December 2 2013

Bad for Women, Bad for Germany

Wall Street Journal

Carrie L. Lukas

In the name of women's empowerment, the German government is considering requiring that publicly listed companies have supervisory boards with at least 30% female membership by 2016. Currently, less than 5% of such positions are held by women, so the quota would require a massive change for major German businesses.

Supporters of the new rule point to Norway, which passed a 40% corporate-board quota in 2003, as evidence that such mandates can succeed in boosting women's power without harming businesses or the larger economy. But the evidence from Norway isn't so encouraging upon close inspection.

Studies do suggest there may be benefits associated with greater female leadership on corporate boards. A 2007 McKinsey study of large European companies found that those with at least three women on their executive committees had higher operating profits and better return on equity than those with more male-dominated leadership. A 2012 study by Credit Suisse of 2,360 businesses echoed those findings: Companies with women on their boards produced higher returns than those with male-only leadership.

Yet this research doesn't mean forced board diversity will yield economic gains. In fact, a 2011 University of Michigan study of the impact of Norway's quota reached the opposite conclusion: "The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance, consistent with less capable boards."

Proponents of a gender quota may dismiss such findings and argue the economic impact is of secondary concern. The real purpose of a quota, they contend, is to advance equality and women's economic prospects. As long as the policy does not inflict extreme economic damage, the gains for women outweigh some lost revenue and growth.

Yet Norway's experience also suggests the quota won't do much to help women as a group. While Norwegian companies subject to the rule—which represent a small fraction of all Norwegian businesses—generally managed to add enough women to their boards to comply with the mandate, the Oslo-based Center for Corporate Diversity noted in 2007 that many firms drew on the same pool of female talent, so that a small cadre of elite women now serves on numerous corporate boards. And the increase in board representation has not elevated more women into leadership positions throughout the rest of Norway's corporate structure, as proponents had hoped.

Nor did it lead to an increase in women's wages compared to men's. Norway has long had a comparatively narrow gap between male and female median wages, but the gap among the highest-income earners—those most likely to benefit from a government mandate for more female leadership—remains stubbornly high at 17%.

Beyond these discouraging statistics, those interested in improving women's prospects and providing role models for younger workers ought to consider the message sent by such quotas. Forcing companies to set aside positions for women leads to questions of whether female board members are truly deserving or are merely selected to make the numbers work. These women may be looked upon as less capable, which would hardly be conducive to fostering respect for women. They may also face resentment by male colleagues who are discriminated against by a system explicitly stacked in women's favor.

German Chancellor Angela Merkel ought to understand this instinctively. The chancellor provides an excellent role model for women around the world, showing that hard work and determination can carry women to the highest ranks of leadership. Had the German people been required by law to elect a female chancellor in the name of fairness and equal representation, Mrs. Merkel's achievements would be less inspiring. Fellow world leaders would view her as less formidable, less worthy of respect, and she would have difficultly representing German citizens effectively.

Happily, women are already making strides in taking leadership roles throughout the Western world. This has overwhelmingly been a natural process, as societies and businesses have recognized the value and strengths of high-achieving women, and as women's individual preferences and choices have evolved. The rise of female leaders has brought benefits to economies, to civil society and most importantly to women themselves.

Equality under the law was the critical foundation for these changes, realized through relatively free labor markets. Further gains will not be won through arbitrary quotas and government force, but rather through market competition and the collective impact of women's decisions and ambitions. Germany would do well to recognize this reality and not step backward in the name of progress.

Ms. Lukas, the managing director of the Independent Women's Forum, lives in Berlin.

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