Beware Of Business Fashions

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Goldman Sachs And Boards Of Old, White, Straight, Men

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Women belong in the boardroom – maybe

Goldman Sachs has announced that is the board of directors of a company doesn’t include at least one woman then they, Goldman Sachs, will not be handling the IPO. A number of responses to this news are possible including “And about time too” if that’s what takes your fancy. However, as with all other such fashions that sweep society it is actually necessary to examine the contention before we decide that it is a good idea.

That is, should companies have a woman on the board? Or, more widely, should the board of directors be diverse as to race, gender, sexuality perhaps and all that good stuff? It is entirely obvious that we want to have diversity of experience and opinion, because that’s what the board is there for. But as the book “The Trouble With Diversity” pointed out – when discussing colleges – diversity of thought is not what people generally do mean when using that word, diversity.

The argument in favour of such an insistence upon diversity is that the female, or black say, viewpoint will be an aid to the decision making process of the company. It is, however, difficult to see this in action. For example, it is often noted that Twitter has a greater penetration into the population of people of colour – or, more accurately, the black American population which is why they say “Black Twitter”. More penetration than it does into the population not blessed with that extra melanin. Well, OK, this happens to be true.

Activists then go on to insist that this means that Twitter should – must! – hire more black people, so that the black experience is properly represented. So that, obviously, Twitter may tailor its product to black desires. This is logic that just doesn’t work. For we started by noting that Twitter already has greater market penetration among blacks than whites. That is, that the product already appeals more to people of colour. How could we possibly need more people of colour to guide its penetration of the black marketplace therefore?

Actually, from our basic facts here we should be arguing that Twitter needs more whites in order to work out how to appeal equally well to them.

The point is not what Twitter should do or not. Rather, to point out that logic is not always a strong point in thee claims about the desirability of diversity.

We can and should go on here and point out that the essence of the claim isn’t true either. That claim being that diversity increases profitability, that it is in the interests of the company – and us the stockholders – to have those of different races, genders and so on directing affairs. There are even studies which go on to prove this contention to greater or lesser levels of accuracy. OK, let us accept that there are. At a societal level we therefore need to do nothing. For if that diversity leads to greater profitability then profit seeking companies will ensure it happens naturally. No one need be forced to add women to the board because it will already be being done. And if it isn’t the moment you show the proof about that profitability then it will be.

At which point we have nations, Norway comes to mind, that insist, by law, that companies must have female representation on the board. That very insistence being proof that the greater profitability part cannot be true for if it were then why does anyone need to be forced?

So far so good but strict logic isn’t quite how the world does work. It being filled with people, people have opinions and not all opinions are backed up by that strict logic. And it is opinions which determine stock values as well. Thus we do have to take care to understand what those opinions are.

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Diversity of thinking aids a business

Clearly, we can do this the “wrong way” around if we so wish. Many people will not, for moral reasons, buy tobacco, or arms, stocks. Their absence from the market means that prices, for a given dividend payment or future profits stream, are lower. We can thus buy a bargain and it has long been true that portfolios of such “sin stocks” produce greater profits for investors. If the diversity of the board becomes one of these mantras which dominates the market then we could profit by being contrarian and actively look for such opportunities.

But let’s think about playing this straight. For some of these mantras, these fashions, both become dominant and are also worth doing in themselves anyway. We’ve thus got to have a method of deciding which are which? Which are like the sin companies where it becomes a market mispricing we can exploit and which are the sensible things that people really should be doing? And thus we buy into the companies that do them, not into those that don’t?

Sadly, the answer isn’t that the idea itself is sensible, in and of itself, it is instead how widespread the belief is. If the entire society insists that women on the board is a good idea then having women on the board is going to be a good idea for those who want to play by the rules. You might not get your IPO done by Goldmans if you don’t for example. This will also be true for not buying conflict minerals, for other forms of diversity in the workforce, for making sure that factories don’t collapse on third world workers and so on.

If these are the things which the wider society insists are good things then it’s that insistence that matters. Most companies are going to end up doing them because of it. We however need to have a different calculus here. Because sure, everyone likes good things but what about those sin stocks? That is, we’ve got to work out whether the thing being done is good merely because it’s fashionable or because it actually is good in and of itself. Not allowing the factory to collapse upon the workers is clearly a good thing in and of itself – quite apart from anything else who wants to have to pay to build a new one?

So, imagine, there’s this idea that every company must have a Heffalump. Doesn’t matter what one is here, it’s just an example. Our decision tree is that firstly we want to know whether it is in fact a good idea. Does having a Heffalump actually improve company performance? If so then fine, we should buy into those firms which have one in preference over those that don’t.

If it doesn’t in fact improve performance then we need to consider whether it’s a widely held insistence. Is it something that is guiding the investment decisions of a significant part of the market? Like those gambling and booze stocks. Or to be more up to date in fashion green sustainability? If it is something that’s guiding many people but it’s not in fact beneficial to the company doing it then we should be doing the opposite. For those that don’t do it will be cheaper by dint of being unfashionable. That’s great for us, we get to buy in on the cheap.

That is, we’ve got to be aware of these fads and fashions. But which way we jump depends upon whether we think the underlying claim about efficiency is valid. Invalid then we should buy into those who don’t, valid and into those that do.

As to whether having a woman on the board actually improves firm performance I don’t actually know. I can imagine it running either way. That historic misogyny still explains their absence could be true. But it might also be the same thing that causes that lack of female executive officers. Career breaks and so on do mean that the upper reaches of management are largely male. We can imagine that the same will be true of those who might be on the board of a major company. I don’t, as I say, know the specific answer here. My point though is that our underlying decision process remains the same. If female board representation is beneficial to firm performance then we should preferentially invest in those what have that presence. If it isn’t but the insistence is widespread then we should preferentially invest in those that don’t.

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Bloke in North DorsetMartin SewellBloke on M4Mr YanPhoenix44 Recent comment authors
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HJ777
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HJ777

Another problem with such an insistence is that in some industries (e.g. heavy or civil engineering) there are not an awful lot of women to choose from who are experienced in this area of business (this is a consequence of the fact that only about 10% of engineering degrees are awarded to women, which I can assure you is not down to male prejudice, as most engineers I know would love there to be more women engineers to work with). This means that in order to find suitable women to sit on the board, the companies concerned may have to… Read more »

Spike
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Spike

Therefore:
•Companies given their choice of which law to break
•Companies appointing women despite lack of competence normally insisted on
•Potential for the resulting appointees to illustrate women as poor executives
•No one is helped (except the pandering politicians)

HJ777
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HJ777

Not quite, since what is being discussed here is Goldman Sachs’s policy, not the law. However, in order to follow Goldman Sachs’s policy (if they so chose), companies may well have to break the law.

Spike
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Spike

True, but what is also being discussed here is doing the same thing by law.

Phoenix44
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Phoenix44

Not sure that’s right. Shareholders appoint directors, not companies. As a shareholder, I can appoint anyone I want. They are my representative.

TD
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TD

TJ Rodgers, former CEO of Cypress Semiconductor, addressed this very effectively when he responded to a letter from a nun stating that he should have a more diverse board. You can find a lot of articles referencing it, but you’ll probably have to search to find the actual letter.

Phoenix44
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Phoenix44

I don’t really buy that argument though. Boards of engineering companies don’t need more engineers – the company already has lots, including probably the CEO. A big company needs political connections, union experience, legal knowledge, people to sit on audit and remuneration committees, and so on. Boards aren’t deciding what material to use for the bridge, they need to know what country to invest in.

Esteban
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Esteban

Working from memory, but this should be about right – Jordan Peterson was being grilled about “equality” by a woman who kept bringing up female underrepresentation in various areas. He pointed out that in the Nordic countries, widely hailed as the closest to gender neutral utopian opportunity, engineers were over 90% male and nurses were over 80% female. Much to her displeasure, reality and Peterson point out that, as a group, women and men place different value on career versus family time.

Bloke on M4
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Bloke on M4

Yup. The women who write software in teams in the UK are heavily Indian. And I don’t mean born in Southall to 2nd generation parents, but born in Bangalore or Kerala and came over here.

Phoenix44
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Phoenix44

There’s no difference between men and women, so they should be equally represented in every job, but there is a difference which means I can say I feel like a woman and so be one, and there’s no difference between mena nd women so there should be equal numbers on boards but there is a difference so its financially sensible to have women… It’s almost as if you can believe anything you like to get what you think should happen. MOre to the point though, who cares about this issue? There are 100 FTSE companies, add in another 50 large… Read more »

Mr Yan
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Mr Yan

Buy anything the woke pension funds shun. Irrespective of whether its fashion or not. They are guaranteed to be wrong.

Bloke on M4
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Bloke on M4

This whole area is really dishonest. There’s a lot of feminists who want more women on boards and then claim diversity is good. The one area it helps to involve women is product design. I find that when developing software, women have a different perspective on things sometimes and as it’s going to be often used by women, working with that, listening to them, matters. Dyson, I know really wants more women in the engineering section for this region: who does the vacuuming? But you don’t need women running that. It’s fine to have men who value women’s contribution once… Read more »

Martin Sewell
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‘Increasing gender diversity on boards leads to a decline in corporate performance: the evidence’ by Campaign for Merit in Business, 5 October 2019
https://c4mb.files.wordpress.com/2019/10/191005-the-six-studies-showing-that-increasing-female-representation-on-boards-leads-to-a-decline-in-corporate-performance.pdf

Bloke in North Dorset
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Bloke in North Dorset

I haven’t seen the latest figures but when they passed a law in Norway making it compulsory to have women on the board a few talented (and probably not so talented) women made lots of money by sitting on just about every board in the country.