Lord Davies published his report "Women on boards" on 24 February 2011 (the report). Responding to government concerns about the under-representation of women in the boardroom, Lord Davies and a steering group of business and academic experts (the steering board) took evidence from various sources, including business leaders and women in senior positions in business.

The report makes a number of practical recommendations, including the perennially controversial introduction of targets for female board-level participation.

The report identifies four key business reasons why companies must take the issue of having a diverse board seriously:

Corporate performance. Combining different backgrounds, lifestyles, experiences and skills makes for a richer group, better able to make rounded decisions. In a poll for the Government Equality Office, 60% of respondents believed that all-male management teams tend to think the same way. This largely subjective view is backed by empirical evidence in the report, including that companies with more women directors achieved a 42% higher return in sales, 66% higher return on invested capital, and 53% better return on equity compared with their rivals, and a reduced risk of insolvency where at least one board member is a woman.

A McKinsey study in 2007 found that a critical mass of 30% or more of women on the board or at senior management level produces the best financial results. The reasons are not entirely clear, but some studies suggest that women take non-executive director (NED) roles more seriously, prepare better, and that a homogenous board is likely to produce so-called "group think".

Corporate governance. Evidence suggests that gender-balanced boards have a greater focus on corporate governance. FTSE 100 companies that have more women on the board adopted the Higgs guidance relating to NEDs earlier than other companies, and a Harvard Business School study suggested that women are more assertive on governance issues, such as evaluating board performance.

Accessing the talent pool. Around six in ten graduates in the US and Europe are women. To remain competitive, UK companies will need to tap into this talent.

Market responsiveness. Companies need to understand their customers. Women are thought to make about 70% of household purchasing decisions, and consumer-facing businesses tend to have more female directors than many other industries. In addition, women make up almost half the UK workforce, and they are likely to influence decisions in other areas besides consumer purchasing.

Although the percentage of women directors in FTSE 100 companies has doubled in the last 12 years, progress has reached a plateau. One in five FTSE 100 and half of FTSE 250 companies have no women directors. The report comments that reasons may include:

The report examines approaches elsewhere, including the quota system which has resulted in 40% representation in boardrooms in Norway, and the decision by Spain to give companies that meet a 40% quota priority when allocating government contracts. The European Commission is currently considering whether to impose quotas throughout the EU.

Other countries have adopted less formal measures, such as the US Securities and Exchange Commission requirement to disclose how board nomination committees consider diversity in selecting candidates, and the "report or explain" model favoured by Australia. It is hard to assess the impact of these relatively new measures, but since Australia announced its proposals, 27% of new board appointments have been women, compared with 5% in 2009.

Lord Davies resisted formal quotas and instead made ten recommendations:

Targets. In the next six months, chairmen of all FTSE 350 companies should announce targets for the percentage of women they aim to have on their boards by 2013 and by 2015 (there is no specific rationale set out in the report for the two dates, but they would appear to allow for an initial short-term target and then a longer-term one to recognise the fact that roles do not come up that frequently, thereby allowing for rotation).

FTSE 100 companies should aim for at least 25% women directors by 2015, with one-third of new appointments being women. FTSE 250 companies will have lower targets to reflect a lower starting position and typically smaller boards, but they should also apply the one-third women rule to new appointments.

Disclosure. Listed companies should disclose annually the number of women on the board and in senior positions, and the overall proportion of women in their workforce.

Boardroom diversity policy. The UK Corporate Governance Code (the Code) should require listed companies to establish a boardroom diversity policy, with measurable objectives, and to disclose progress against objectives annually. In parallel, the Equality and Human Rights Commission plans to monitor the extent to which large, private sector employers voluntarily report on the gender pay gap across their workforces.

The Equality Act 2010 (2010 Act) contains a power for the government to issue regulations requiring employers to publish such information, if it concludes that the voluntary approach has not worked.

Enhanced corporate governance statements. Affected companies should report on the above three recommendations in 2012, regardless of whether regulatory changes have been made. Chairmen should sign up to a charter supporting the recommendations.

Board nomination process. Code provision B.2.4 requires that a section of the annual report describe the work of the nomination committee and the process used for board appointments. This should include meaningful information about the search and nominations process and how it addresses diversity.

Investor engagement. Investors should pay close attention to the above five recommendations when considering company reporting and appointments.

Advertising. As the influence of personal networks and lack of advertising for board roles can act as a barrier for women, the report encourages transparency, including the periodic advertising of non-executive positions, but rejects a requirement to advertise all opportunities as too cumbersome.

Executive search. Executive search firms should draw up a voluntary code of conduct covering best practice for search criteria and search processes relating to board-level appointments in the FTSE 350.

The pool of candidates and opportunities. Consideration should be given to candidates from among entrepreneurs, academics, civil servants and professional services, as well as the corporate mainstream.

The report recognises existing efforts to identify, and retain, female talent but notes that current initiatives aimed at allowing women to gain the necessary skills for board appointment could be improved. While not a formal recommendation, it suggests that companies consider board internships, and encourage non-executive positions on non-competitor boards.

Continued focus. The steering board will meet bi-annually and report annually on progress, warning that failure to improve is likely to lead to legislation.

The Financial Reporting Council plans to consult on the proposed changes to the Code within the next few months. In the meantime, the report has received a guarded welcome, along with some criticism. Some chairmen have commented that the 25% target will not be easy to achieve; conversely, organisations such as the City Women’s Network felt that the target was not far-reaching enough. Indeed, 25% is significantly lower than the quotas established in many countries, but Lord Davies believes that this is achievable, ultimately leading to 30% by 2020.

Quotas remain controversial. Many women have concerns about the need for appointments to be seen to be made on merit. Against that background, a 25% target strikes a sensible balance to achieve better representation without tokenism. If companies are to achieve it, however, more women must make the leap to senior management. Companies are already grappling with that problem, and the comments in the report about current programmes, and lack of mentoring and role models make interesting reading.

Research by the organisation Catalyst suggests that women receive just as much mentoring as men do, but do not derive the same benefits. Alternative ideas, such as the board internships proposed by Lord Davies, may therefore have a key role to play.

The positive action provisions in the 2010 Act will also, from April 2011 and for the first time, allow an employer to choose to prefer a female candidate over a male candidate who is "as qualified" where there is under-representation of women. However, there are more systemic factors hampering the progress of women to senior positions that these recommendations do not address. If, as some chairmen suggest, the pool of senior female talent simply does not exist at present for reasons which are outside their control, the pace of change may not be fast enough, with quotas a logical next step.

Monica Kurnatowska and Sarah Gregory are partners in the employment department of Baker & McKenzie LLP.

The report is at www.bis.gov.uk/assets/biscore/business-law/docs/w/11-745-women-on-boards.pdf.