Svetlana Borovkova & Pim Poppe: Goals of gender balance

Svetlana Borovkova & Pim Poppe: Goals of gender balance

Svetlana Borovkova en Pim Poppe 980x600.jpg

By Svetlana Borovkova, Head of Quant Modelling at Probability & Partners, and Pim Poppe, Risk Management Professional at Probability & Partners

In June 2021, the ECB posted a consultation paper about the fit and proper assessments of banking board members, taking into account gender diversity. This places gender diversity in financial institutions’ boards firmly on the ECB agenda.

However, gender diversity is not stated as the primary goal but as means to prevent the so-called ‘groupthink’ and achieve a fairer representation of the society on the boards. This paper triggered a heated debate in our office last week, and so it seemed appropriate to touch upon this issue in our column.

Gender balance is a complicated and long-standing issue in society and businesses. Previous attempts to increase gender diversity in high positions have ranged from regulatory efforts and hard quotas to business incentives.

Government-imposed gender quotas have a long history and have led to successful outcomes in gender balance. For example, in the Soviet Union, a hard approach to this issue has resulted in high participation of women in all levels of government, industry, and academia, making the USSR the most gender-diverse society (before Perestroika). More recent efforts (e.g., in Norway and Italy) have also positively impacted gender balance in high positions in society.

What is the goal of gender balance?

Here one must stop and ask an important question: what is the ultimate goal of such policies? If the outcome is just that: percentage of women in high positions – then there is clear evidence that the regulatory approach to this issue achieves the desired goal.

If, on the other hand, the outcome is better functioning institutions (in terms of financial or societal performance), then the results are not so clear.

Business cases for gender balance

Business cases have been made claiming that more diverse organizations (in terms of gender and other kinds of diversity) have better innovative performance and are more attractive to customers. However, statistical evidence is ambiguous. Evidence from Norway is interesting.

On the effect of gender quotas in Norway, American economists David Matsa and Amalia Miller, writing in the American Economic Journal in 2013, conclude: ‘We find that affected firms undertake fewer workforce reductions than comparison firms, increasing relative labor costs and employment levels and reducing short-term profits.’

Superficially this implies improved societal performance and worse financial performance of a firm. Another conclusion about the Norway experience, drawn by economists Kenneth Ahern and Amy Dittmar, writing in the Quarterly Journal of Economics in 2012, is that ‘The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deteriorating operating performance.’ This result seems counterintuitive because an increased female balance was supposed to reduce risk-taking behavior.

Unintended consequences

Imposing gender quotes can lead to unintended (and often negative) consequences, for example, backslash within organizations towards women (who are seen as promoted not due to merit), fears of discrimination, or even not achieving the desired goals.

For example, the initiative of TU Delft to improve upward mobility of female Dutch researchers by appointing women-only professors has resulted in zero upward mobility for domestic female academics: all professors appointed to these positions came from outside The Netherlands and all of them have left the Netherlands immediately after their tenure has ended, pursuing positions in their home countries.

New ways of thinking

The success versus (unintended) negative consequences of the existing solutions to the gender diversity problem is a subject of a heated debate. We believe that new, ingenious and ‘out-of-the-box’ solutions must be designed, preferably those that combine both regulatory and business incentives.

We think the start to solving this problem is in education: universities and business schools should create programs for young women to achieve high business positions and encourage broader female participation in traditionally male areas such as finance, business, and economics (but also tech and beta-sciences).

What are the benefits?

But before designing such solutions, the question has to be raised: what are the benefits (except for obvious gender quotas) of gender diversity, especially at the high levels?

These benefits might include better customer satisfaction (for female customers), reduced strategic and reputational risk, increased potential talent pool, and attracting highly educated and valuable female employees.

Probability & Partners is a Risk Advisory Firm offering integrated risk management and quantitative modelling solutions to the financial sector and data-driven enterprises.