beyond Norway, other researchers are finding more pluses than minuses in board integration. María Encarnación Lucas Pérez, a professor of management at the University of Murcia in Spain, says that companies with women on board tend to perform better.

“Different studies—including our own research—show that heterogeneous groups tend to be more effective in making decisions due to the diversity of knowledge, experience and social networks. Most women tend to be independent directors and provide greater independence in decision-making of boards, favoring greater oversight and maximizing firm performance,” says Lucas Pérez.

Gender-integrated boards act more independently, monitor the company more effectively, and evaluate executives by clearer criteria. “The presence of women produces better information and supervision of executives and an increased tendency to establish compensation linked to firm performance, better aligning the interests of the owners and executives,” she adds.

Michael Useem, a professor of management at the Wharton School of Business at the University of Pennsylvania, agrees. The co-author of Boards that Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way, says that while cause and effect is hard to prove, he agrees that a variety of studies have shown that diversity in general helps generate more debate, a richer mix of ideas, and more careful decision making.

“Somebody who’s an odd person out, especially if there are two odd persons out in the room, are a little bit more likely to say, ‘are you sure we want to take this step? These mortgage packages just don’t sound right to us,’” says Useem.

Lucas Pérez points to a recent study by the Research Institute, which found that companies with women on the board tend to have lower debt levels than those that don’t. Lower leverage should mean less chance for profit, but not necessarily less risk-adjusted profit: over the past 20 years, Lucas Pérez says, the study found that companies with lower gearing ratios tend to outperform the average. Over the last four years, companies with lower debt levels have outperformed 2.5% per annum over the last 20 years and 6.5% over the last four.

Despite these kinds of numbers, old habits die hard. In Spain, gender-integrated boards seem to be even more a work in progress than in Norway. Between 2006 and 2012, the percentage of female board members has increased from 2.3% of the total numbers of directors to 10.4%. That’s a far cry from the 4% that authors of the country’s corporate governance code had suggested as a target by 2015, but the number keeps climbing about a percentage point ever year.

One aspect that has evolved in many places is an upward revision of the quota being requested. In Germany, for instance, FidAR (Frauen in die Aufsichtsräte or Women on Executive Boards), a lobbying group that focuses on quotas, began asking for a 25% quota in 2008 but now presses for a 30% share.

“There are a lot of businesses that have found out that if you have 30% of a certain group in another group, then they are taken as normal. Then they’re no longer ‘do we have to listen to the girls?’ and ‘can’t we go back to the boys, because they have these very important things to say?’” explains Monika Schulz-Strelow, president of the group.

Right or wrong, quota laws continue to be passed. For example, Germany now seems likely to start mandating board quotas over the next two years. Although Chancellor Angela Merkel is arguably the most powerful woman on the planet at the moment, and her own cabinet is 40% women, she did not announce her support of the plan until recently. Some critics see more electoral calculation than conviction in her conversion, but whatever the motives, Germany’s ruling coalition is now set on passing a law that will require the country’s top 100 public companies to earmark 30% of their board seats. “This law is an important step for equality because it will initiate cultural change in the workplace,” Merkel told the German parliament in November.

The Market Votes Yes

But business may soon be driving more board diversity than governments, as institutional investors seem increasingly persuaded that whether board diversity is a best practice or a leading indicator, it’s something they like to see in a stock.

“Investors’ calls for greater gender diversity appear to be nudging nominating committees to find more women to serve on boards at US firms,” argue analysts at Institutional Shareholder Services (ISS) in a recent report. “Overall, women still account for less than 20% of all board seats at these large cap firms, but growth—prodded by a growing number of pension fund and other activist groups—continues at a steady one-percentage-point-per-year pace and, at this rate, should reach 25% before the end of the decade.”

In the US, 30% of new board nominees at S&P 500 companies were women, up from 15% in 2008. New nominees to Russell 3000 companies have been 22% female in 2014, up from 11% in 2008. In terms of sitting directors, women comprise on average 18.7% of S&P 500 boards thus far in 2014, up from 16.3% in 2011, according to a 2014 report from ISS.

Female representation on boards of the London Stock Exchange FTSE 350 firms grew to 18.5% in 2014 (up roughly 8 percentage points from 2008), while that for Canada’s TSX Composite index increased by roughly 4 percentage points to 14.6%, according to ISS research.

For its part, ISS, a research company that recommends which proxies investors should sign and suggests best practices for governance, now holds that well-run companies should always include women on the board.

“The old style of people from a small catchment—same clubs, same colleges, small world—will no longer cut it. It becomes a competitive disadvantage,” says Useem.