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. 

Top 10 tips for teaching CSR and business ethics

It's time again for the start of the new school year in universities across much of the globe. For us, this typically means updating course outlines, refreshing our teaching materials and getting ready to hopefully engage and excite a new cohort of students looking to learn about corporate responsibility.

There are many ways to teach courses on CSR or business ethics. Some approaches suit particular professors or groups of students better. But over the years, we've discovered that, as far as teaching in business schools is concerned, there are some fairly common do's and don'ts that can make teaching in this field more effective.  Not everyone will agree with all of these, but here's our list of the 10 best ways to ensure a positive learning experience in ethics and CSR.

1. Be clear and realistic about what you can achieve.
All good courses start with a clear set of learning objectives. This is particularly important in corporate responsibility courses because there are so many different types of outcome that an instructor might be aiming for. Do you want to make your students more ethical managers? Do you want to improve their decision making? Do you want them to be able to practice CSR, or to have a more critical perspective on it? Think about not only what is most important to you, but, most importantly, what you think your students hope t learn. But beware of expecting too much - you're never going to change your students' values in a couple of months of teaching.

2. Use current events to engage students.
Teaching ethics and CSR isn't easy, but one thing we do have an advantage in is that there is hardly a day that goes by without our subject being in the news. This is a golden opportunity to demonstrate to students that what they are learning in the classroom has immediate relevance in the real world, especially when those individual events are part of broader trends, such as globalization, shifts in power, public mistrust of business, etc. Don't waste the opportunity!  

3. Start with a problem or issue, not with a theory
In our experience, business school students respond best when they recognize there's a problem to be fixed and then you give them some theories or concepts to help them do so. So start with a problem - whether a case study, a news story, or your own experience - and then use this to hook them on why theory matters - not the other way round! Starting with the theory and then showing how it applies runs the risk of losing the students' interest too early. It might work for some, but it's a risky strategy.

4. Students’ own experience is valuable class material – don’t waste it!
We are constantly surprised by the rich variety of  experience and opinion that our students have had in corporate responsibility, even without ever having a formal CR position. This is a real treasure chest for teachable moments, when you can flip what you're teaching in the classroom to help students make sense of their own past or current experience. And the rest of the class can learn so much from this too. It brings everything into such clear focus about the here and now rather than some abstract case in a textbook.

5. Don't preach.
In our opinion it is important to avoid imposing a single theoretical position or set of values on students, regardless of what your own perspective on corporate responsibility might be. There are few unequivocal right or wrong answers in this field. So the goal should be to help students understand the breadth of perspectives on the issues at hand and enable them to find their own position not to impose one on them. The professor's job should be more like that of a coach than a preacher.

6. Don’t confuse ‘there are no right and wrong answers’ with ‘there are no better and worse answers’.
The first statement is largely true. The second one is not. One of our most important jobs is to enable students to make better decisions, and to come up with better answers than just simple moral relativism : "my opinion is just as valid as anyone else's". A valid opinion, or a good answer, is one supported by fact, reason, evidence and logic. This may not mean that the answer is right from any universal moral perspective, but is should mean that it gets an A when you're doing your grading - even if you don't agree with the answer!

7. Use (but do not abuse) the business case 
Rightly or wrongly, the business case is the most powerful tool for any corporate responsibility advocate in the workplace. If you can show how a CR initiative will create business opportunities or reduce risks, it has a much better chance of getting approved. So teaching the business case is a crucial part of any course. But there is more to responsibility than only the business case. A good course needs to consider other social and ethical arguments for corporate responsibility beyond the business case so that students do not get trapped inside a purely self-interested mindset.

8. Be mindful of the limits posed by particular forms of business and business system. Not all companies are publicly-held corporations, and not all systems of governance work like the US where the shareholder is king. When teaching corporate responsibility it is essential to help students recognize this, especially if they are using a US textbook. Small firms, privately held companies, co-ops, mutuals, B Corps, social enterprises, etc - these all operate by different rules that give rise to different limits and opportunities for social responsibility. Likewise, the governance of large companies in continental Europe, Asia and and Latin America is quite different from in the Anglo-American system. Corporate responsibility is best understood as a practice than happens within particular constraints - and students need to know exactly what those constraints are in different parts of the world and in different parts of the economy.

9. Provide a good structure for learning. 
This is true for any course, but its easy to forget how important good structure is for good learning when there are so many juicy issues to get your teeth into in our field. An effective course will use a clear relevant organizing framework (such as themes, stakeholders, theories), not just a list of issues. Think about a course as series of building blocks - what's the foundation and what are you aiming at reaching at the pinnacle?

10. Remember to link with other business subjects and courses
Corporate responsibility is not an island. It needs to be linked and embedded with the other subjects that students are taking. Hopefully some of this will be happening in those other courses, but our job as a corporate responsibility professor is also to make those links clear for our students so that they don;t see ethics and social responsibility as add-ons separate from "real" business. So bring in elements of strategy, or marketing, supply chain management, accounting, finance - whatever it is that makes sense in the context of what you are teaching. A joined-up curriculum leads to joined-up thinkers - and one way or another we need a whole lot more of them out there.

Photo ©Schulich School of Business

Who really should resign for the Barclays interest rate scandal?

The banking sector needs another scandal like a hole in the head. Or maybe that's the wrong metaphor. Because a quick death from a headshot might be more preferable to the excruciating, but likely never fatal, torture of interminable crises that we seem to be constantly enduring.

The latest bout of banking misery comes from the UK, where Barclays, the retail and investment banking giant has fallen foul of regulators for manipulating the interbank interest rate over a number of years during the mid 2000s.  It's a huge scandal that looks set to engulf not just Barclays, but potentially also a slew of other banks, and even maybe the Bank of England and the UK Government.

One of the more interesting facets has been the reaction from Barclays. What a week it has been. First a number of senior executives including the CEO Bob Diamond reacted to the media criticism by announcing they would forgo their bonuses. Then, as the scandal escalated, the Barclays Chairman, Marcus Agius announced his resignation. In a dramatic turnaround, the following day Agius was reinstated and CEO Diamond announced his resignation, along with his right hand man, Jerry del Missier.

So the big question is: who really should go in a scandal like this? The Chairman, the CEO, or someone else? The answer, of course, depends on the type of scandal, the level of knowledge of the activity that the senior leadership had (or should of had) as the events unfolded, the likely best route to reform, and of course the likely reaction of stakeholders. With Barclays it seems right that Agius, the Chairman, has (on second thoughts) decided to stay. The Board is unlikely to know about an activity such as the interest rate rigging, and so cannot be held culpable in their overseeing function. It is different from, say, the role of the Board in something like Enron's accounting fraud, which is directly related to the Board's role, and relates to accounts that they must have seen and approved.

With Barclays, you would expect the Board and its Chairman to take a central role in dealing with the problem once it has been revealed to them, which apparently was only days ago. As one member of the House of Lords scathingly remarked upon Agius's resignation: "The board is so hopeless they've just shot the head of the firing squad and missed the prisoner." By resigning Agius was signalling that the Board was unfit to be a "firing squad" and instigate the kind of change necessary at the bank.

Turning to Diamond, one of the main reasons forwarded for his resignation has been the "lightening rod" argument, as in the UK newspaper, The Guardian's analysis: "Diamond, under pressure from the banking regulator and the governor of the Bank of England, Sir Mervyn King, quit after he decided he would be the lightning rod for the scandal at the hearing".

It's not the first time we have heard this argument about the resignation of a prominent CEO in recent times;  News International made exactly the same claim regarding the departure of CEO Rebekah Brooks in July last year in the wake of the phone hacking scandal.

Why the lightening rod argument? Well, it enables the CEO to continue to proclaim their innocence, despite stepping down. Their resignation is not due to guilt but is to save their firm from excessive media and political criticism. The idea is that it is supposed to diffuse the storm of negative publicity - the brave leader falling on their sword to save the company.

The problem, which we saw with News International, and which is already happening with Barclays, is that it doesn't really work.  For a start, no one really believes the argument. So the media is just as likely to respond by digging even deeper expecting there to be more secrets that the company is trying to hide by jettisoning the CEO.  Secondly, even if you get rid of one lightening rod, the critics will readily find another .... or they will simply continue targeting the same one in the hope of more revelations. Barclays found this to their cost last week after lightening rod no.1, Agius quit, only to be replaced by lightening rod no.2, Diamond. As The Telegraph put it: "Mr Agius is thought to have hoped his departure would serve as a lightning rod to conduct anger away from the bank and Mr Diamond". No chance.

It seems in this instance Diamond was responding primarily to pressure from politicians and to a lesser extent shareholders. Numerous influential voices were calling for the CEOs resignation and it is no coincidence that the Barclays share price rose on the announcement of Diamond's departure, despite him being up until recently strongly supported by investors. In other words, Diamond's resignation was primarily a symbolic act to appease stakeholders.

This is all very well, especially at a time when trust in big banks is at an all time low. But it is not necessarily the best course of action for actually dealing with the root problem. Mind you, the root problem is not 100% clear at the moment. Whilst Diamond was blaming "a small minority", others were were laying the blame at the culture at the bank or even of the entire sector. So although Diamond's proposed solution  - to “get to the bottom of what happened”, punish those involved, enhance internal controls, and change the bank's culture - may on the face of it make sense, this scandal has all the hallmarks of a more deep-seated systemic problem.

One bank and one CEO can't change an entire sector, especially when no one, not even the guy that's resigning, seems willing to take personal responsibility. Did he symbolise a culture that needed changing, Diamond was asked today. "I don't think so at all," he replied. Institutions like the banking industry are based on taken for granted assumptions that are highly resistant to change. Symbolic resignations are not the answer. But maybe they are a start.

Photo by SomeDriftwood. Reproduced under Creative Commons Licence

CSR quest: Wayne Visser in the hot seat

In January, our sometime collaborator and co-editor of the A-Z of CSR, Wayne Visser set off on a 12 month, 22 country ‘CSR quest’ to talk and learn about how companies can help tackle the world’s most pressing social and environmental problems. Crane & Matten talked to him about what he hopes to achieve and what’s in his luggage.

C&M: So, what is the CSR quest and why are you doing it?

WV: In my mind it’s a bit like the Holy Grail. Is CSR (corporate social responsibility) something that we should be chasing after, and what actually is a company’s social responsibility? My experience so far is that it means completely different things in different countries. So I want to explore this variety and then capture and share some of the innovative CSR practices that are going on out there.

But why pack up all your stuff and go on the road for a year? Couldn’t you have just sent some emails?

You can only do so much with email and internet forums. Unless you meet and engage face-to-face, you don’t really capture the learning. Also, companies are just not achieving the transformative change that we need to solve the world’s problems. This is my attempt to help turn the tide.

But is flying all over the world the most responsible way of promoting social responsibility?

There’s merit to that criticism. I’m trying to make the trip neutral through carbon offsets. But I wouldn’t be doing the trip if I didn’t think the benefits outweighed the costs – and that includes the environmental costs. I’m hoping it has a multiplying effect. If you look at the impact Al Gore had on climate change awareness, it wouldn’t have happened if he’d just stayed home.

How much difference do you expect to see in terms of how companies practice CSR in different countries?

I’m learning about the various cultures and how cultural context affects CSR – in terms of religion, history, etc. And I’m particularly targeting developing countries, where the need for CSR is greatest. Often it’s where the need is greatest that the real innovation happens. So I’m looking out for some of those kinds of differences too.

Do you think you’ll be anywhere long enough to see any real differences?

I’m under no illusions that it’s anything other than a snapshot. It’s my personal wandering adventure, so it will inevitably be ad hoc. But just by interacting on the ground and meeting people face to face you do get a good sense of what’s going on.

You’ve just been to Turkey and Kenya – was there anything that struck you in those countries?

In Kenya, what was really exciting was M-Pesa, which is an initiative that has now empowered a whole country (where 80% of people don’t even have a bank account) to access financial services through mobile phones. That’s an example of where need can drive innovation. Turkey was still surprisingly immature with respect to CSR. But it has got hold of the corporate governance agenda and is promoting itself as a bit of a hub for corporate governance in the region, especially in the Middle East.

How are you going to go about sharing all the things that you pick up along the way?

I’m conducting workshops for various host institutions (universities, CSR associations and the like) and sharing what I’ve found. I’m also posting blogs and short videos of interviews that I conduct in each country. And I’m keeping a diary, so a CSR Quest book is a possibility some time in the future.

What if no one tunes in?

It will probably grow in momentum as it goes on. I have existing networks and outlets through Facebook, Twitter, Ning, so you never know what the impact of these things will be. Besides, I would do it even if only 1 person was listening; it’s a personal journey as much as anything.

You’re putting everything on the internet for free and you’re giving free talks – so how exactly are you financing the trip?

With difficulty! It’s all self-funded. I’m organizing more substantial workshops for some of the host institutions, and those are paid-for. But it’s very uncertain. I’ve got the tickets booked but its not all set-up – I’m relying on the power of the web and the networks to keep it going. So all offers to help are welcome!

You’re one month in now – how are you liking being on the road?

I gave up my flat, so I’m essentially homeless now, living out of a suitcase. It’s a mixture of tiring and unsettling, and invigorating and stimulating. As soon as I’m interacting with people on the ground it’s extremely rewarding. It’s already been worthwhile, so even if the rest of the tour would falter, I’d still feel it had been a success.

How big is that suitcase?

Just one quite large suitcase and the bag for the computer and the camera. So two bags. It’s not quite hand luggage but it’s not much.

Is there anything that you’re sorry that you had to leave behind?

Not yet. But I may regret going light on the clothes. I’ve just got one suit and 3 shirts. And I’m having to do a lot of underwear washing in the shower!

Crane and Matten are currently based in Amsterdam and Toronto respectively. Any plans on dropping in on us?

I hope so. I plan to finish the tour with a North American leg, but I’m not planning on coming to Amsterdam at the moment. If after 10 or 12 months I get an invitation and I’m up for more, who knows? By then, though, I may well need to put my feet in concrete for a while.

You can follow Wayne’s CSR Quest on the CSR International blog at www.csrinternational.org or http://csrinternational.blogspot.com/ or contact him directly on wayne@csrinternational.org

Airport photo copyright Idle Type. Reproduced under Creative Commons Licence. Wayne Visser photo courtesy of Wayne.