California's New Corporatism

Deloitte’s recent report on diversity in the workplace serves to embolden the State of California’s activism aimed at forcing corporations to increase female presence on corporate boards. Though the constitutionality of California’s overreach has yet to be determined, gone are the good ‘ol days when the most a company had to fear was a hostile takeover. A board facing a hostile takeover sometimes resorted to bargaining with the activist investorm as in a hostage situation. California’s plan to tame the free markets was simply to take hostage their publicly traded corporations with main headquarters in the state. Former Governor Jerry Brown signed into law SB 826 as the legislature pointed to multiple studies to wage its war on male-dominated boardrooms. However, Deloitte’s most recent report does not claim-correlation or causality between female representation and an increase in profits. It simply tracks the changes of diversity in Fortune 500 and 100 boards. Another report by McKinsey asserts that diverse companies are more profitable companies, with the disclaimer that “…correlation does not equal causation (greater gender and ethnic diversity in corporate leadership doesn’t automatically translate into more profit).” What these organizations want to see is progress, and they are willing to sacrifice science in order to achieve their progressive goal.

More studies could be cited, but these studies were laid to rest about three years ago. Alice Eagley, professor of psychology and management at Northwestern University, debunked the claim that more women on boards resilts in greater profits in The Journal of Social Issues. Dr. Eagley calls into question the ability of social activists and constructionists to ethically apply the rigor of scientific research and be honest about the subsequent results. In fact, social constructionists want to make the world a better place through policy, and are often willing to misconstrue research findings to achieve this goal. If one reads through the Deloitte, and especially the McKinsey reports, one will find emotional language laden with strong belief that diversity is the key to greater profits. Furthermore, Eagley denounced findings and assertions that link the presence of female board members to greater corporate profits. Studies that assert such findings are “…certainly not publishable in academic journals because of the elementary form of their data presentations.” Many of these studies do not take into account reverse causation nor omitted variables, which could easily affirm weak links of female board members to corporate profits. Eagley references a study conducted from 1996 to 2003 in which the study did account for omitted variables, resulting in negative results of female leadership to financial performance. Furthermore, Katherine Klein of the Wharton School of Business remarks that there is no credibility of a link between diversity and increased profits. Obviously, the goal is not to prevent more women from becoming members of boards. The goal should be to allow the free market to be as free as possible without the overreach of the state. Unfortunately, the passage of such laws by the People’s Republic of California does more to insert the state’s control of corporations and enhance social engineering than it is to increase representation of women on boards and increase the profits of corporations. This is evidenced in several ways. First, progressive government and big corporations historically have a corporatist relationship through manufactured crisis. For example, Upton Sinclair’s The Jungle is a historical example of a manufactured crisis calling for greater regulation. When Sinclair “unmasked” the meat packing industry, the sector already had many of the regulatory standards in place. Teddy Roosevelt’s progressive administration took the car keys and handed them to the meatpacking industry anyway. The industry then wrote its own regulations, gave those standards to the federal government, and said we will play by the rules we wrote. Teddy’s administration agreed, since the industry was the expert. The businesses who benefited from greater regulations were the major players in the meatpacking industry. The groups who suffered were smaller mom and pop butchers who could not afford to play by the new rules. The major players, in tandem with the federal government, wrote rules to intentionally crush their competition. Americans should take note of the fact there is little to no complaint from California’s largest publicly traded corporations about the new law. Big corporations can afford the new law and welcome it. The implementation of such a law actually gives big cap businesses a historical competitive advantage over small cap companies and some private companies, because they can afford to implement costly regulations. Consider Apple, which paid Angela Ahrendt $73.4 million in cash and stock in 2015 for her service to the giant. Then consider other organizations that pay as low as $30 thousand for a board retainer. To further illustrate the manufactured crisis, fewer than 100 publicly traded companies headquartered in California have zero women serving on their board… out of 761 companies. With one out of seven companies without a female board member, the crisis necessitating a law to fix it is reminiscent of Hillary Clinton’s manufactured crisis over day care. Only 14 percent of families polled listed day care needs in their top three needs as Hillary put forth her demand for government intervention. With the help of incorrect scientific research methods, as pointed out by Eagley, California has made an ill-informed case for social engineering and corporatism. California as a progressive activist state spent over forty years suing the Boy Scouts of America until the organization folded to progressive values. Membership has fallen by half over the last five years, and Scouts BSA (the new name) is now considering filing for bankruptcy. California also sets the standards for other states, such as the case of being the first state to legalize recreational marijuana use. The point: California activism works. Another challenge is the treatment of women as placeholders on corporate boards. Talented, insightful, and innovative women may find themselves simply present for the corporation to meet its diversity quota. Boards will likely have to dismiss a current board member who is male, or create another board seat. The creation of a board seat may mean that a role is created to simply meet the quota, not meet an actual need by the corporation. Other corporations will simply migrate to other states. The current diaspora from Silicon Valley already sees corporations head for locales like Austin, Detroit, and Huntsville, Alabama. These locations are cheaper, with lower costs of living than San Francisco. Throw a $100K penalty on a small cap corporation and that might serve as the straw that broke the camel’s back. Finally, IPOs will definitely need to adjust their pitches for venture capital with a plan to have diverse boards before the first VC check is cashed. This planning will be key to ensure that a start-up qualifies to file for an initial public offering as it matures. If California prohibits corporations from filing an IPO based on its board composition, then the state will successfully achieve greater corporatist control of big firms. Big firms, due to their loyalty to California, will now have greater competitive advantage as new entrants to the market will face mounting regulations and obstacles to become publicly traded.