Want More Women in Boardrooms? Easy: Make It the Law

Gender quotas might not have a sterling reputation, but Germany thinks they're the answer to its male-dominated corporations. According to a new agreement between the parties negotiating to form Germany's next governing coalition, supervisory boards for companies registered on the German stock exchange will need to be at least 30 percent female starting in 2016.

This idea has been around for some time. In 2011, the 30 companies of the DAX index avoided binding quotas and instead pledged voluntarily to increase the proportion of women in management positions. France, Norway, Belgium, Iceland, Italy, the Netherlands, and Spain have already instituted government-mandated quotas on public companies, though some will only take effect several years from now.

From the U.S., where women held only 16.1 percent of board seats by last count, it's an intriguing experiment to watch for several reasons. Government-directed quotas are potentially unconstitutional, and even private companies seeking to set quotas have been told affirmative action plans need to meet pretty strict requirements to survive an equal protection or Civil Rights Act-based challenge. But many of the folks following women’s lack of progress on Wall Street would like to see the U.S. be, well, a little more Teutonic.

Even though the principles of liberalism suggest quotas are a terrible idea, Americans can still learn from Germany's great social experiment. Here's why. 

(1) Even the Threat of Quotas Gets Companies to Hire Women ...

The German quota experiment isn't asking DAX companies to do much more than they're already doing. In 2011, then-Labor Minister Ursula von der Leyen said she was “completely convinced” any pledge to increase female representation “won’t work without laws.” 

She was wrong. A PricewaterhouseCoopers survey in June put the proportion of women on DAX company supervisory boards at nearly 22 percent, up from 13 percent in 2011. Even the threat of binding quotas was enough to get companies moving, either because they wanted to forestall the actual legislation through a show of good faith, or (if you’re inclined towards a rosier reading) because the policy discussions alone have helped shift corporate culture.

(2) ... But Sometimes, It's Just for Show

One outstanding question for the German experiment is: Does making a quota really change the culture?

German boards, unlike those in the U.S., are divided into a “management board” containing executives and a “supervisory board” akin to the U.S. board of directors. Unlike quotas elsewhere in Europe, German quotas will only apply to the supervisory board: It would be unusually easy in these circumstances for companies to meet the law’s requirements by simply placing women on the supervisory board while keeping them out of the company's decision-making positions.

This has been a problem in other countries even with different requirements: Reviewing available research in 2011 for a background paper for the World Development Report on Gender, Rohini Pande and Deanna Ford wrote that Norway’s quota system was associated with an “increase in women serving on multiple boards,” but not necessarily an increase in the total number of women serving. In addition, there was “mixed evidence on whether companies replace male directors with female directors or if they increase the overall size of the board in order to reach the target.”

(3) We Don't Know Whether Quotas Hurt Economic Performance

The German plan will provide fresh data on the potentially adverse consequences of quotas, as well. On the one hand, as one editor at German paper Die Zeit recently pointed out, these quotas aren’t that demanding, given the current boardroom demographics: 22 percent to 30 percent isn’t the largest of jumps. Nor are there severe penalties for failing to find enough female candidates. If the quotas aren’t reached, the seats on the board will simply stay open.

On the other hand, there’s always a concern about quotas disrupting a company’s ability to pick the best person for the job. The president of Gesamtmetall, the employer association for the metal and electrical industry, has already complained to the Rheinischen Post that the policy approaches the problem backwards, failing to address a fundamental supply problem.

“The proportion of women among engineering graduates of all disciplines is around 20 percent,” he said, and therefore “a mandatory quota for boards will offer little help to companies that are [already] desperately searching for more women.” Martin Wansleben, managing director of the German Chambers of Industry and Commerce added to the Passauer Neuen Presse that, “in many branches, only 20 percent, if that, of employees are female.”

Granted, maybe that reflects a role-model problem that more women in leadership positions might help address. But it's true that the issue of whether quotas are more of a hindrance than an asset to companies hasn’t yet been resolved. In that background paper in 2011, Pande and Ford pointed to a study showing a short-term negative impact on firm value associated with Norway’s quota implementation. The problem with that finding? It can’t tell the difference between public perceptions of performance and performance. In other words, sometimes the value of a publicly traded company drops when more women join the team just because the market isn’t yet sure women are a good thing. To isolate those variables (and, in particular, to remove the possibility that Norway just had a bad roll-out), we need more data.

If Germany’s experiment helps clear that up, American activists and policymakers will have a much better idea of how to address representation in the U.S.—even if it's without quotas.