California Mandates Women on Board — Affirmative Action to be Continued?

By: Hannah Zhang

Do Quota Laws work as effectively as people expect them to be? Evidence suggests that they don’t.

In 2014, the Senate Constitutional Amendment No. 5 was proposed to delete provisions of the California Proposition 209, which mandated that “the state shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.” Although the amendment passed in the Assembly, it was withdrawn from consideration in the Senate, indicating that the State of California was still not allowed to give preferential treatment in public education to individuals on the basis of race or sex. So far, California had remained insusceptible to one of the most hotly-debated issues: the Affirmative Action.

Commonly known as the Quota Law, Affirmative Action includes a set of policies that ensure racial minorities or women would have equal access to education and employment in government-sanctioned programs. It was raised to a heated controversy in 2013, when Harvard University was accused of having discriminated against Asian Americans by setting up a non-transparent Quota Law that kept the ratio of admitted Asian Americans around 18%, while the local Asian population had doubled in the past 20 years.

It seemed that California would never be involved in the discussion of the Quota Law, until Governor Jerry Brown signed California SB-826 on September 30, which makes California the first state to mandate female board directors in publicly-held companies. As required by SB-826, all California company boards must have one female director by 2019. In addition, companies with 5 directors must have 2 women directors and companies with 6 directors must have 3 women directors by 2021. For example, Apple, which currently has two women on its eight-member board, will have to add a third by 2021.

The State of California has finally joined the conversation — but does the allocation of quotas to racial minorities or women really have its intended effect? Unlike the advocates of Affirmative Action who only need to justify themselves by emphasizing the morality of eliminating discrimination, those of SB-826 will have to earn the votes of key decision-makers in the corporate world by convincing them of the economic profits brought by an increase in gender diversity. Many studies and reports have shown that there is a positive correlation between increased gender diversity and economic profit. According to a report “Diversity Matters” released by McKinsey in 2015, the advancement of the Quota Law is undoubtedly vital due to the fact that “companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians”, and that in the United Kingdom, “for every 10% increase in gender diversity, EBIT rises by 3.5%.” Moreover, according to the Gender 3000 Report by Credit Suisse, the presence of women on board is positively correlated with the performance of large companies, especially those greater than USD 10 billion. It is shown that global companies with at least one woman on board have outperformed their business rivals without any woman on board by 26% over the past six years. Despite the large amount of evidence and data that support the advancement of the Quota Law, there are also some problems we need to consider. One obvious drawback of these researches is that they ignore the simple fact that correlation does not necessarily imply causation — while having more female board members can lead to better company performances, companies that perform better could be the reason why more female board members are hired.

Let alone all the bias factors undisclosed by the econometric studies, a psychological research also casts doubts on the implementation of the Quota Law. It is shown that when women are intentionally favored by sex-based preferential selection, they tend to “devalue their leadership performance, take less credit for successful outcomes, and report less interest in persisting as leaders.” As a result, women might not be able to show their full potential on board due to the fact that their self-perceptions and self-evaluations are unintentionally and negatively harmed by such gender-based selection process.

While the studies concerning the benefits of the Quota Law show a mix of results, there is empirical evidence from abroad that justifies the necessity of reassessing its impact. In 2003, Norway became the first country in the world that implemented the quota system regarding gender and the boardroom. The law mandated that at least 40% of the board seats in all Norway-based companies must be held by women, in an effort to change the fact at the time that only 9% of directors in the country were women. Companies rushed to comply, adding inexperienced women directors to the board so they could avoid the fine. Some western European countries have also implemented similar Quota Laws that increased the share of women directors in big companies four- or five-fold in the past ten years. To tackle the inefficiency brought by such a drastic change in boardrooms, some of France’s markets regulators even introduced the “circumvention strategies”, which propose decreasing the total number of board members to increase the percentage of females. In Germany, a shortage of qualified women led to a sudden surge of foreigners onto supervisory boards, which could be problematic because “they [were] less familiar with the firms or German regulations”, said Bernhard Stehfest from the Federation of German Industries. Admittedly, in almost all western countries where the Quota Laws have been implemented to a certain extent, women’s representation increased dramatically in a short period of time. But it is also notable that business leaders across countries protested over the system and still failed to elect female CEOs or close the gender pay gap in the boardroom.

Certainly, the Quota Law is not a policy that aims to resolve the gender issues in the corporate world all at once. Some critics point out that although it won’t bring greater corporate profits or shrink the gender pay gap in a short period of time, it is still better than nothing. At least it shows that California is taking the matter of gender equality seriously, and that alone is a statement. However, the rationale behind the Quota Law does have its shortcomings and leaves us the question of how to achieve gender equality without victimizing women as a disadvantaged group. After all, women’s empowerment in the business world is only possible when they are treated as equal competitors as men.

References:

California just passed a law requiring more women on boards. It matters, even if it fails. https://www.vox.com/2018/10/3/17924014/california-women-corporate-boards-jerry-brown

Why diversity matters? https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters

The CS Gender 3000: Women in Senior Management https://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=8128F3C0-99BC-22E6-838E2A5B1E4366DF

Ten years on from Norway’s quota for women on corporate boards https://www.economist.com/business/2018/02/17/ten-years-on-from-norways-quota-for-women-on-corporate-boards

Intentionally favored, unintentionally harmed? Impact of sex-based preferential selection on self-perceptions and self-evaluations. http://psycnet.apa.org/record/1987-15511-001