Richard Epstein: Is Women’s Empowerment a Bureaucratic Imperative?

Times are tough. Both the European Union and the United States are facing stagnant economic growth, high levels of unemployment, excessive debt, and an aging population. I am not alone in urging the European Union and the United States to make major reforms of their labor markets as an essential step toward economic growth. Sadly, serious progress on reform has lagged behind on both sides of the Atlantic.

Yet, in at least one respect, the United States is in far better shape than the European Union. I refer to the advancement of women in business, particularly their representation on corporate boards. For the EU, compulsion is the preferred path, while in the United States, to date, voluntary action is the name of the game.

To see how the EU is marching off in the wrong regulatory direction, it is necessary to examine the recently released study of the European Commission, “Women in economic decision-making in the EU: Progress report.” Its major proposal is to require quotas for women on corporate boards—unless of course these boards reform themselves first by, ahem, “voluntary” action.

This report is the brainchild of Luxembourg’s Viviane Reding, the Vice President of the European Commission and EU Commissioner for Justice, Fundamental Rights and Citizenship. Her politics are said to be “center-right,” which only shows how bad the intellectual climate in the EU has become. The report’s slick cover features a head-shot of a self-assured black-haired woman, behind whom, off to the side, is the blurry image of a smirking gray-haired man. With a message like that, who could oppose the proposal?

The answer, alas, is anyone who bothers to read the report, which finds the case for mandating quotas for women on corporate boards so compelling that it does not trouble itself with addressing the objections to its conclusion. The report’s opening economic salvo for gender parity assures the reader that those firms with “a higher share of women at top levels deliver strong organizational and financial performance.” Let’s suppose that this point is 100 percent true. It still hardly makes the case for mandating quotas for women on boards.

As the report notes, the average number of women on boards has increased only slightly from 8.5 percent in 2003, to 11.8 percent in 2010 (when the quota proposal was first floated), to 13.7 percent in 2012. That small level of increase means that there are few, if any, EU corporate boards that are anywhere close to the 30-percent female representation that the report hopes to see by 2015, let alone its aim of 40-percent representation by 2020. The report presupposes that the male board heads remain obdurate beyond measure for their failure to grasp the report’s message that a higher percentage of women on boards leads to greater profits and innovation.

That cannot be right. It is not credible to assume that boards all across the EU are populated by shrewd and savvy men who just don’t understand the lay of the land. In any contest between those individuals who have the bottom-line responsibility for running a business, and the public bureaucrats who want to goad them into implementing their own grand vision of the boardroom, the choice is clear. The board members have inside knowledge. They have strong financial incentives to do well. Meanwhile, the bureaucrats in Brussels are doggedly pursuing their own transparent political agenda —as evidenced by the report’s stilted cover.

The incurable weaknesses of this report become clearer by drilling down on its particular arguments. Indeed, the economic data that the report presents to make its case cut in exactly the opposite direction. The first point to note is the report, in its sweeping ambition, is blind to the complications on the supply side of the market. Totally disregarding the principle of diminishing marginal returns, the report announces grandiose plans first to double and then to triple the number of women on boards.

Thankfully, the report does not go so far as to recommend the unceremonious dismissal of sitting male board members. Instead, it favors the more discreet route of replacing outgoing men with incoming women. But depending on the turnover rate, this approach could easily lead to the need to appoint women to 60 percent or more of the empty seats over the next decade and counting. Thus, even if the supposed studies of existing boards show—which I doubt—the substantial boost that female directors give to company performance, it is careless to posit that boards will be able to maintain their overall quality while having to dig far deeper into the pool of available women candidates. Put otherwise, imposing this quota system could easily compromise the quality of all boards by shutting out younger men who, at the margin, might contribute more to the board than the women who, under the EU mandate, are being recruited largely if not exclusively on the basis of gender.

The situation is made more dangerous still because the report insists this quota should apply to each firm separately, not just to industry averages. In so doing, it makes the same mistake of American employment discrimination law, whose incautious use of a “disparate impact” test treats any substantial deviation from a stated target as powerful evidence of invidious discrimination.

A sex-blind hiring process, however, would never yield gender parity across firms. The decision-making process of firms can be instructively modeled as a probability distribution, which creates the virtual certainty that some sex-blind firms will hire fewer women than the quota demands. Thus, assume that every board has a random chance, in any appointment process, of picking 40 percent females and 60 percent males. If the board had only two members, 16 percent of the boards would have two females, 36 percent would have two males, and 48 percent would have one each. Right from the get-go, 36 percent of the firms would be noncompliant. Increasing the board size of these firms will still make a large fraction of them noncompliant under a sex-blind selection process.

To counteract these tendencies, boards would have to engage in extensive gender-conscious decision-making, which could generate expensive searches that lead to inferior boards. There is no reason to expect that the number of women who are able to handle board positions in engineering or finance, traditionally more male professions, should equal the numbers of those on boards devoted to retail or interior design. Yet the report contains no suggestion that the EU should allow some firms to target fewer women directors because other firms have exceeded the 40 percent target for 2020.

The question then arises of why it makes sense, in this time of economic malaise, to impose this costly and intrusive quota on firms that already have every incentive to pick the best board members. The report seeks to answer this question by insisting on the importance of getting women’s perspectives on boards in order to “mirror the market” in which “women control about 70 percent of global consumer spending.” But that observation carries no weight at all. Right now, the women who dominate consumer markets could, if they chose, punish firms that do not cater to their tastes, regardless of the composition of their boards.

Nor does it advance the report’s case to note that women are, in ever-larger numbers, graduating from universities with advanced degrees in business and management. As they move up the ranks, their presence on boards may well increase, wholly without quotas. Nonetheless, this does not imply that women will seek board positions at the same rate as men.

The champions of quotas too often forget that it takes two sides to make an agreement. If a higher percentage of women decide to drop out of the frantic race to the boardroom in order to raise families or to run small businesses, why should anyone question the authenticity of their preferences or seek to change their behavior in the name of some higher social objective? Even if many women want to stay off boards, it hardly follows that their skills have to go underutilized. An increasing number of women occupy positions in upper and middle management that give them extensive input on how businesses should design and market new product lines. A board of directors that systematically avoids getting that critical input will be shooting itself in the foot.

In the United States, the picture is quite different. The Wall Street Journal’s Women in the Economy: Executive Task Force plans to examine the role of women in business in a far more constructive way than the EU:

The Wall Street Journal’s Task Force for Women in the Economy—a select group of nearly 200 influential CEOs, luminaries and subject-matter experts, both men and women—will convene for a second time in the spring of 2012 to create a business-based, data-driven action plan to address an important economic issue: making better use of female talent to promote economic growth and competitiveness in the U.S. and worldwide.

The conference is sponsored by CEOs like Daniel Akerson of General Motors, George Halvorson of Kaiser Permanente, and James Turley of Ernst & Young—and it will feature a star-studded line up of business leaders and celebrities of both sexes. A majority of the speakers are in fact women. Attendance is by invitation only.

So what is the difference between the Wall Street Journal and the EU’s approach? Simple. The former uses voluntary action and enlists high-profile leaders to make its case, while the latter uses coercion in a ham-handed effort to achieve some narrow and counterproductive initiative toward the same general end. The EU has its onerous quotas and timetables for the future. The Wall Street Journal calls for action now, and lets private firms experiment with different approaches not only at the board level, but throughout the upper management ranks.

By treating the question of women’s empowerment as a business and social issue, the market and society will marshal the needed resources to address it. By treating it as a bureaucratic imperative, the political intrusions will generate resentments from the very leaders whose support is needed. Ms. Reding should withdraw her report and ask the Wall Street Journal to run an EU version of the same voluntary task force. If she is lucky, they might even invite her to speak at it.

Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.