Morgan Stanley recently launched an investment fund that aims to combine high returns and gender justice. Its "parity portfolio," requiring a minimum $250,000 placement, is limited to companies with three or more women on their boards of directors. According to fund publicity, "Research... shows that companies with significant female representation on boards and in senior leadership have stronger financials (return to shareholders, return on assets, return on equity, profit margins) than those that lack gender diversity in leadership." Is the parity portfolio a welcome innovation? Not entirely. While it is fine for Morgan Stanley to create a fund that appeals to socially conscious customers, it is misleading to sell it in terms of investment performance.
Women's groups have long complained about the paucity of women in the top ranks of corporate America. In making their case, they typically pointed to the injustice of discrimination, glass ceilings and old-boy networks. But today they are being joined by business and financial groups who emphasize profit. The Committee for Economic Development (CED), a leading voice of the business establishment, issued an urgent statement in 2012 warning that America is falling seriously behind Europe in adding women to corporate boards: "Gender representation is a competitiveness issue."
As it happens, U.S. Fortune 500 companies as a group are slightly ahead of major European firms in women directors (16 percent to 13 percent female representation overall), but Europe is now poised to move well ahead of the US. The governments of France, Italy, Spain, Holland, Belgium, and Iceland have adopted quota systems that require boards of 30 to 40 percent women. Viviane Reding, the European Commissioner for Justice, Fundamental Rights and Citizenship, touts these initiatives as business-based policies: "Companies are finally starting to understand that if they want to remain competitive in an aging society they cannot afford to ignore female talent."
The economic case for gender quotas is, however, shakier than its advocates seem to realize. Morgan Stanley and the CED cite studies by both Catalyst, a women's advocacy group, and McKinsey & Company, a consulting firm, showing large economic gains accruing to companies with female directors. Catalyst's 2007 study found that, "On average, companies with the highest percentages of women board directors outperformed those with the least by 53 percent." But neither study has established causation: More female directors could be a consequence, rather than a cause, of business success. Aspiring upstart firms often need to fill their boards with financial backers and business partners (who may be disproportionately male), while rich, established firms may have more leeway and more interest in broader considerations like gender equality.
Some studies, moreover, find a negative relationship between women directors and firm performance. In a 2008 paper in the Journal of Financial Economics, economists Renee Adams and Daniel Ferreira found that female directors had better meeting attendance and were more active in "monitoring" their firms—but that "the average effect of gender diversity on firm performance is negative... Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms." Deborah Rhode and Amanda Packel, both directors at Stanford University's Center on the Legal Profession, are committed to getting women on boards but object to hyperbole and overstatement in the research. In their exhaustive 2010 review of the literature, they conclude: "The relationship between diversity and financial performance has not been convincingly established." And here is an intriguing 2012 finding from business professors Charles O'Reilly (Stanford) and Brian Main (University of Edinburgh): "We find no evidence that adding women outsiders to the board enhances corporate performance. We do find some evidence that male CEOs with higher levels of compensation are more likely to appoint women outsiders and that boards with more women outside members are more generous in paying the CEO."
The richest source of empirical experience is from Norway, which in 2003 required that all publicly listed companies promptly move to 40 percent women directors or be liquidated. That worked. Female board membership soared from nine percent in 2003 to 40 percent today. But, as a 2011 University of Michigan study concluded, Norwegian firms suffered a decline in value: "The quota led to younger and less experienced boards...and a deterioration in operating performance." So far, the program has done little to increase the number of Norwegian women in upper management. What it has done is greatly enrich about 70 much-sought-after women who now hold more than 300 board seats. Critics refer to them derisively as the Golden Skirts or the Old Girls Club.
The campaign to include more women on corporate boards is well intentioned. Gender diversity in corporate oversight is an important desideratum. But business and financial leaders are supposed to be—we depend on them to be—coolly objective and focused on economic reality. When they stray into cherry-picked research and quota-based metrics, they sow confusion and invite trouble. Morgan Stanley, for instance, depends on investors' confidence that it is a smart, high-return company. But it flunks its own test of investment-worthiness: Its 14-person board of directors has only two women.