Board composition and company performance

In 2012, the NZX required listed firms to disclose the gender composition of their boards. No gender quotas were introduced, but the disclosure rule was expected to encourage changes in board composition.

Glenn Boyle takes up the topic with Michael Foley and Sanghyun Hong.

The Impact of the 2012 NZX Listing Rule Change on Board Composition and Company Performance

We examine the impact of the December 2012 NZX listing rule change that introduced compulsory disclosure about gender diversity on NZ boards. Most notably, the rate of growth in female-held directorships increased significantly after the introduction of the new rule, resulting in, by 2016, average female board representation being approximately double what it had been in 2012. However, we find no relationship between this response and company performance. Across six measures of operating and financial performance, firms that responded most strongly to the listing rule change fared, on average, no better or worse than those that stuck closer to the status quo.

That doesn't mean that tighter rules requiring specific board gender balance targets would be costless; it is always risky to extrapolate from changes like this voluntarily undertaken by firms that were able to do so to changes that would obtain under compulsion.

They conclude:

We have obtained two principal results in this paper. First, NZ companies significantly increased their rate of female director appointments following the 31 December 2012 listing rule change that required all NZX-listed firms to disclose more information about the level of gender diversity on their boards. Although we cannot totally rule out the possibility that this relationship is merely coincidental, it seems more likely to have been at least partly causal. Thus, despite its “gentle-nudge” nature, the new listing rule appears to have had a positive impact on the gender diversity of NZ boards.

Second, however, this positive impact did not translate into better firm performance. Although post-2012 NZ company performance was generally strong, inter-firm variation appears to have been independent of changes in gender diversity: on average, firms that responded most strongly to the listing rule change subsequently performed no better on average than firms that failed to respond at all. Perhaps even more strikingly, there is also no relationship between listing rule responsiveness and performance improvement following the listing rule change. Such a finding is consistent with the bulk of the literature on the relationship between company performance and female board  representation: as Klein (2017) has noted, meta-studies of this relationship conclude that there is essentially zero relationship between these two variables. Our work provides further support for this view, in a NZ context.

Our results are consistent with an efficient director appointment process in NZ. If, following the 2012 listing rule change, NZ firms had over-reacted by appointing unqualified female directors, then we would expect to see a relative deterioration in performance among the firms that responded most strongly to the rule change. Similarly, if prior to 2012 NZ firms had been under-utilising available female talent, then we would expect to see a relative improvement in performance among the firms that responded most strongly to the rule change. However, we observe neither such effect, suggesting that NZ firms applied, at least on average, meritocratic principles in appointing directors prior to 2012 and have continued to do so since.

This leads to one final implication of our results. Despite the meta-study evidence, NZ commentators (e.g., Meier, 2014; Parker, 2018) and politicians (Lambert, 2018) periodically call for the imposition of female quotas on boards. Our study suggests such claims should be treated with caution: if a voluntary increase in female directors (which is likely to consist of mainly well-qualified appointees) has no impact on firm performance, then a further enforced increase (regardless of ability and qualifications) could well have a negative impact.

Previously: Wishful Treasury Thinking

Relatedly: Reddell on that full-page ad in the Dom.

Cycling benefits?

So, would a new $156 million Christchurch cycleway really provide an 8:1 benefit to cost ratio? Here's Lois Cairns at The Press:

A $156-million Christchurch cycleway plan is under attack from two economists, who say the city council could buy new cars for every convert to cycling for the same amount of money.

University of Canterbury finance professor Glenn Boyle and PhD student James Hill have analysed the Christchurch City Council's business case for the major cycleways programme and say it is "excessively optimistic".

Boyle said the 18,000 increase in cycling trips expected as a result of the new cycleway network roughly translated into an additional 9000 people cycling. For $156m, the council could buy all those people brand new Suzuki Altos. 

"Every Christchurch household is faced with an average bill of at least $1100 in present value terms for facilities that are predicted to only attract a relatively small number of cyclists, will result in more cyclist accidents and deaths, have at best zero impact on congestion, and yield highly uncertain health benefits," the pair said.

The cost of building Christchurch's proposed major cycleway network has jumped in price from an original estimate of $69m to $156m but a business case presented by the council earlier this year claimed every dollar invested would give a $5 to $8 return. 

Boyle and Hill studied the assumptions those figures were based on and have concluded the likely return was almost certainly less than $2 and probably less than $1.

Boyle and Hill's paper is here. A couple fun bits:

• The original cost-benefit analysis depended on a 40% increase in real fuel costs. Maybe that would happen if we had a large and sustained depreciation in the NZ dollar, but nobody's betting on that right now.
• The time savings estimates amount to 6 seconds per trip, but those are aggregated up to being worth $316m; Boyle and Hill dismiss these as too small to matter. On this point, I'll thank Julie-Anne Genter for having pointed me to Metz last year.

I like this part of the executive summary:

The overall prognosis looks grim. Every Christchurch household is faced with an average bill of at least $1100 in present value terms for facilities that are predicted to attract only a relatively small and insignificant number of new cyclists, will result in more cyclist accidents and deaths, have at best zero impact on congestion, and yield highly uncertain health benefits. At current expected capital costs and cycleway uptake, it would be cheaper to provide every projected new cyclist with a Suzuki Alto.

I still would love to see a cycleway from New Brighton along the abandoned Avon River through to downtown, but not at any price.

For a contrary view on Boyle and Hill's work, Cairns has this:

University of Canterbury geography professor Simon Kingham said he had read Boyle and Hill's research and believed they had gone into it determined to pick holes in the business case.

I tend to think that Christchurch could use a few more people willing to pick holes in shonky business cases.

Reader mailbag: Dunedin plastic mountains edition

In the inbox, from our Professor of Finance:

Oh the irony - the 'sustainability' of recycling

Ratepayers are going to be charged more to keep producing a 'good' that nobody apparently wants or needs! Now that's certainly a 'sustainable' policy…

The ODT article forwarded me by the good Professor Glenn Boyle notes:

As a stockpile of the city's plastic waste grows ever bigger, the Dunedin City Council is being warned it may have to increase rates if returns from recycling do not improve.

The amount Dunedin people recycle has increased by a third since a new service was introduced in 2011.

That increase, combined with the high New Zealand dollar and a four-month stay on sending some plastics to the main Chinese market following a crackdown on contaminants in recyclables that has put traders off selling to China, resulted in the council running the service at a loss last year.

...The situation has prompted council solid waste manager Ian Featherston to warn the council this week that although the exchange rate was falling and new markets for the materials were being sought, the reduced target of a $210,000 return this financial year might also be difficult to achieve.

In that case, the kerbside recycling targeted rate would need to be increased next year from $64 to $69, he said.

Mr Featherston said Dunedin people recycle about 30 tonnes of material a month.

The stockpile of plastics being held had now reached about 150 tonnes.

Recycling programmes can still make sense even if they run at a loss, but only if the costs of disposing of this kind of plastic via the recycling system is lower than the costs of disposing of it via landfill. If it costs $30/tonne to get rid of waste at the landfill and the net costs of a recycling programme are $20/tonne, we're still $10/tonne better off by having it.

When I'd run some ballpark numbers on Christchurch's system in 2009, it looked like we were paying at least twice as much to get rid of waste via recycling, on average, as we were paying for disposal at Kate Valley. Some recyclables are of high value and are worth sending through a recycling system, but most of it is not worth the cost.

The numbers in Christchurch have likely changed with our newer bin system that separates out composting waste; the Otago numbers too could vary. I'd be surprised if it made sense to be stockpiling plastics in hopes of shipping them to China, but it's not impossible.

Council Debt for Dividends

My colleague Professor Glenn Boyle provided a few rather insightful comments on what's going on with Council-owned assets in Christchurch. I've hoisted them up from the comments section:

The first question to ask is: what are these increased dividends going to be used for? There are two possibilities - greater council spending or lower rates. It's hard to believe it couldn't be anything but the former.

That being the case, what really matters is the quality of the intended spending, i.e., is it covering its cost of capital? (which is more than just the cost of the borrowing used to finance the spending) Since we don't know what the increased spending is going to be on, it's impossible to say anything definite about this. But the quality of council spending over recent years, and the quality of the 'analysis' underpinning it (e.g., the $70m cycleway), means the most plausible assumption is to place 0% probability on these borrowed funds being spent wisely.

There are other interesting undercurrents in all this though. First, by getting CCHL to do the borrowing, the council is avoiding the need to reveal it on its own books, i.e., it's cunningly 'hiding' the extent of its indebtedness. Second, and more importantly, the council is effectively saying it can invest new capital more productively than CCHL. This is intriguing, given that we're repeatedly told what great investments the CCHL assets are, that they return 15% per annum, and how rates would be so much higher if we didn't have them. If all this were true, then the best strategy available to the council would be to reinvest the borrowed funds in the CCHL assets to provide for further growth. By implicitly saying it could do better than this, the council clearly doesn't believe its own spin.

This is hardly surprising. The arguments trotted out to justify the 'keep-the-CCHL-assets' line are so transparently flawed that the only plausible explanation for the council's behaviour is good old fashioned empire building (something that those of us who work at the University of Canterbury are familiar with).

But now the chickens are coming home to roost. As well as the disturbing announcement identified by Eric, this week we've also learnt that (i) Red Bus earned basically zero profit in the last financial year and will pay no dividend, and (ii) the council has sold one asset (Jet Engine Facility - what on earth was it doing owning it in the first place?) in order to prop up another loss-making subsidiary (VBase).

It's like living in an episode of Mad Men (without the fun parts).

Glenn is entirely right. Council drawing funds out of the Council-held firms is inconsistent with Council's repeated assertions that the rate of return on Council-held firms is very high.

Council should be in the business of providing decent roading infrastructure, working and reliable sewers and waterworks, and a few consumption amenities. They are not the best owners of things like ports. The temptation to tunnel assets out by deferring maintenance and loading the companies up with debt ... well, some perils are just too perilous.

Better biologists?

Glenn Boyle previously reckoned that New Zealand's relatively flat academic pay structures mean less than stellar research performance in areas where American universities pay a premium - Seamus and I are paid peanuts, and so must be monkeys (though the same holds for Glenn as well, as he is first to admit).

I read today that new biology PhDs earn about $37-$40k in the US - less than the starting salaries for undergrads starting in industry. That has to be less than New Zealand starting salaries, even given purchasing parity adjustments.

More than 86,000 biology majors graduate each year, to compete for entry-level positions in research, environmental monitoring, health care and teaching. Salaries start at $40,000 to $50,000 a year, college placement offices say, compared with $55,000 to $65,000 for graduates in computer fields and engineering.

Spending six or more years to earn a doctorate doesn’t pay off, either. There is such a glut of biology Ph.D.’s that only 14 percent find tenure-track academic jobs within six years.
Younger Ph.D.’s face the biggest problems. Many entered graduate school when federal financing for health research surged a decade ago. But most of the money to fight cancer and search for other breakthroughs went to established researchers. At the same time, in the face of financial realities, universities are clamping down on tenure-track spots in all fields. As a result, many new Ph.D.’s are stuck in one postdoctoral research job after another, helping run laboratories set up by senior scientists, waiting to see if they can win permanent academic appointment.

Starting pay is low, $37,000 to $40,000, and more than a third of biologists are still working in these and other non-tenure track jobs six years after receiving their Ph.D.’s. Others teach at community colleges or high schools, jobs that would not have required as much training, or work for industry or the government.

Federal, state and local agencies employ 40 percent of biologists at all degree levels, and they are tightening their budgets. The pharmaceutical industry has laid off 300,000 workers over the last decade, and is outsourcing basic research jobs to India and China.

A PhD in biology starts looking more like an MFA in puppetry; Big Bang Theory's Bernadette waitressing while in grad school in biology also starts making more sense (though her subsequent hiring at high salary less so).

If we look to the QS rankings, New Zealand has, in economics, Auckland ranked 37th, Canterbury 51-100, Massey 101-150, Otago 101-150, Waikato 101-150 and U Vic at Wellington 101-150.

In biology, we have Auckland at 39th, Otago 51-100, Waikato 51-100, Canterbury 151-200, Massey 151-200, and U Vic at Wellington 151-200. Only Otago and Waikato match the expected relative rankings given salary differentials. I wonder why New Zealand universities' economics departments are so much better at recruiting, given salaries, than are their biology departments. Or is it that biologists require complementary investments in kit that New Zealand universities are less able to supply?