Lord Davies' report and recommendations were published earlier today: see here (pdf). There is further background information, including a podcast, here. Lord Davies recommends (to quote directly from his report):
- All Chairmen of FTSE 350 companies should set out the percentage of women they aim to have on their boards in 2013 and 2015. FTSE 100 boards should aim for a minimum of 25% female representation by 2015 and we expect that many will achieve a higher figure. Chairmen should announce their aspirational goals within the next six months (by September 2011). Also we expect all Chief Executives to review the percentage of women they aim to have on their Executive Committees in 2013 and 2015. ...
- The Financial Reporting Council should amend the UK Corporate Governance Code to require listed companies to establish a policy concerning boardroom diversity, including measurable objectives for implementing the policy, and disclose annually a summary of the policy and the progress made in achieving the objectives.
So not merely affirmative action, but also quotas for women. Is it clear that gender diversity really improves board performance or is this just political correctness? My take is that it's the latter.
As Kim Kraweic observes:
One has to wonder ... if gender diversity is so obviously and overwhelmingly positive for the bottom line, why aren’t corporations pursuing female directors with a vengeance? Is the old boy network so entrenched that corporations are unwilling to gender diversify their boards, even at the expense of higher profits and at a time when competition for scarce profits has never been more heated?
Although that’s possible, of course, the story is likely far more complicated. Unfortunately, there is no consensus on the critical question of whether board diversity improves firm performance. Whereas some studies find evidence consistent with the theory that board diversity positively affects firm performance, others find no support or even contradictory evidence. A recent study concluded, for example, that the increased monitoring associated with more women on boards can have a negative effect on well-governed businesses, and some other studies find similar negative effects or no effect at all. (See here for a literature review of these empirical studies)
These divergent results may be due to a number of factors, including the thorny causation issues posed by attempts to study diversity and firm performance, and the different tools employed by researchers seeking to address that problem. In short, although board diversity could create value for shareholders, the opposite could also be true. More successful firms could have greater resources to dedicate to the pursuit of board diversity. Or more successful firms could be under greater public scrutiny and pressure to diversify their boards. Or female and minority directors could be scarce commodities who can choose to serve only on the boards of more successful firms. (See here for a discussion of reverse causation and other problems related to empirical research on board diversity).
Confusion on this point has sometimes led to unwarranted conclusions about how well we understand the effects of corporate board diversity. For example, popular studies, such as Catalyst’s ..., that consistently document the superior financial performance of firms with more female directors are frequently cited in the press and by industry and advocacy groups as proving “the business case” for board diversity. In reality, we know very little about whether, how, why, and under what conditions board diversity impacts firm performance.
This lack of clear support for the business case for board diversity is consistent with our preliminary findings in Narratives of Diversity in the Corporate Boardroom: What Corporate Insiders Say About Why Diversity Matters, undertaken with Lissa Lamkin Broome and John Michael Conley. Our research suggests that corporate insiders appear not to have arrived at a master narrative to explain the pursuit of diversity on boards of directors. Instead, their accounts stress a variety of factors and feature few concrete examples. Elements of each of the diversity rationales discussed in my prior post, Money Is Diversity or Diversity Is Money?, appear, but it is largely a theoretical narrative without concrete detail -- a story without substance. When invited to elaborate, subjects have digressed into instances that had little to do with race or gender, and in fact have often distanced themselves from demographic variables. And none expressed anything more than a hope that diversity would correlate with business performance. Despite their focus on the business case for diversity, overall our subjects do not tell that story concretely or consistently, instead falling back on a story that is more similar to “it seems like a good thing to do.”
As her post suggests, the research in this area is even more fraught with problems than is the norm with empirical legal studies. What if diversity decisions are endogneous? How much do we discount the many studies done by folks with a political ax to grind? And so on. On balance, however, it looks like there simply is no compelling business case for mandated diversity.
Whether or not one buys the basic pro-diversity story, moreover, there is a separate case to be made against the use of quotas. In connection with Scandanavian proposals to adopt quotas, Christina Hoff Summers explained that:
Norway recently imposed a 40 percent quota for women on its corporate boards. One of the chief architects, a former Minister of Trade and Industry, gleefully told reporters that it was the social equivalent of a “nuclear bomb.” Sweden should resist the temptation to detonate a similar device in its own corporate boardrooms. In the United States, we have rejected gender quotas because we have found them to be demeaning to women, detrimental to companies, and an affront to common sense.
The Norwegian model will create a two-tier system of corporate leadership: men will be chosen because of their value to the company, women simply because they are women. If Sweden imposes a similar radical constraint on its board memberships, every female director--regardless of her talent--will inevitably bear the stigma of special treatment. ...
The best way for Norway and Sweden to encourage and support female entrepreneurs is to foster a healthy, dynamic business environment. A burdensome quota system is antithetical to this end. American women are advancing in the corporate world far more rapidly than European women--not because companies are forced to hire them but because, in our robust economy, companies cannot thrive without their talents and perspectives.
The judgments of the marketplace are relentless and utterly heedless of political considerations. Swedish firms must compete every day with companies from Japan, India, and China that are intent on commercial success and oblivious to gender politics. Highly expert and focused corporate leadership is critical to Sweden’s success in this environment. Of course, such leadership will include women.
A corporation that discriminates against women in senior management or in the boardroom will pay a heavy price, losing out to firms that do not. This powerful natural incentive is a much more effective device for women’s progress than anything the government might impose--and it replaces the stigma of quota-shadowed women directors with the high prestige of women who have succeeded in a demanding environment by dint of their own efforts and abilities.
Conversely, as Justice Scalia observed in a related context, "even 'benign' racial quotas have individual victims, whose very real injustice we ignore whenever we deny them enforcement of their right not to be disadvantaged on the basis of race." The same is equally true of gender quotas.
In sum, there is neither a business case nor a moral one for quotas in the boardroom.