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European Union Pushes Discriminatory Gender Quotas for Corporate Boards

The European Union (EU) could not keep member states like Greece from cheating on EU budget rules, resulting in Greece's fiscal collapse and the current European financial crisis. But now, the EU government, which cannot manage itself effectively, wants to micromanage private companies in the EU by dictating that they use gender quotas on their corporate boards -- a discriminatory, economically-destructive demand that would be illegal if imposed on U.S. companies. As Bloomberg News recently noted, Greece was able to enter the Euro Zone "after claiming its deficit was less than 1 percent of gross domestic product, well within the bloc’s 3-percent threshold. European Commission reports have since revealed Greece’s budget hasn’t been within the 3-percent limit a single year since its accession. Greece went unpunished except for being told by the EU to tighten up its bookkeeping."

Rather than focusing their energy on preventing the EU ship from sinking, or fixing the EU's flawed constitutional architecture, EU officials are now doing the equivalent of rearranging the deck chairs on the Titanic. The EU is now eying 40-percent quotas for corporate boards, a mandate already imposed in several countries such as Spain and France. Such a quota is backed by the EU's Justice Minister, Viviane Reding, who wants the EU to adopt Europe-wide laws that would impose such quotas even on EU member countries that have traditionally avoided such micro-management of corporate affairs.

Gender quotas could provide a big boost for nepotism on corporate boards in some fields. In sectors like metallurgical engineering, there are just not very many women with the required knowledge and expertise to sit on a corporate board. So a company in such a sector, confronted with a gender quota, will probably pick female relatives of existing corporate insiders to sit on the board. If you have to put someone who is largely ignorant of your business on your board, it might as well be someone who will do what others on the board with more knowledge advise them to do -- and they are more likely to take your advice if they are your relative than if they are not related to you.

After Norway adopted gender quotas for corporate boards -- requiring companies to have boards of directors comprised of at least 40 percent women -- large numbers of inexperienced people ended up as corporate directors. “A study by the University of Michigan found that this led to large numbers of inexperienced women being appointed to boards, and that this has seriously damaged those firms’ performance.”

But this didn’t stop other European countries such as Spain and France from following Norway’s example and mandating 40-percent quotas (Spain’s quota requirement is already in effect, while France’s law goes into effect in 2017). Other countries, like Italy, adoped lower quotas (Italy's is 30 percent). The European Parliament has previously recommended that all member countries adopt such quotas in their national laws.

The Economist recently opposed such quotas in an editorial. (Corporate law scholars such as Stephen Bainbridge have also criticized such proposals.) As The Economist later noted, Europe’s race towards quotas is at odds with company practice and legal norms elsewhere in the world:

Hans Bader, a senior attorney at the Competitive Enterprise Institute in Washington, compares the situation in Europe with that of America:  “From an American legal perspective, laws mandating quotas for women on corporate boards in European countries seem utterly bizarre. In America, such quotas would be struck down as a violation of the right of male directors to equal treatment.  The Supreme Court ruled in its 1989 Croson decision that quotas violate, rather than promote, equality, calling it ‘completely unrealistic’ to expect groups to be represented in each field or activity ‘in lockstep proportion to their representation in the local population.’ American courts have struck down quotas and gender-balance requirements for boards and commissions in cases such as Back v. Carter.  They have allowed companies to challenge quotas on behalf of their male or white employees in cases such as Lutheran Church Missouri Synod v. FCC. And they overturned government-mandated preferences for female business owners in the Lamprecht case.” . . . Ranko Bon, writing from Motovun in Croatia, thinks it is lucky that the idea of female quotas is catching on in Europe only: “America is largely free of it, and much of Asia is still blissfully unaware. As Europe is increasingly irrelevant in world business, the damage will be limited and perhaps even tolerable.”

Defenders of these quotas argue that quotas are good for business because companies with more women on their boards do better. But even if such companies typically make more money, this claim confuses cause and effect, and puts the cart before the horse, as studies like the University of Michigan study illustrate. With each passing year, the percentage of female business professionals in Europe rises, as does the percentage of female college graduates. The pool of female qualified applicants in a company for a directorship naturally rises over time. So a company that is not growing and hires few new people will naturally have less women in its ranks than a company that is growing and hiring new people. The company’s growth does not occur because of the increase in women in the company; rather, the increase in women in a company occurs because of the company’s prior and pre-existing growth.  Countries like Sweden that have faster-growing economies and less corruption and red tape than places like Greece also have higher female participation in the labor force, and thus, higher numbers of women on corporate boards: "Northern countries like Finland, Sweden or Latvia, which don't have quotas, boast the biggest percentage of women on company boards in Europe."

This is also why growing companies in the U.S. tend to have more Asians, Hispanics, and women than companies that aren’t growing: the percentage of each graduating class that is Asian or Hispanic or female grows each year. It’s not because affirmative action helps company performance --it doesn’t. Rather, it’s because growing companies hire new blood, and new blood is more heavily Asian and Hispanic (and female) than the older generation, among whom business people are overwhelmingly white males. My brother’s investment firm was much more heavily minority than the ranks of the company its principals came from (Deutsche Bank), and the financial industry as a whole, but it did not practice affirmative action, and would have regarding doing so as bizarre. The reason for its high minority percentage was because the company’s managers were young, and young people as a group are more heavily minority and more heavily non-white than their elders, due to immigration (immigrants are disproportionately non-white) and a higher non-white birthrate.