The economic collapse of October 2008 was neither an accident nor a simple matter of recklessness and greed. William Black, the former senior deputy counsel at the federal Office of Thrift Supervision, recently testified before Congress regarding the epidemic of mortgage loan fraud, accounting fraud and credit rating fraud that was ultimately responsible for the global banking collapse. According to Black the mortgage lenders, the banks who created the credit swaps, collateralized debt obligations and other derivatives, the banks who bought them and the credit agencies who rated their financial risk all knew it was happening and conspired to conceal it from borrowers and investors. It turns out many of the federal and state regulators who were supposedly monitoring these companies also knew exactly what was going on.
In most cases these companies continue to be run by the same boards and corporate executives. Why these people got a five trillion bailout instead of going to jail for this Enron on steroids is beyond me. Meanwhile most of the regulators were promoted and presently either work for the Obama administration or the Federal Reserve.
The SEC's New Diversity Rules
Learning the Security and Exchange Commission (SEC) is filing a civil suit against Goldman Sachs for misleading their investors was good news. Less well publicized are the new diversity rules the SEC has introduced for the 2010 proxies corporations send out to shareholders. The rules, which propose to address Wall Street's malignant "don't ask, don't tell" culture, require companies to disclose to shareholders that they have considered diversity when selecting candidates for board positions.
I strongly suspect this move was influenced by Norway's 2003 law, which has been copied in several other European countries, requiring that corporate boards be 40% female (actually the law requires 33-50% representation by both sexes in a few cases companies have been required to recruit additional male board members). In Norway, which unlike the US, is ethnically homogenous, the "diversity" issue a mainly male-female one. In the US, where 30% of residents claim minority racial or ethnic heritage, achieving true diversity is much more complex.
Why Norway Enacted Their 40% Law
Interestingly the arguments for implementing Norway's 40% law (it became compulsory in 2006 when it became clear voluntary compliance wasn't working) were based mainly on economic considerations rather than gender equality. As women began to graduate from university in higher numbers than men, the scores of college educated Norwegian women with business experience who had no chance of being selected for corporate boards (by the inner circle of middle aged men who ran them) was viewed as a wasted resource. As Ansgar Gabrielsen, the conservative trade minister who drafted the legislation, put it: "What's the point in pouring a fortune into educating girls, and then watching them exceed boys at almost every level, if, when it comes to appointing business leaders in top companies, these are drawn from just half the population friends who have been recruited on fishing and hunting trips or from within a small circle of acquaintances?"
Another major impetus for the law were theoretical and empirical studies showing that diversity promotes innovation and resilience by broadening the range of debate. A number of European leaders (in government and business) recognized as far back as the late nineties that Peak Oil and pressure to reduce carbon emissions posed very serious challenges for the corporate world. They were also far-sighted enough to see that diversity-based resilience and innovation would be essential in finding the drastic solutions that were required.
Many saw the example of the US as one they didn't want to follow. Initiatives to develop alternative energy sources and auto mileage and emissions standards by "appropriate technology" enthusiasts and engineers, as well as state and local governments date back to the 1973 oil crisis. The response by the small circle of middle aged white gentlemen who ran the US oil and car companies was to buy up all the solar and wind patents and sequester them, to kill the electric car and to systematically obstruct any federal or state fuel or emissions standards.
Is the Norwegian Experiment Working?
Not surprisingly there was considerable backlash against Norway's 2003 law mandating that women make up 40 percent of corporate boards. The most common objection was that there were insufficient qualified women in Norway. In fact one male executive complained that boards would have to recruit "escorts" to meet the quota. There were also dire predictions that replacing male board members with females would cause boards to lose their expertise, that shareholder confidence would plummet and that overseas investors would withdraw their holdings from Norway and take them elsewhere.
We are now four years down the track from 2006 legislation making the 40% quota mandatory and none of the direct predictions have come to pass. Norwegian business women responded to the new law by creating a plethora of women-focused executive search firms and training, mentoring and networking programs. Moreover most of the 300 women who have taken seats on Norway's are better educated and qualified than the men they replaced.
It's too early to measure the effect of these changes on financial and other performance indicators. Results of a study investigating the effects of Norway's new gender quota should be available by 2012. Results from other studies demonstrate clear positive outcomes from including women in the boardroom. One study last year by the influential New York think-tank Catalyst, which ranked hundreds of Fortune-500 companies by the percentage of women on their boards, found the top quarter outperformed those in the bottom quarter with a 53% higher return on equity. A second 2007 report, by the international management consultants McKinsey, looked at 89 top European companies and found those where women were most strongly represented on both the board and at senior-management level outperformed others in their sector in return on equity and stock-price growth.
Women Have Different Patterns of Communication
Despite the lack of empirical data, anecdotal feedback and qualitative data from Norwegian CEOs about the addition of women to their boards has been extremely position. Executives are pleased and surprised that women (unlike many of the men) do their homework and read management reports prior to coming to board meetings. In general, they are better at working as part of a team. This may relate to different communication patterns, which have been studied in other contexts. Although there is a lot of individual variability, social psychologists find that women tend to be invested in ensuring everyone has a chance to speak whereas men tend to be invested in advancing their own position. Women also appear to be more sensitive to divided interests in boardrooms and to ethical issues (also known as fraud).
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