Women on the Board and Market Failure (Part 2)

What is the Economist's objection to legislation requiring boards to have at least 40% of each gender?  That it will fill boards with "inexperienced" directors.  As the Economist describes:

• Finding qualified women in a country where only 9% of board seats were held by women in 2003 and the vast majority of senior corporate jobs are filled by men proved challenging. According to a study by the University of Michigan, Norwegian firms have lost lots of boardroom experience: the new, younger women directors have spent less time running companies on average, are less likely to sit on other boards and are more likely to come from middle management.

• DNO International, a Norwegian oil firm, appointed two new female directors in 2007. The three men on DNO’s board have a combined 66 years of experience in the oil business, but the new women directors have none; instead they have backgrounds in accounting and human resources. Schibsted, an international media group based in Oslo, selected all three of its new female directors from Sweden, one of its main markets. “If we hadn’t had the Swedish pool to draw from, the law would have been far more difficult for us,” says a senior executive at the firm.

So it is a gaggle of inexperienced women that cause any decline in value.  The solution?  Wait for the market to catch up.

• Too many women go into functional roles such as accounting, marketing or human resources early in their careers rather than staying in the mainstream, driving profits. Some do so by choice, but others fear they will not get ahead in more chauvinist parts of a business. . . . Yet according to EPWN, the pipeline of female executives is “almost empty”: women occupy only 3% of executive roles on boards, compared with 12% of non-executive ones.  That suggests that the best way to increase the number of women on boards is to ensure that more women gain the right experience further down the corporate hierarchy. That may be a slower process than imposing a quota, but it is also likely to be a more meaningful and effective one.

There are any number of problems with this approach.  First, there is no guarantee that the goal of ensuring women the "right experience" down the corporate hierarchy will happen anytime soon.  As a result, this market solution is no solution at all.  It is an acceptance of the status quo.  

Second, the argument is really a variation of them that there are not enough qualified women to sit on the assorted boards.  That may be true if the definition of qualified is limited to CEOs.  Yet there is room in the boardroom for a more varied set of experiences.  Plenty of lawyers and professors sit on boards.  The Michigan study in fact notes that the presence of professors on the board increases value.   Moreover, in the US, in the aftermath of SOX, more functional types, such as CFOs, also have joined the board.  

Third, the experience in Norway may be unique, at least relative to the United States.  The "shortage" of qualified candidates may be less of an issue in a country of more than 300 million people, compared with Norway's 4.7 million. 

Finally, as we get to in the next post, the Michigan study (The Changing of the Boards: The Value Effect of a Massive Exogenous Shock) is less about women directors and more about dramatic and sudden changes to board membership.  In Norway, the average size of boards (6.5 directors) did not change during the period when the number of women increased.  In other words, each woman added was at the expense of an existing male director.  An inexperienced director replaced an experienced director.  So many inexperienced directors at one time may well be a better explanation for any decline in value.  At most, it suggests that any legislation mandating a specified percentage of women provide a longer transition time than was used in Norway. 

The number of women on the boards of US companies (and those elsewhere) reflect "market" failure.  Really they reflect a non-existent market.  To rely on the "market" to solve the problem is to present no solution at all.