Is there any causal link between women in the boardroom and enhanced performance?

"Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible."

Milton Friedman, Capitalism and Freedom (1962)

The freedom of companies to appoint directors solely on the basis of merit is a cornerstone of capitalism. That cornerstone is slowly but surely being removed in the name of an innocuous-sounding initiative, ‘improved’ gender diversity in the boardroom (‘GDITB’).

The British government continues to bully major companies into appointing more women to their boards with threats of legislated quotas if they don’t do so ‘voluntarily’. The following shows the proportion of newly-appointed FTSE100 directors who are women:

2010 – 13 percent

2011 – 30 percent

2012 to date – 44 percent

The vast majority of these women are non-executive directors, the least risky appointments for companies. The government justifies its continuing threats of quotas by arguing that corporate performance will improve as a result of GDITB. An example of this viewpoint may be found in a recent article by Vince Cable, Business Secretary, in the Evening Standard (16 July 2012):

"Having more women on boards isn’t just good for the culture of business, it’s also good for business. A growing body of evidence shows clear links between diversity, financial performance and stock market growth. Recent research by Catalyst found that companies with more women on their boards outperformed rivals with a 42 per cent higher return in sales, 66 per cent higher return on capital and 53 per cent higher return on equity."

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Campaign for Merit in Business has publicly challenged Vince Cable (and many other individuals and organisations supporting GDITB, including David Cameron) to provide evidence of the causal links they claim between GDITB and enhanced performance. No evidence has ever been forthcoming.

Proponents of GDITB – at least those with some integrity – are increasingly distancing themselves from claims of enhanced performance. Professor Susan Vinnicombe of the Cranfield International Centre for Women Leaders made the following statement to a House of Lords sub-committee investigating ‘Women on Boards’ on 16 July 2012:

"… there has been quite a push in the past – indeed, we ourselves have engaged in such research – to look at the relationship between having women on corporate boards and financial performance. We do not subscribe to this research.

We have shared it with chairmen and they do not think that it makes sense. We agree that it does not make sense. You cannot correlate two or three women on a massive corporate board with a return on investment, return on equity, turnover or profits.

We have dropped such research in the past five years and I am pleased to say that Catalyst, which claims to have done a ground-breaking study on this in the US, officially dropped this line of argument last September."

Studies and reports cited as showing a positive causal link only show, upon close inspection, correlation. A more plausible explanation for that correlation is surely that companies with strong underlying performance can better afford social engineering initiatives such as the appointment of more women onto their boards. It also gives them a good public relations story.

We would justifiably be concerned if research indicated that appointing more women onto boards not only failed to enhance corporate performance but impaired it, given that this would inevitably result in reduced corporation tax receipts for the government and reduced private sector employment – and reduced income tax receipts in turn.

So what does the available research tell us? Only two independent studies show a causal link between GDITB and corporate performance, and in both cases the link is negative. The first study was carried out by two academics at the University of Michigan, Kenneth Ahern and Amy Dittmar, and the latest draft was published in May 2011. The report’s full Abstract:

"In 2003, a new law required that 40 percent of Norwegian firms’ directors be women – at the time only nine percent of directors were women. We use the pre-quota cross-sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota.

We find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in Tobin’s Q over the following years, consistent with the idea that firms choose boards to maximize value. The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance, consistent with less capable boards."

Proponents of GDITB have claimed that the negative effect of legislated quotas on Norwegian businesses reflects only the effect of inexperienced directors, rather than any gender effect.

So what do we find when organisations voluntarily ‘improve’ GDITB, appointing more female directors on the grounds of perceived merit? We turn to a discussion paper prepared for Deutsche Bundesbank earlier this year, titled ‘Executive board composition and bank risk taking’.

The researchers studied German banks over 1994-2010. The report’s full Abstract:

"Little is known about how socio-economic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions.

First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a higher proportion of female executives [my emphasis]. In contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines."

We have the remarkable scenario of a Conservative-led coalition bullying major companies into recruiting more female directors, when the independent evidence shows that the initiative will damage those companies. How has this sorry state of affairs come about?

Supporters of GDITB have stifled any meaningful debate, and politicians of all parties have been complicit. A few examples should illustrate the point:

- David Cameron appointed a Labour peer, Lord Davies of Abersoch, to report on gender diversity in boardrooms, knowing that Davies’s final report would inevitably argue for more women on boards.

- A 2010 CBI report on gender diversity in boardrooms, ‘Room at the Top’, had 14 co-signatories. Nine were women, and the five men – all ‘captains of industry’ – were already on record as supporting GDITB before the report was written.

- You could read the minutes of all the recent House of Lords select committee meetings investigating ‘Women on Boards’ without finding evidence of even one of the 11 peers arguing against ‘improving’ the number of women on boards. The primary focus of the discussions was the mechanisms for doing so, in particular the advisability (or otherwise) of EU-legislated quotas. All the committee’s witnesses were supporters of GDITB, many of them professionally employed (usually at taxpayers’ expense) in the fight for GDITB.

‘Improving’ gender balance in boardrooms removes the freedom of companies to appoint directors solely on the grounds of merit. If allowed to continue, the result will be inevitable – the steady decline of the business sector. Not without reason has the initiative been called "socialism’s Trojan Horse."

Mike Buchanan is the Chief Executive at Campaign for Merit in Business