Over at the Boards at their Best blog, James Kristie, editor of the journal Directors & Boards, recently proposed a rule requiring that at least 40 percent of corporate board members be women. Support for diversity on corporate boards has become customary. But, for some diversity advocates, voluntary change is no longer viewed as sufficient.
In 2003, Norway enacted a law setting a 40 percent gender quota for that country’s corporate boards. Firms that fail to comply face dissolution! Now Kristie wonders why we don’t bring just such a law here to the United States, and his is not an isolated view. Having asked the question, though, Kristie sought out a range of opinions from various experts, and these are featured as the cover story in the fall 2010 edition of the journal. You can read my contribution here. Since the length was tightly limited, I thought I’d expand on my thoughts and add a few points I couldn’t make in that shorter format.
It’s no surprise that a proposal like this would be adopted first in Norway. After all, including women in political governance has long been a Nordic tradition — Gro Harlem Bruntland became the first female (and youngest) Norwegian Prime Minister way back in 1981. But is it wise to dictate that kind of diversity in corporate governance? I suggest the answer is no.
There are important differences between politics and business, and it does no one good to blur those distinctions. Governments may need diversity to legitimize their ability to exert coercive power, but firms have only the power granted them by consumers. Whether women or men, Catholics or Protestants, engineers or accountants would strengthen a board’s ability to meet these challenges is best determined by consumers via competition.
Corporations are specialized entities organized to meet specialized human needs. Corporate boards oversee these institutions, seeking to ensure that top managers effectively coordinate the firm’s employees to achieve that task. And the modern corporation has been extremely effective in aligning the self-interest of firms and their employees to advance human welfare, as John Micklethwait and Adrian Wooldridge document so well in their book, The Company. They achieve in the large what Adam Smith noted long ago happens in the small: “It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Corporate boards oversee these management decisions, so the challenge of selecting the appropriate mix of individuals to play these roles is critical. Why would we expect politicians (focused on the general duties of government) to better select the specialized team needed to achieve these highly specialized tasks?
Not surprisingly, proponents see the Norwegian law as a “great success.” Kristie, for example, notes that, “In 2003 women represented 7% of board directors in Norway. Today, that total is 40%.” What else would we expect when the law mandates that at least 40 percent of corporate directors be women? But, while this surely benefits those women who’ve been promoted to the boardroom, is it good for their firms? Is it good for society? A recent University of Michigan study notes that the law has reduced corporate performance. The reasons for this are unclear, though the authors suggest it may reflect the shorter workplace experience of the women appointees.
As in so many cases, politics is impatient. Technological and institutional innovations have reduced the biological pressures for differentiated sexual roles, and those factors are having major impacts (note how the proportion of women in MBA and legal programs has exploded in recent decades). Feminists may argue that “justice delayed is justice denied!” But is it wise to promote those women now playing valuable mid- and senior-management roles to the boardroom before they’re ready? The Norwegian experience suggests not.
The private world experiments and adopts changes as they prove their competitive value. It is not surprising that these factors will operate very differently in different business sectors. But, when innovations prove their worth, they are adopted. Politicians may gain voter support by promoting such policies, but they may well harm consumers far more than we realize. It is far better to strengthen competition and allow the market to determine what firms do — and with whom they select to do it.