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Diversity quotas on corporate boards can work

ON Sept 30, Governor Jerry Brown of California signed a Bill requiring companies with main executive offices in the state to have at least one woman on their boards by the end of next year. By 2021, companies will be required to have at least two or three women directors, depending on their size. Failure to comply will result in fines of US$100,000 to US$300,000.

This is, essentially, a quota that forces large companies to include women on their boards. Other countries, including Belgium, Finland, France, Germany, Iceland, Italy, the Netherlands, Norway and Spain, have such quotas, but this approach to diversity is a novelty on this side of the Atlantic.

It's an idea whose time came long ago. In California, a quarter of public companies have no women on their boards. That's particularly egregious, but the pattern holds across the country. Among S&P 500 companies, 2.8 per cent had zero women on their boards in 2015; overall, women held less than 20 per cent of board seats. Less than 4 per cent of board seats at Fortune 500 companies were held by women of colour in 2016.

So far, policies for increasing board diversity in the US have mostly consisted of asking companies to change. It hasn't worked. The share of women on Fortune 500 boards increased less than five percentage points between 2010 and 2016. California passed a resolution in 2013, urging public companies in the state to add women to their boards by 2017, but fewer than 20 per cent met the deadline.

Quotas, on the other hand, are pretty effective. Norway implemented a 40 per cent requirement in 2003; Norwegian companies met the target within five years.

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Warnings that the quota would result in the appointment of unqualified women proved to be unfounded: After the new policy, the qualifications of women on corporate boards improved. Italy has similarly increased the share of women on boards, and also increased the overall levels of education among board members, with no negative impact on company performance.

But California's new rule is already in danger. It faces potential legal challenges from opponents like the California Chamber of Commerce, which has argued that it may be unconstitutional.

Before it was even signed, a commissioner of the Securities and Exchange Commission, Hester Peirce, attacked it, saying it "effectively forces corporations, including non-California corporations, to consider all women as stakeholders". He added: "Opening such a wide door introduces uncertainty and political influence into corporate operations."

The SEC should instead examine its own paltry efforts to boost diversity on corporate boards. The only rule the US has on this subject requires companies to report how they consider it in their filings to the SEC. But the meaning of "diversity" isn't specified, so companies are free to define it how they please. About half the time, they take it to mean gender and race; age is counted a quarter of the time, and sexual orientation has been mentioned by just two S&P 100 companies.

Instead, most companies define diversity to mean a variety of experience, background or "viewpoint". And while 98 per cent complied in 2013, most did so by simply telling the SEC that they don't have a diversity policy when they pick board members. The agency's previous chairman had pushed to strengthen the rule, and the agency could choose to continue her work.

There is, of course, a limit to what gender diversity on corporate boards can do. It won't solve gender equality. While boards hold chief executives accountable, they remain far removed from actual workplace policies. That typically falls to high-level executives and managers (who, also, are still overwhelmingly male).

There's also no reason to think that putting more women into the top ranks trickles down into benefits for the women below them, or that women in leadership can't or won't discriminate against other women. In a 2014 study of what happened after Norway implemented its gender quota for boards, researchers found no change in how many women were promoted to top positions, nor a narrowing of the gender wage gap. Female managers exhibit the same kinds of gender discrimination as male ones.

But the paltry number of women on boards is an embarrassment and a missed opportunity. In a country where women make up half the work force, it's an outrage that they are still so rare in the boardroom.

If companies don't find the moral argument persuasive, there's the financial incentive. A growing body of research has found that more diverse boards perform better than all-white, all-male ones.

California has taken a step that actually has the potential to make companies get on board with these benefits. Instead of stopping it before we can even see whether it works, critics should offer a better solution for changing the persistently pathetic numbers of women on boards - or get out of the state's way. NYTIMES

  • The writer is a contributor at The Nation and a contributing NYT opinion writer.

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