Wishful Treasury thinking?


Eric Crampton

Treasury Secretary Gabriel Makhlouf

Here's Treasury Secretary Gabriel Makhlouf in the NBR:

The business case for diversity in the workplace is clear. In the case of gender diversity, international research shows companies that have a balanced representation of women and men on their boards perform better.

I was curious what Mr Makhlouf was citing when he referred to international research, so I asked. Treasury says Gabs was citing a Deloitte piece; the Deloitte piece cites work by Catalyst (2011 and 2007). The 2007 piece is a one-page infographic. The 2011 version splits firms up by quartiles of gender diversity and compares returns across quartiles as comparisons of means in what's basically a cross-tab and t-test. And it also cites a McKinsey piece, which is also just comparisons of returns across quartiles of firms sorted by gender diversity without any correction for other firm-level differences.

Now if there's any endogeneity in selection of board members, there could be problems. And there could also be problems if there are other things that correlate with both board choices and with performance. That's why the more standard method will run a pile of other stuff we know predicts firm performance then add the new variable, like gender diversity, in a multivariate regression. And it might try to find an instrument to get around the endogeneity issue.

Here's Adams and Ferreira in the Journal of Financial Economics, who do things properly and correct for all the other firm-specific bits:

We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that chief executive officer turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.

I'd quoted from their conclusion last year, emphasis added here:

Our results highlight the importance of trying to address the endogeneity of gender diversity in performance regressions. Although a positive relation between gender diversity in the boardroom and firm performance is often cited in the popular press, it is not robust to any of our methods of addressing the endogeneity of gender diversity. The true relation between gender diversity and firm performance appears to be more complex. We find that diversity has a positive impact on performance in firms that otherwise have weak governance, as measured by their abilities to resist takeovers. In firms with strong governance, however, enforcing gender quotas in the boardroom could ultimately decrease shareholder value. One possible explanation is that greater gender diversity could lead to overmonitoring in those firms.

More generally, our results show that female directors have a substantial and value-relevant impact on board structure. But this evidence does not provide support for quota-based policy initiatives. No evidence suggests that such policies would improve firm performance on average. Proposals for regulations enforcing quotas for women on boards must then be motivated by reasons other than improvements in governance and firm performance.

It is interesting that the Secretary of the Treasury missed this piece in the Journal of Financial Economics on a question of financial economics. Surely he has a research staff that can point him to these things.

There are other pieces out there in reputable journals, but this seems the one that has to be answered. Infographics or comparisons of means where firms are sorted by gender representation* aren't a great place to start.

I agree with Mr Makhlouf's ultimate conclusion that providing flexible arrangements** is an important part of enabling greater female representation in senior leadership. But we shouldn't necessarily expect it to yield great dividends on the dividends front.

* Treasury's Living Standards Framework likely has a weighting in which it's ok to rank infographics ahead of the Journal of Financial Economics on matters of financial economics.

** On a related Wellington-specific whinge, think about how many offices put on after-work work events in the 5:30 - 7 pm time slot. Things held during office hours that are work-related, well, you balance it against other work stuff and make a call. Things held after kid bedtime that are work-related - if you're a two-parent family, it isn't hard to work something out. But the 5:30-7 pm slot is the absolute worst. If you have two working parents, somebody is then stuck on after-school duty if the other has to be at a post-work-but-still-work thing. And sole-parent households would have to sort sitters.

It's hard to find a day when there isn't an invite for some 5:30pm event that would be worthwhile, is great networking, and that would matter for work one way or another. They're great for the not-yet-kidded, and for those with adult children. But it's a reasonable hindrance on everybody else. We have those events too. Would that there were a better equilibrium.

Dr Eric Crampton is head of research at the New Zealand Initiative. He blogs at Offsetting Behaviour.

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Just out of interest has anyone tried to research Mr Makhlouf's career prior to coming to Treasury?? It seems a bit of a black hole on the www.

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He was Chief Secretary to Gordon Brown when the latter was Chancellor in the UK. And we all know what Gordon Brown's spell in charge did to the UK's books - he pretty much nearly bankrupted them.
I imagine Makhlouf would rather gloss over that part of his history. For the life of me I have no idea why we thought it wise to appoint someone with his history.

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The research literature, as opposed to consulting firm reports, is actually quite thin in this area. Adams and Ferreira is certainly the gold standard, but here's another one:
Carter et al (2010): Corporate Governance
"We do not find a significant relationship between the gender or ethnic diversity of the board, or important board committees, and financial performance for a sample of major US corporations. Our evidence
also suggests that the gender and ethnic minority diversity of the board and firm financial performance appear to be endogenous.
Practitioner/Policy Implications:
The results of our analysis do not support the business case for inclusion of women and ethnic minorities on corporate boards. However, we find no evidence of any negative effect either. Our evidence implies that decisions concerning the appointment of women and ethnic minorities to corporate boards should be based on criteria other than future financial performance."

Bohren and Stauro (J Corp Fin, 2014) is also quite interesting:
"Norway is the first, and so far the only, country to mandate a minimum fraction of female and male directors on corporate boards. We find that after a new gender balance law surprisingly stipulated that the firm must be liquidated unless at least 40% of its directors are of each gender, half the firms exit to an organizational form not exposed to the law. This response suggests that forced gender balance is costly. The costs are also firm-specific, because exit is more common when the firm is non-listed, successful, small, young, has powerful owners, no dominating family owner, and few female directors. These characteristics reflect high costs of involuntary board restructuring and low costs of abandoning the exposed organizational form. Correspondingly, certain unexposed firms hesitate to become exposed. Overall, we find that mandatory gender balance may produce firms with inefficient organizational forms or inefficient boards."

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Any thoughts on why research is so thin? I'd think this would be a promising area for research, given how much interest there is in the topic. Is it just that it's such a difficult effect to measure?

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Why do we need to measure this at all? Have you or anyone researched whether men are effective as directors?

Is it just because you all think it's so strange that women want to be directors and you are using 19th century methods (specious intellectual arguments) to remind them that their place is in the kitchen?

This all smacks of silly-boy sexism and reminds me that I still believe that economists should stick to astrology (oops, forcasting the economy) and leave the real world to real people.


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I don't know that it needs to be measured at all, Deborah. But I do think that if the Secretary of the Treasury is going to claim that the international literature has some result, it should be based in the international literature and not on an infographic.

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Yawn. It's just another exercise in white male bashing which is de rigueur in NZ nowadays. Sad and pathetic. People should be elected on merit and ability, not their gender or sexuality. In NZ though, it's a small old boys' and girls' network and many have multiple board memberships and judging by the financial health of these companies many of them are parasitic and incompetent.The list is long. The NZ stockmarket is constantly in need of replenishing because so many NZ companies have failed over the last few decades. Without the privatisation of state assets there would be no NZX today. The boards of Feltex, Mainzeal and Fonterra spring to mind. They all had at least one useless female on board alongside a bunch of equally useless greedy old men.

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