The manager of the world's largest sovereign wealth fund wants companies to increase the diversity of their boards, bringing more women to executive positions.
Norges Bank Investment Management, which runs the 11.1 trillion Norwegian kroner ($1.3 trillion) Government Pension Fund Global, published a new position paper on board diversity on Monday. The beliefs outlined in the paper will form the basis for discussions with company boards.
"Weighing the arguments, we consider board diversity as a contribution to the overall effectiveness of the board and an indication of an effective board nomination process," the paper said. "Diversity will likely bring additional perspectives and approaches to the board's discussions and ultimately improve the quality of its decision-making process."
NBIM acknowledged that there are many different dimensions when it comes to diversity, but said it is "particularly concerned by persistent underrepresentation of women on boards."
It said that, on average, 26% of board members are female in G7 countries. European regulatory requirements for female representation on boards vary from 30% to 40%, the paper said.
Underrepresentation of women may indicate that a company board is "recruiting too narrowly and does not have a clear view of the full range of backgrounds and competences required to be effective. Based on our experience from markets with mandatory gender quotas for company boards, we do not believe that gender diversity will crowd out other qualifications."
Companies with boards that are not diverse also risk not being able to maintain the trust of their customers, investors and society over time, NBIM said — a particular concern for long-term investors.
The paper sets out other arguments for and against diversity on boards. It said diverse boards "enjoy greater legitimacy among a broader range of stakeholders. Gender balance on the board may also contribute to improving gender balance in the company."
On the against side, it is unclear whether diversity on a company's board improves performance, so "it may not be in the interest of shareholders to promote this issue." Further, some companies will "embrace diversity" without the input of shareholders, with more women in management positions and regulatory requirements for gender quotas set to bring increased female representation, the paper said.