Wednesday, April 22, 2015

Why diversity quotas in the boardroom may be a good idea

Today we feature a guest post from our colleague over in the law school, Aaron A. Dhir, who is an Associate Professor at Osgoode Hall Law School and a Senior Research Scholar at Yale Law School. Aaron's book on boardroom diversity is out next month and it is causing quite a stir. So we asked him to tell us a little about the issue of diversity quotas on boards and why, despite the controversy, his research suggests that it might be a good idea. 

The lack of diversity in the governance of business corporations is quickly becoming one of the most discussed topics in corporate governance.  It has ignited a heated global debate, leading policymakers to wrestle with difficult questions that lie at the intersection of market activity and social identity politics.

My new book, Challenging Boardroom Homogeneity, will be published next month by Cambridge University Press.  In it, I draw on semi-structured interviews with corporate board directors in Norway and documentary content analysis of corporate securities filings in the United States to empirically investigate the two main regulatory models designed to address diversity in the boardroom — quotas and disclosure.

In this post, I focus on quotas.  While quotas are anathema in the United States, their presence in Europe is striking.  In their most potent form, quotas mandate particular levels of gender balance in the boardroom.  Countries such as Norway, France, Italy, Iceland, Belgium, and (just last month) Germany have all taken this path.  In Germany, both genders must constitute at least 30 percent of the supervisory boards of specified German companies beginning in 2016.  In Norway, non-compliant firms run the risk of court-ordered dissolution.

Little is known about the day-to-day operation of corporate quotas around the world.  To fill this void in our knowledge, I interviewed Norwegian corporate directors about their experiences under Norway’s controversial law – the very first quota on the books.  The participants in my study included men and women, as well as directors appointed before and after the law came into effect.

A strong majority of the directors I interviewed supported the law.  The dominant narrative my interviewees conveyed was that quota-induced gender diversity has positively affected boardroom work and firm governance.  Generally, respondents emphasized the range of perspectives and experiences that women bring to the board, as well as the value of women’s independence and outsider status.  They also stressed women’s greater propensity to engage in more rigorous deliberations, risk assessment, and monitoring.

But even if diversification has positive effects on company governance, the question remains:  Why are quotas an appropriate mechanism by which to achieve those benefits? 

Some commentators impugn the wisdom of quotas, charging that they stigmatize and marginalize their beneficiaries.  As one critic wrote in The New York Times:  “women admitted to boards in order to fulfill a quota are unlikely to be seen as equals whose presence at the table is merited.”  These critiques must be taken seriously.  If the recipients of affirmative action feel isolated, or that they are perceived as mere tokens, how can such measures possibly be justified?

Without question, quotas are an imperfect means of diversifying corporate boardrooms and in the book I explore the limitations of the quota model.  That said, critics sometimes paint an incomplete picture and seldom ground their arguments in the voices of those who presumably matter the most — those who actually live under quota regimes.  What do they themselves say about quotas’ possibly pernicious effects? 

My research asks exactly that question.  Only a small minority of board members I interviewed felt that female directors were stigmatized or isolated.  My female interviewees explained this in different ways.  Some highlighted the importance of the substantial number of women required by the law.  By mandating gender balance, the law made marginalization difficult, if not impossible.  As one female director told me:  “you can’t stigmatize 40 percent of the board. . . . [Y]ou could have stigmatized one person, or 15 percent. . . . But you can’t stigmatize 40 percent.”

The majority of female participants reported that they felt comfortable on the boards on which they sat, discussed their contributions to these boards, and confirmed the feeling that their boards recognized or appreciated these contributions.  Though their stories are complex, most characterized the quota as a positive vehicle that had democratized access to the upper echelons of the corporation — a space previously closed to them.  This suggests that the benefits of the quota law have outweighed any stigmatizing costs, to the extent that these costs have materialized. 

Some critics may suggest that these results are self-evident – of course the beneficiaries of quotas will support the measures that opened up the otherwise closed doors of the boardroom.  The reality, however, is far more complex.  Most directors, including women, were initially opposed, hesitant, or agnostic about quotas.  It was only after seeing the law in action and directly experiencing its effects that they eventually came to endorse it.  A significant degree of the support ultimately stemmed from the view that the law was necessary to diversify boards in a meaningful way.  For some directors, this acceptance of quotas caused them to question their own deeply held beliefs in free market principles.

There are many difficult and unresolved questions about the value and effects of quota laws.  Whether a quota is appropriate for a given country will depend on that country’s socio-political context, its corporate governance culture, and characteristics particular to firms and industries.  As policymakers around the world wrestle with these issues, however, it will be important to draw from the experiences of those who have lived under quota regimes.  These narratives give us reason to believe that quotas are worthy of careful public policy consideration.


This post first appeared (in modified form) on The Faculty Lounge. My sincere thanks to Andy and Dirk for inviting me to contribute this guest post to the Crane and Matten blog. 

Aaron A. Dhir, Associate Professor, Osgoode Hall Law School & Senior Research Scholar, Yale Law School. 

Friday, April 10, 2015

Has Tim Hortons given up on sustainability?

"Making a True Difference" has been Tim Hortons' slogan animating its social responsibility and sustainability initiatives over the past few years. But since they were acquired late last year by Brazilian private equity outfit 3G Capital, the owners of the fast food chain Burger King, the true difference seems to be that sustainability is suddenly in rapid decline at the iconic Canadian coffee chain. The new owners, promising to cut costs and improve performance, have effectively closed down the company's sustainability department.

The change has been pretty dramatic. Just last year, the then CEO of the company was saying that their "overall vision for sustainability is to be a leader in the North American quick service restaurant sector and across all sectors in Canada". Already well-known for their community initiatives, the company  had upped its game over recent years in a number of key areas including sustainable sourcing, recycling, energy and water efficiency, animal welfare, nutrition, and disclosure and reporting. As a result it had made it into the Dow Jones Sustainability Index, Corporate Knights magazine's Global 100, the Carbon Disclosure Project's Leadership Index and various other best-of sustainability lists and rankings. The company was far from perfect, but it was clearly making progress.

Since the turn of the year, however, a lot has changed. The new owners have instituted swingeing cuts in personnel in order to institute "efficiencies", just as they did at Burger King a few years ago. As is so often the case, sustainability and responsibility has been one of the first areas to feel the heat. In addition to jettisoning the dedicated sustainability team, the company appears to have also cut the budget for various corporate responsibility initiatives. There's not much sign of a company aiming to be a sustainability leader any longer. Not unless you think Burger King is a leader that is.

So what to make of the changes? The are at least two things worth noting.

First, it seems like the new owners are convinced a lot of Tim Horton's sustainability initiatives were simply not adding value to the company - or at least not to the share price. This is always a major issue for sustainability champions to address, but is typically tricky to prove either way. Still, the swift move to cut the whole department hardly suggests a careful financial evaluation from the new owners either. 3G Capital seem to be operating on gut instinct (or maybe just ideology) much more than evidence when it comes to the financial value of sustainability.

Second, the quick serve market is increasingly being bifurcated into higher end 'gourmet' brands like Chipotle or Starbucks that see sustainability as part of their superior quality proposition to customers and lower end brands like Burger King or KFC that focus more on price and so seek to minimize the costs of sustainability. The new owners probably saw Tim Hortons as somewhat stuck in the middle (much like McDonald's have become), and have elected to head down the low-end route in order to maintain their strategic focus. This certainly makes some sense from the perspective of competitive strategy, and could see the company pulling back from a lot more than just sustainability as it reins in its costs across its operations. If so, we can expect to see simpler menus and a back to basics approach after a recent period of experimentation with higher end fare. However, if this is the way they want to go, you would expect to see more, not less, attention to the costs savings that sustainability initiatives can bring through more efficient resource utilization. As Wal-Mart has shown, sustainability can also very much be part of a low cost strategy.

All told, things don't look for good for sustainability at Tim Hortons. Although some firms can manage sustainability well with just one or two core staff by integrating responsibilities within other parts of the business, Tim Hortons seems to be more intent on stripping it down as far as possible as part of a broader strategic reorientation.  However, there is at least a slither of good news for sustainability enthusiasts in all this. As part of the cutbacks, the new owners have also put the company's private jet up for sale.

Photo by Jeff M For Short. Reproduced under Creative Commons Licence

Saturday, March 28, 2015

Germanwings 4U9525: The art of asking the right questions


The crash of the Germanwings flight earlier this week is still dominating much of the (Western) news media. It is not just the fact that it happened with a well known Airline with a good safety record (Germanwings is a part of Lufthansa) right in the middle of Europe – in fact one of us sat on a Lufthansa A320 just a day before the crash. But it is also the absence of any good explanation as to the cause of the crash.

Now that story has evolved over the last hours. First, we learned from the voice recorder of the black box that the co-pilot was alone in the cockpit and did not open the door for the pilot to come back after his toilet break. It was interesting to see how Lufthansa, the prosecutors and most media then jumped to the conclusion that the co-pilot deliberately crashed the plane.

While that is indeed one option, only few reports raised the question why the flight data recorder – the other black box – could not be found. Or why when it was found the hard disk with the data was missing. Because only those data would clearly document which actions the co-pilot actually took while alone in the cockpit. It is still conceivable, that we saw a repeat of an incident on a Lufthansa A321 just five months ago when iced sensors sent the plane on route from Bilbao to Munich on a similar descent and could only be saved by the pilot switching off the autopilot.

And maybe it was not suicidal intent but other forms of incapacitation that made the co-pilot behave that way. After all, as we finally learned today, he had a history of psychological problems and should in fact have been on sick leave rather than flying.

Nearly unanimously, most commentators jumped to the conclusion that his medical condition just proves that the plane was brought down intentionally by a mentally sick individual. And in particular Lufthansa appeared to be relieved to identify a rare singular individual case as the reason for the accident – rather than technical or other reasons which might have put the company in a much trickier position.

Or does it? After all, air crashes have a long history as case material and illustrative incidents in the business ethics debate. Even if we assume that an individual is to blame - more often than not such behavior occurs in a specific organizational context which normally leads to this behavior. One of the most recent examples is certainly the 2009 Crash of the Colgan Air  commuter plane in Buffalo (similar to this week’s case, a supplier of Continental Airways), which initially all looked like pilot error. However, as a brilliant PBS documentary illustrates, this incident revealed a host of unethical practices and infractions not just with the airline but in fact with the wider industry.

So, this is the time to ask the right questions. The first of which would be to get some more insight as to why the co-pilot did conceal his mental illness from his employer. Does Germanwings have a procedure for this? Do they just fire people like him, when such condition is revealed? Do they care?

A next question would be how on earth his depression could have gone unnoticed by his colleagues? After all, pilots spend a lot of time together and observe each other from up-close. How could it be that the pilot was totally comfortable to leave this co-pilot in charge for a couple of minutes? What does this say about the culture at Germanwings? Does anybody care about how his colleagues are doing?

The more important questions would look at the wider context of work in the airline. Germanwings recently had strikes as Lufthansa tries to impose a low wage no frills-system of wages and working conditions on their low cost branch, which competes with the likes of Easyjet or Ryanair. This is an object of fierce dispute and Lufthansa itself is in a middle of a merciless battle with their pilots. Just last week, thousands of flights on Lufthansa were cancelled due to a strike. This climate does not exactly encourage a young aspiring pilot – on the way to live his childhood dream – to expect an empathetic reception when broaching his personal issues.

The problematic working conditions at other low cost carriers are by now common currency. So the question we have to ask is in how far Lufthansa has made its subsidiary Germanwings in nothing but a clone of Ryanair and the others. This raises the question if we are actually talking about an environment where someone with mental health issues would think the last thing to disclose to his employer and to hope for empathy would be his personal troubles and problems?

Overall then, there are a lot of questions to ask to Lufthansa, the investigating bodies, and in fact the media. But there are also larger questions unanswered. European pilots associations now openly challenge why so many facts of an ongoing investigation are leaked to the press. Or why certain questions, most notably about the flight data recorder have not been addressed. One cannot help but having some uncomfortable reminiscences with the disappearance of MH370 in South East Asia about a year ago. As even the CEO of Emirates, Sir Tim Clark (far from being one of the inevitable conspiracy theorists in these incidents), has very vocally set out, the way the public gets (mis-)informed about those disasters raises serious questions. Questions, to which we ultimately need an answer.


Image copyright Plane13.com, Reproduced under Creative Commons Licence

Monday, March 9, 2015

Apple's big bet on consumer trust and privacy

The Apple Watch understandably took the limelight at Apple's big launch event today. But what is becoming increasingly clear is that to really understand the company we need to see it as so much more than simply a technology company. And we have to look beyond its products, however alluring they might be.

Nowhere is this more evident than in the area of corporate responsibility. For much of the past few years, the corporate responsibility community has been focusing hard on Apple's product supply chain. And for good reason, with a spate of labour violations plaguing the company (most recently from the BBC in December last year) despite some impressive commitments to responsible sourcing. But with the launch of the Apple Watch and its extended capabilities for health monitoring, research and diagnosis, along with the rapid growth of its Apple Pay system, it is the company's capabilities in data management and security that will likely define its reputation for corporate responsibility over the next decade.

As Tim Crook noted at the launch, the Apple Watch is "the most personal product we've ever made". It is not only wearable but collects real time data on users' health and fitness, enables them to make contactless payment direct from their financial services provider, and provides the possibility for a host of other applications relying on personal data. Keeping all of this data private and secure is going to be a big test for the company. Their success now will rely just as much on maintaining the trust of their consumers as it will on wowing them with cool new gadgets.

Apple is not alone in this of course. Other technology companies such as Facebook, Sony, Microsoft and Google have already learnt to their cost the necessity for maintaining the confidence of their customers in terms of privacy and security. Apple has had its own scares with breaches of its iCloud service, but its exposure to data security risks are only going to accelerate now that it is going increasingly personal. Apple is now not just in the technology industry but also in financial services and health services where the privacy and security concerns are accentuated even further.

Apple is making a big bet on consumer trust because it has a strong reputation for digital security already (say, compared to Microsoft) and it has less of the challenges in managing privacy compared to some of its others competitors. This is because it does not rely on ad revenue (and therefore intimate knowledge of its consumers) to drive profitability, unlike say, Google and Facebook. So it is already out ahead in many important respects. Whether it can maintain that pole position will remain to be seen. But what is clear is that Apple's reputation for corporate responsibility, and indeed its success in personal devices and services more generally, will increasingly be won and lost in the area of consumer trust and privacy rather than product design and execution alone.

Image copyright Martin Hajek. Reproduced under Creative Commons Licence

Monday, October 27, 2014

How Apple and Facebook have taken gender discrimination to a new level


Over the last week or so we have seen a vibrant debate unfolding after the announcement of Apple and Facebook’s latest benefit: Female employees can store and freeze their eggs on the company’s dime so that they can postpone pregnancy beyond the phase where they might want to just focus on their careers.

I put the case up for debate in my undergraduate classes on business ethics this week. It was a fascinating experience. To start, we assessed the upshot. There is a surge of female professionals who attempt at pregnancy in their forties and thus a surge in in-vitro fertilization and a host of other avenues to late motherhood luckily provided by progress in obstetrics these days. But there is also a fair number of women who just have to suck it up that by the time they can put their head around having babies, that ship has sailed.

Here, such an offer seems to be a big benefit. You can progress in an environment where your commitment to the job is 24/7 – like your male colleagues – and still enjoy motherhood at a later stage. And your babies will be built out of genetic material that is as good as it would have been had you dared at the impossible of merging both, career and motherhood. This policy indeed provides women with more options, more choice to freely decide what to do with their lives, their careers and their aspirations at the personal level.

But upon further scrutiny, my students unearthed three major problems. The first is fairly obvious: what is offered as an ‘option’ by the company may quickly become the ‘default’. What will happen now at Google if a 32 year old women tells her boss she wants to go on maternity leave? Given the options, she makes a statement clear and loud that she prefers her personal priorities over the company’s. In organizations, rules prescribe roles. This new option potentially excludes motherhood from what a ‘high potential’, future executive at Google should prioritize in her most fertile years.

A second focus of discussion turned out to unveil the unsaid. What about the male role in child bearing and rearing? The tacit assumption of such a policy seems to be that not a single of Apple or Facebook’s male employees will ever need similar help or support in his career because of having children. In some ways then the policy just reflects rather problematic gender stereotypes: mothers get distracted from their careers by having children; fathers just carry on as if nothing has happened. Yes, there are different biological constraints on women; but having and rearing a child also totally involves the father – unless he is a complete moron (or Google and Facebook’s model employee?). Fair enough, Facebook also extends an option to male employees to freeze their sperms: after all, a significant threat to post-40 pregnancy is not the female egg, but increasingly the deterioration of male sperm at that age. But the message is the same: postpone that baby business!

Which leads to a third objection which cuts to a deeper level. The age between 25 and 35 for a woman is the phase where biologically motherhood is the most likely. It is also the phase where most women are at the prime of their adulthood: mature enough to make tough life choices on partners and lifestyles, but also vibrant and physically energetic enough to dedicate full energy to their pursuits. By offering this option, aren’t Apple and Facebook just saying: ‘Give us the best years of your life, your kids can put up with whatever is left of you at a later stage’?

One of my students put it more bluntly: ‘If you translated this policy to other forms of discrimination in the workplace, such as racial discrimination, this would amount to saying to black people: “Look, you are very welcome here, but just to make it easier, we offer you this cream that will make your skin as white as everybody else’s here.”’ This new benefit essentially offers to a woman to be just like her male colleagues, happily stripped of all her female ‘impediments’. In some ways, that is gender discrimination at its worst.

Apple and Facebook deserve praise to recognize a common and pressing problem. Admittedly, they have policies regarding maternity benefits and childcare that are better than most other American companies. But the moral imagination they applied to this particular solution falls short of the creativity that made them billion dollar companies. If they are willing to throw $20,000 at the problem, why not offer more choice to both female and male employees? The women  (and men) contributing to the company are not just ‘human resources’ ready for maximum exploitation.
DM
Artwork by Keoni Kabral, reproduced under the Creative Commons License.