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Affluent Christian Investor | September 21, 2017

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“Diversity” on Corporate Boards: One More Thing Feds Should Stay Out Of

board room

Would corporations operate better if their board members were chosen so as to ensure that women and major racial/ethnic groups were all appropriately represented? Many social activists believe so and their thinking has penetrated into the federal regulatory agency that oversees our stock exchanges – the Securities and Exchange Commission (SEC).

Back in 2009, the SEC instituted a requirement that publicly traded companies disclose plans they might have regarding the diversity of their boards of directors. That is to say, the racial, ethnic and gender characteristics of board members – as if those attributes were the essential, defining attributes of a person.

But now SEC Chairman Mary Jo White has concluded that the earlier rule was too soft, leading only to vague disclosures about board diversity. As we learn in this Wall Street Journal editorial, she wants a new rule mandating that firms “include in their proxy statements more meaningful board diversity disclosures on their members and nominees.”

Chairman White’s idea dovetails with the thinking of Canadian law professor Aaron Dhir, who has been crusading for rules to compel companies to consider “the socio-demographic composition of their boards” and of Representative Carolyn Mahoney of New York, who wants the SEC to force companies to identify each member of their boards according to gender, race, and ethnicity.

Advocating more diversity just for the sake of creating boards that “look like America” (as Bill Clintonfamously described his cabinet) makes many people feel good. But Law professors, bureaucrats, and politicians don’t have much if any idea what business management entails, and they won’t suffer any of the costs if boards stocked with people chosen mainly to meet a quota push the company into poor decisions.

All of this brings to mind a furor that arose twenty years ago.

In May, 1996, Sister Doris Gormley wrote a letter to T.J. Rodgers, the founder and then-CEO of Cypress Semiconductor. She argued that Cypress ought to diversify its board by adding some women.

Replying to her, Rodgers wrote, “Choosing a Board of Directors based on race and gender is a lousy way to run a company. Cypress will never do it. Furthermore, we will never be pressured into it, because bowing to well-meaning, special-interest groups is an immoral way to run a company, given all the people it would hurt. We simply cannot allow arbitrary rules to be forced on us by organizations that lack business expertise.”

To people who actually run business enterprises, getting sound advice from the board is important. It can help them avoid costly mistakes. But that requires deep knowledge of the specific business field. Companies have every incentive to find such people, which has nothing at all to do with the happenstance of their ancestry or sex.

It’s one of the clichés of progressivism that “diverse” groups are necessarily better at making decisions. Rep. Maloney sponsored a federal report on corporate boards that’s quoted in the Journal article above, stating that “the broader range of perspectives represented in diverse groups require individuals to work harder to come to a consensus, which can lead to better decisions.”

That belief, which justifies endless social engineering by people who like to do such engineering, is rooted in a 2007 book by University of Michigan professor Scott Page, The Difference. Page’s work, however, was torn apart by UC-Davis mathematics professor Abigail Thompson in this paper she published in 2014. But in any case, since people can be different in innumerable ways other than race and gender, there is no way of specifying exactly what “diversity” (if any) is optimal for a board to make good decisions.

A federal rule on corporate board diversity would invite a great deal of mischief by people who, the Journaleditorial says, “want to open a new front in the campaign to have government allocate participation in society for groups it designates as protected classes.” In other words, this advances the “progressive” goal of subordinating individual merit to group identity. We already suffer from an excess of that.

By the way, why does the S.E.C. have any such authority? Do the federal securities statutes provide that the agency has the power to mandate anything pertaining to the composition of boards? No, but this is yet another of the many instances where “administrative law” saddles us laws concocted by bureaucrats.

In his superb 2014 book Is Administrative Law Unlawful? law professor Philip Hamburger explained how this unconstitutional method of making law has become the principal means by which the government subjects Americans to its will. His broad indictment applies to Chairman White’s proposed rule.

Whether stockholders want their directors to “look like America” or be chosen purely for their business acumen  should be up to them, not up to politicians or bureaucrats.

 

Article originally published on Forbes.com.

 

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