Keep your eye on the prize and don't get distracted by postmodernist baubles

From Investors Penalize Companies for Adding Women to Their Boards by Jeff Green. Interesting data though I think this is light on the analysis.

Many of the biggest companies have wholeheartedly embraced the theory that more diversity means more profits. Investors may be less convinced—at least when it comes to adding women to boards.

An analysis of 14 years of market returns across about 1,889 companies finds that when they appointed female directors, they experienced two years of stock declines. The market value of a given company fell 2.3% by adding one additional woman. The research was published in the Informs journal Organization Science.

Shareholders penalize these companies, despite the fact that increased gender diversity doesn’t have a material effect on a company’s return on assets, said Kaisa Snellman, an assistant professor of organizational behavior at INSEAD business school and a co-author of the study.

“Nothing happens to the actual value of the companies,” she said. “It’s just the perceptions that change.”

A portion of the study conducted by Snellman and her co-author from INSEAD suggests investor biases are at play. The researchers asked senior managers with MBAs to read fictional press releases announcing new board members. The statements were identical, except for the gender of the incoming director. Participants rated those hiring men as more likely to care about profits and less about social values and those hiring women as “softer,” Snellman said.

In effect, most diversity issues are simply efforts to resurrect the long rejected idea of affirmative action. It is also predicated on bigoted beliefs and false ideologies.

People asserting that greater diversity in terms of bean counting for sex and race are the bigots. Without evidence, they are presuming into existence the assumption that any variance in demographic representation must solely be due to prejudice. In other words, the diversity crowd are making assumptions without evidence about other people whose traits of sex and color they abhor.

Paint-by-the-numbers diversity is pretty bankrupt and I am unsurprised that they are finding no correlation between board diversity and business results.

What would be really interesting to see is an analysis driven by experience and knowledge rather than by reverse racism and sexism.

An alternate view, which I hold, is that diversity does matter to any system but that has to be thoughtful diversity. Every dynamic system gains tactical efficiency by standardization and gains strategic effectiveness by diversity.

If you have an entirely uniform and consistent system in the near term, you gain enormous efficiency but your system becomes fragile. It cannot evolve because no deviance is allowed. That fragility will tell as exogenous circumstances change and the system fails to evolve. At some point not only is efficiency lost but very survival comes into play.

You do need diversity. But on the other hand, you also need some modicum of standardization for efficiency. An incredibly diverse system might roll with the punches and readily evolve with changing exogenous conditions but it lacks the capacity to gain a competitive edge through efficiency. It is too amorphous.

You need diversity. You need standardization. And the optimum balance between the two is always shifting.

So what makes an effective Board? In one respect, it is diversity of experience and expertise. You need a broad range of informed perspectives. People from multiple processes (SCM, HR, Manufacturing, etc.), from multiple industries, even from multiple markets or geographies. The only requirement is that they be accomplished at the highest levels in their respective fields.

That sort of diverse board can balance the highest attainable efficiency through standardization with the highest level of diversity of views about risks and trade-offs. And this is exactly what some companies seek to do.

For most companies undertaking diversity initiatives, it is usually much more crude, and much less effective. They are counting skin colors and sex traits, not focusing on achievement or viewpoint diversity. They put people from HR on the board, or from academia, or some two-bit retired politician.

These people usually add cost and little advantage. Skin color and sex traits just aren't that important.

Most of the diversity advocates have always struck me as essentially affirmative action for aspirational non-entities. They can't earn a place at the table through accomplishment so instead they try to use coercion.

“If anyone is biased, it is the market,” she said. In fact, Snellman said investors should consider organizations that add women and other under-represented groups to their boards “because there's a good chance that company is being undervalued.”

Well, maybe. But maybe not.

My guess is that if you were to categorize board appointments of the set-asides for race and gender by their actual likely contribution you would actually find some interesting differences. Where the add is a person who has clearly demonstrated accomplishments in fields near or adjacent to the needs and interests of the firms to which they are being appointed, I would wager you will see an increase in market valuation.

I think what is actually happening is not a biased market but a wary market. If most board diversity adds are perceived as non-value adding, not because of race and gender but because of perceived irrelevance, then of course there is likely some potential decline in market valuation. Space is being taken up at the board without contribution.

There is probably also a second-order effect. What are the companies most likely to indulge these sorts of advocacy campaigns? Those which are most able to afford it. Companies which are early in their growth cycle, companies with a natural or regulated monopoly, companies with proprietary IP which protects them from commodity competition.

My suspicion is that board appointments for explicit diversity objectives is a signal to the market that this is a company no longer focused on the fundamentals. Not only are they taking their eye off the ball but, by diluting the talent pool, they are signaling that they companies which are going, in the future, to be less able to respond to shifts in market balance or competitive position.

I would expect to see a company which adds a female Phd in Psychology from a prestigious university to their board to see a market erosion in value whereas if it adds a woman who just retired from the most senior levels of a comparable company in another country, it will see its valuation rise.

It is not race and gender bias, it is accomplishment bias. That is what I would anticipate the data showing. But that is not what they were looking for. Easier to blame prejudice.

Looking at financial performance, rather than market value, many studies conclude that increasing representation results in neither significant benefit nor harm. Snellman counted 140 papers that show no clear relationship between adding diversity at any level with improving performance metrics of any kind.

“Just to be very clear, I'm not saying that we should not promote female leaders into senior leader positions,” Snellman said. “But is there a business case for gender diversity on boards? If you ask an academic, the answer is no.”

So board diversity has little or no correlation with actual financial performance but diversity appointments to the board do cost the company in valuation for as much as two years.

That fits my hypothesis that there is little or no race or gender bias but plenty of precautionary bias against compaanies being deemed to be focusing on non-financial performance variables.