We must be more meritocratic – but quotas are not the answer

Allister Heath
QUOTAS are the enemy of meritocracy and have no place in public companies. Giving people jobs or promoting them merely because they happen to belong to a particular group ought to be anathema to a free, liberal society in which people are treated and judged solely as individuals, regardless of their gender, race or any other such criteria.
It is a shame, therefore, that the EU is to force large financial firms to set gender targets for boards, as we report on p1. It would be more sensible to insist that applicants should be judged solely on their merits – for their ability to perform, their skill match with what the company is looking for, their motivation – and not because they tick an arbitrary box. There should be no discrimination against or in favour of any group and no favouritism. On one extreme, listed firms should not be run like small family businesses, where relatives are promoted above more able outsiders – on the other extreme, neither should they be used for the purposes of social engineering by politicians or Brussels bureaucrats, for whom tokenism is more important than real change.
The good news is that the old-fashioned, shamelessly explicit, horribly sexist discrimination of yore is in dramatic retreat – but that has not been enough. Those who support initiatives such as the EU’s are rightly seeking to improve women’s chances and to help them realise their dreams, a motivation I wholeheartedly and enthusiastically support – but sadly they are going about it the wrong way. As this newspaper has argued in the past, quotas devalue the achievements of those who climb to the top without artificial assistance, punish those who are discriminated against, promote inferior candidates (and hurt firms) and create resentment. We need more women in top roles – but quotas are not the answer.
They replace one flawed network by another: instead of the old school tie, whereby a small group of (often inadequate) male cronies serve on vast numbers of boards, an even smaller number of women would end up doing the same, in an even more extreme manner. The figures would look better, but there would be no real transfer of power. As ever, the jobs that would be filled in this way would be the non-executive positions – not the executive roles that really matter.
The other reason sometimes cited by supporters of quotas – that more women on financial firms’ boards would make them safer – fails to convince. By the time men or women reach the top ranks of large banks, they tend to have internalised the culture and incentive structure, and I see no evidence that they would behave any differently. A trader is a trader, regardless of gender or background; members of the same, specialised profession tend to see the world in a very similar way.
A good starting point for a discussion of this literature is Executive Board Composition and Bank Risk Taking, by Allen N Berger, Thomas Kick and Klaus Schaeck, published by the Bundesbank in 2012. The paper poured cold water on the view – prevalent a few years ago, when politicians claimed that a Lehman Sisters wouldn’t have gone bust – that quotas are the way forward. Among many other findings, it reports that Norway’s gender quota system caused firms to pick younger, less experienced and so riskier candidates. It also studies 3,525 German banks and reveals that having directors with PhDs “robustly” lowers the risk profile of a firm’s decisions, and that a board’s age and education have more of an impact than gender.
Huge progress has been made, but we need a more meritocratic, more equal business culture. We also need to stamp out any remaining discrimination and sexism. But quotas are a step backwards towards a more illiberal, less individualistic society. They will prove to be a big mistake.
Follow me on Twitter: @allisterheath