Why does the City still use quotas?

It sometimes feels like every regulatory body in Britain today misuses its influence to advance progressive causes. A welcome exception is the Financial Conduct Authority, which last week decided to allow firms to choose whether they use sex or gender as the definition of ‘woman’ for reporting on their representation on corporate boards.

It is clearly not the role of a financial services regulator to attempt to define 'man' and 'woman'. Out of 540 responses to a consultation on the matter, all but one said they did not want trans women to be automatically included in the targets and data.

As the group Sex Matters has pointed out, there is no reason to believe that the perceived advantages and disadvantages of female workers are shared by men who self-identify as women. But should either sex or gender matter to the City watchdog? The FCA appears to think so, and is now setting out requirements for UK listed companies to ensure that 40 per cent of its board of directors and at least one senior board member are women. Companies that don’t meet these targets will be required to explain the reasons why – with all the public opprobrium we’ve come to see from other government reporting requirements, such as gender pay. The fundamental principles of the Listing Rules, which focus on ‘maintaining market confidence and ensuring fair and orderly markets’, seem a long way away.

The FCA's justification is flimsy. Over time, it expects that: 

“enhanced transparency may strengthen incentives for in-scope companies towards greater diversity on their boards. This may have further benefits of improving the quality of corporate governance and company performance in due course. 

Leaving aside the fact that the word ‘may’ is doing a lot of heavy lifting, it concedes that the evidence base for its proposals is ‘inconclusive’, and that it cannot show a ‘causal link’ between its policy proposal and ‘any desired outcomes deriving from greater diversity’.

Over the course of the 2010s, two government-backed commissions sought to boost female representation on FTSE boards. New targets were introduced, and an independent framework supported by the government created to oversee progress. The FTSE Women Leaders Review recently lamented that ‘the number of women in the very top job, that is the CEO, remains flat and stubbornly low… and there is much more to do on executive committees, and in some key functional roles’.

While the UK has so far resisted introducing quotas, the FCA is now trying to enforce them through the listing mechanism – despite international examples they don’t work. In 2008, Norway obliged listed companies to reserve at least 40 per cent of their director seats for women after delisting. It reportedly prompted some firms to delist rather than comply, and the shortage of female candidates led many women to hold several non-executive roles. They were described, pejoratively, as ‘golden skirts’.

In France, where similar legislation was imposed, firms have used ‘circumvention strategies’, such as decreasing the total number of board members to increase the percentage of females. And a recent review of studies on the subject has cast doubt on the widely-held view that mandating women on boards of directors contributes to better company performance on the continent.

None of this is to mention how supremely insulting it is to women to suggest they cannot climb the greasy pole without virtue-signallers at some arms-length body giving them a step up. Quotas are fundamentally anti-meritocratic, and extremely demeaning. Female career paths are known to be different from those of males. Women do not enter key industries such as construction and engineering and the financial sector in anything remotely like the numbers which men do. In surveys, they consistently rate pay less highly than other aspects of the job. These are cultural issues, ones that cannot be fixed by piling more and more bureaucracy onto large firms.

Ultimately, we shouldn’t mix business and politics. It is reasonable that official enquiries, commissions and quangos might try to achieve as high a level of diversity as possible. Representation matters in politics. But businesses exist to maximise shareholder returns – and their single-minded pursuit of profit, as Adam Smith realised, then has the unintended consequence of benefitting society. The FCA should focus on delivering on its core objectives as most investors and consumers would understand them, and no doubt as parliament intended them, rather than telling banks how many women to employ.