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Tuesday, November 26, 2013

Corporate Sex Quotas – Key Questions for Debate

At this conference, Gender Quotas at the Global Level: Toward Parity Governance?, which I attended at EUI, most of the experts in attendance focused on parity governance as a regime within the public sphere – quota rules that require political parties balance candidates’ sex or even occasionally reserving seats for women in legislatures. The recent rush to institute corporate board quotas proves more compelling for me right now.  Corporations overpower governmental action these days, and in that sense private sector sex equality may hold more potential to diminish the exclusion of women, non-traditionally gendered men, and other sexes from corporate power. Indeed, one of the reasons behind the Norwegian corporate board quota was a recognition that sex equality had succeeded in the public sector but not in the private.

If states choose to instill sex equality in the private sector, why boards?  Boards appear to sit at the pinnacle of the corporation, and quotas there may foster equality lower in the hierarchy.  The board certainly has symbolic power, but it only plays a secondary role in the decision-making process  - it oversees corporate strategy rather than design it.   One can also argue that the board is a good place for sex diversity precisely because it does not fundamentally alter corporate decision-making.  Inserting women into this “oversight” role may play into increasingly common stereotypes of women as “responsible,” even “risk averse.” Despite the many studies that suggest women’s presence improves profitability, I remain skeptical given that my own research (involving interviews with male and female board members from boards of a quarter of the top French companies) that suggests that it’s newness that makes a difference, not femaleness.

These quotas raise compelling questions: 1) what are the costs to men of such quotas, and will those costs overwhelm benefits?; 2) are explicit sunset provisions a good idea and if so, how long should they last?; and 3) are quicker remedies (like the Norwegian quota’s five years) more effective to shift sex equality norms, or do softer remedies, like reporting requirements, work? and 4) If indeed newness matters, would term limits work? 

Posted by Darren Rosenblum on November 26, 2013 at 10:12 PM | Permalink

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I am curious about your first question, "what are the costs to men of such quotas." It seems sensible to ask whether quotas increase overall welfare (i.e., efficiency). Are you separately concerned about distributive effects of quotas on men? Or is your point (1) an inelegantly stated concern about social welfare?

Posted by: Urska | Nov 27, 2013 9:40:11 AM

My concern for the impacts on men is about distributive effects, as you suggest. It is worth noting that men will lose their board slots or not accede to boards thanks to these quotas. A related cost could be backlash or resentment originating from these men that could undermine equality efforts. One advantage of more voluntary remedies is perhaps that they may garner less resistance.

Posted by: Darren Rosenblum | Nov 27, 2013 11:20:24 AM

Isn't a large part of the upshot here a factual question about the true independence of directors? Although I'm no corporate scholar, it certainly looks like many board members are mere proxies for some particular outside interest group -- a class of shareholders with special voting rights, the CEO, a particular activist shareholder, the former majority owner of a large acquisition, and so on.

Does it make a difference if Zuckerberg appoints a male or female friend to represent his 50+% voting rights on Facebook's board?

Posted by: brad | Nov 27, 2013 12:52:13 PM

That's totally the question, Brad - it may be the case that diversifying the board context does not matter much in terms of the decisions that get made. It will vary tremendously by corporation of course since many have more independent or even more managerial boards than others. However, there certainly are many contexts in which the sex will prove irrelevant because the board members either exercise little discretion or little power.

Posted by: Darren Rosenblum | Nov 27, 2013 1:42:38 PM

"It seems sensible to ask whether quotas increase overall welfare (i.e., efficiency)." I don't think anyone with any economics background makes this claim. These quotas can only be defended on equity grounds, and must be justified on those grounds notwithstanding the loss to economic efficiency that they entail.

Posted by: Douglas Levene | Nov 27, 2013 8:19:11 PM

Believe it or not, Douglas, many people, including some economists, argue the existence of a correlation between women on boards or in management and profitability. Desz and Ross, and another piece by Erhardt make this point. I agree that it's dubious, and really like the work by Amy Dittmar on this point.

Posted by: Darren Rosenblum | Nov 27, 2013 9:22:39 PM

The argument against quotas is often made on very narrow economic grounds that quotas reduce corporate profits or return on assets. But that's an overly narrow way to measure whether quotas increase welfare.

The reason I raised the issue is that Darren raised it first: costs to men vs. benefits to women, and whether the benefits to women exceed costs to men. But the costs and the benefits of a rule like quotas won't be neatly contained to men who are asked to step down and women who are appointed to serve on a board.

My basic point is this: stock prices don't measure welfare. Amy Dittmar's work suggests that stock prices of Norwegian companies declined when the 40% quota was adopted because new boards were inexperienced and were expected to make rookie mistakes. She and her coauthor conclude that this result is "consistent with the idea that firms choose boards to maximize value." Perhaps a decade later, Norwegian boards are more experienced and there's no stock price penalty. Perhaps the penalty persists. But that does not necessarily imply that quotas reduce value as Ahern & Dittmar paper suggests. Rather, one would need to look closely at whether companies with a higher proportion of women pay their workers more, for example, are less likely to commit fraud, fix prices or pay bribes, and comply with environmental laws. None of this is captured by the Ahern & Dittmar study, by design (and I agree that it's otherwise a great study).

Perhaps companies with more women boards are no different along these dimensions than those without women. And then we should have a discussion whether equity justifications overwhelm economic. But to my mind, the economic case is still open.

Posted by: Urska | Nov 28, 2013 10:39:22 AM

Urska - I totally agree that the economic case is still open. My reliance on Dittmar is realy just to undermine what I see as an over-reliance by advocates on utilitarian arguments for quotas. There are studies, like Matsa and Miller, which show that Norwegian companies became more labor-friendly after the quotas implementation. I think your point is particularly true if we consider broader yardsticks for welfare that include stakeholders as well as shareholders.

Posted by: Darren Rosenblum | Nov 29, 2013 3:57:12 PM

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