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Diversity requires quotas

Part 1 of the Alastair Ross Goobey Debate

Home / Hermes EOS Blog / Diversity requires quotas – Part 1 of the Alastair Ross Goobey Debate

On 11 April 2016, we hosted the Alastair Ross Goobey Debate in honour of the former CEO of Hermes Investment Management who played a leading role in establishing stewardship practices in UK companies. This year, we debated divestment of fossil fuels and diversity and quotas. I took part in the latter and outlined why in my view quotas are necessary to increase diversity in the boardroom of companies, at senior management levels and beyond.

So why does diversity require quotas? Why does change need to be imposed?  Can it not occur naturally?

Addressing groupthink
I believe that quotas are one of the most effective ways to address a weakness that has significant impact on the performance of companies – groupthink. This practice may lead to a lack of support for innovative ideas, disregard for demanding analyses and decisions being taken without challenge. The situation is particularly worrying when groupthink takes place at the board level, which is at the heart of a company’s corporate governance.

Conditions for change
Despite numerous studies showing that diversity leads to better performance[1], scepticism about diversity has remained.

Change does not happen on its own, and if it ever does, it takes a long time, like evolution. Therefore, we need to create the conditions for change to take place swiftly. Even then, the way to diversity may be long and windy.

For example, Denmark granted women suffrage in 1915, followed by Canada in 1915, the UK and Ireland in 1918 and Japan in 1947. This movement culminated in 1948 with the adoption of the Universal Declaration of Human Rights by the UN, which stated that The will of the people shall be expressed in elections which shall be by universal and equal suffrage." Still, Switzerland only granted women the right to vote in 1971 after rejecting it in a referendum 12 years earlier. It took the country 23 years to come to terms with universal suffrage.

Creating momentum
However, quotas challenge the status quo. They serve to create momentum for change in our lifetime.

But quotas are a means and not an end. They are an external force and attempt to create momentum even when there is resistance to change, something we have observed at some company boards.

Initially, I was against quotas. However, I changed my mind at an event at the Bombay Stock Exchange earlier this year.

In 2013, the Indian Parliament enacted a new Companies Act requiring all listed companies to have at least one woman on the board. However, that just prompted some companies to appoint the nearest woman in sight. My reaction was that quotas are bad because we end up having unsuitable people in the job.

But I was enlightened by a number of experts at the conference. They said that without this change in law, no one would even think about what type of skill sets are required at boards, let alone take action. So sometimes there is a need for what can be perceived as an extreme push to affect change.

Quotas create the necessary momentum for the destruction of the status quo to allow a new environment to rise from the ashes of the old system, one that suits the ethos and values of the 21st century.

The motion again quotas will be published shortly.

 

 

[1] McKinsey (2007) Women Matters

Credit Suisse (2012) Does Gender Diversity Improve Performance?

Thomson Reuters (2013) Mining the metrics of board diversity

Grant Thornton (2014) Women in Business: From Classroom to Boardroom

MSCI (2014) Survey of Women on Boards

Cumming, Leung and Rui (2014) Gender diversity and securities fraud

Morgan Stanley (2016) A Framework for Gender Diversity in the Workplace

Virgin Money (2016) Empowering productivity

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    Christine Chow Dr Christine Chow is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has 19 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. She is an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She is a governor of the London School of Economics and a member of the university’s investment committee. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
    Read all articles by Christine Chow

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