Wishful Treasury thinking?

Here's Treasury Secretary Gabriel Makhlouf in The NBR:

The business case for diversity in the workplace is clear. In the case of gender diversity, international research shows companies that have a balanced representation of women and men on their boards perform better.

I was curious what Makhlouf was citing when he referred to international research, so I asked. Treasury says Gabs was citing a Deloitte piece; the Deloitte piece cites work by Catalyst (2011 and 2007). The 2007 piece is a one-page infographic. The 2011 version splits firms up by quartiles of gender diversity and compares returns across quartiles as comparisons of means in what's basically a cross-tab and t-test. And it also cites a McKinsey piece, which is also just comparisons of returns across quartiles of firms sorted by gender diversity without any correction for other firm-level differences.

Now if there's any endogeneity in selection of board members, there could be problems. And there could also be problems if there are other things that correlate with both board choices and with performance. That's why the more standard method will run a pile of other stuff we know predicts firm performance then add the new variable, like gender diversity, in a multivariate regression. And it might try to find an instrument to get around the endogeneity issue.

Here's Adams and Ferreira in the Journal of Financial Economics, who do things properly and correct for all the other firm-specific bits:

We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that chief executive officer turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.

I'd quoted from their conclusion last year, emphasis added here:

Our results highlight the importance of trying to address the endogeneity of gender diversity in performance regressions. Although a positive relation between gender diversity in the boardroom and firm performance is often cited in the popular press, it is not robust to any of our methods of addressing the endogeneity of gender diversity. The true relation between gender diversity and firm performance appears to be more complex. We find that diversity has a positive impact on performance in firms that otherwise have weak governance, as measured by their abilities to resist takeovers. In firms with strong governance, however, enforcing gender quotas in the boardroom could ultimately decrease shareholder value. One possible explanation is that greater gender diversity could lead to overmonitoring in those firms.

More generally, our results show that female directors have a substantial and value-relevant impact on board structure. But this evidence does not provide support for quota-based policy initiatives. No evidence suggests that such policies would improve firm performance on average. Proposals for regulations enforcing quotas for women on boards must then be motivated by reasons other than improvements in governance and firm performance.

It is interesting that the Secretary of the Treasury missed this piece in the Journal of Financial Economics on a question of financial economics. Surely he has a research staff that can point him to these things.

There are other pieces out there in reputable journals, but this seems the one that has to be answered. Infographics or comparisons of means where firms are sorted by gender representation* aren't a great place to start.

I agree with Makhlouf's ultimate conclusion that providing flexible arrangements** is an important part of enabling greater female representation in senior leadership. But we shouldn't necessarily expect it to yield great dividends on the dividends front.


* Treasury's Living Standards Framework likely has a weighting in which it's ok to rank infographics ahead of the Journal of Financial Economics on matters of Financial Economics.

** On a related Wellington-specific whinge, think about how many offices put on after-work work events in the 5:30 - 7 pm time slot. Things held during office hours that are work-related, well, you balance it against other work stuff and make a call. Things held after kid bedtime that are work-related - if you're a two-parent family, it isn't hard to work something out. But the 5:30-7 pm slot is the absolute worst. If you have two working parents, somebody is then stuck on after-school duty if the other has to be at a post-work-but-still-work thing. And sole-parent households would have to sort sitters.

It's hard to find a day when there isn't an invite for some 5:30pm event that would be worthwhile, is great networking, and that would matter for work one way or another. They're great for the not-yet-kidded, and for those with adult children. But it's a reasonable hindrance on everybody else. We have those events too. Would that there were a better equilibrium.