Wednesday, July 3, 2019

How Does Diversity Impact Corporate Profitability?

Those who support corporate diversity quotas always claim that diversity is good for corporate profits. And yet, if diversity were good for profits then rapacious capitalist companies would be doing everything in their power to make diversity their hiring policy. You don’t think that these greedy capitalists are shooting themselves in the bottom line in order to keep women off their boards? 

As I say, mandated diversity on corporate boards makes no rational sense.

By the terms of the argument we are within our rights to conclude that more diversity means fewer profits.

Happily for all of us, we now have a test case. Serious researchers from Norway, Germany and the United States have studied the case of Norway. You see, the enlightened Norwegians mandated a 40% female representation on company boards in 2003. Thus, they have been experimenting with the policy for around a decade and a half.

It sounds fair enough. Sad to say, especially for those who believe that diversity will solve all of our problems, the results are not very heartening. More women on more boards means fewer profits. 

The Daily Mail reports the outcome:

An increase from one to two female members on a board reduces that firm's profits by 12.3 per cent, a study has claimed.

Why should this be so? Apparently, women are more risk averse. Hmmm:

Using post 2003 data, they found that increasing the number of women meant that they took 'fewer risks', which they say could attribute to the fall in profits.

Norwegian firms after this point scored lower in terms of accounting-based performance and were characterised by fewer risks.

But, they said, the lower risk might positively affect firms' long-term success and survival. 

The last sentence suggests that in the long term this might work itself out. Of course, in the longer term, we’ll all be dead.

At the least, the research is telling investors to look at the gender composition of a company board of directors before investing. 


David Foster said...

"An increase from one to two female members on a board reduces that firm's profits by 12.3 per cent, a study has claimed."

No one who believes that a number like "profit impact of female board members" can be measured to a precision of 1/10 of one percent...which is what citing "12.3 percent" implies...should have any credibility as a researcher or analyst.

Sam L. said...

David, I expect that's an average, but where can we find the the study that came up with that number?

David Foster said...

Found the article...right here...remarkably, it's open-access, no subscription or payment needed:

Haven't read it yet, but I'm very suspicious of anyone who thinks they can assess the effect of a single factor (like number of female directors) on businesses with any precision. Too many causal factors, lots of lags in effectivity, and and pretty constrained sample size.

I note that they said adding more women increases average education levels of boards. To the extent that adding women *really* increases risk-aversion, it may be an artifact of that more-education factor...anecdotal evidence only, but I have noticed that people with advanced degrees...whether an MBA or a masters in Computer Science...are often reluctant to do anything that departs from their training.

Stuart Schneiderman said...

We can certainly consider whether women are more or less risk averse than men. And whether they will be more or less likely to take necessary risks or unnecessary risks. Of course, the distinction is not limited to women. Many Americans felt that Barack Obama was very risk averse. Many Americans feel that Donald Trump is more likely to take risks. Those who preferred the Obama approach have been horrified at Trump's appetite for risk. Those who prefer Trump's approach believed that Obama was a coward. And many Trump supporters refused to vote for Hillary Clinton because they thought she was either risk averse or too willing to take unnecessary risks-- i.e. between Benghazi and removing Qaddhafi.

Ignatius Acton Chesterton OCD said...

Brett Kavanaugh’s all-female staff was a first for SCOTUS, and RBG commended him fir it:

Here’s the problem: Kavanaugh’s staff is the exact opposite of gender equality.

Kavanaugh seems risk-averse, but he seems like Sir Lancelot compared to Chief Justice Roberts, who fancies himself some kind of hero and Steward of the Republic..