Thursday, November 22, 2012

Subsidiarity: Women Quotas (2)

For reasons passing understanding, Mrs. Reding is still keen to have the world think that she made it into the College of Commissioners only because she's the only woman politician they could find in Luxembourg, rather than because she is actually competent. (Especially for a small Member State, coming up with a woman candidate is essential if one is to snatch up a coveted portfolio or Vice-Presidency.) Hence the presentation, last week, of the official Commission proposal for a Directive on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures. Since I already subjected this proposal to my patented Subsidiarity Test once before, I thought I'd look at the finished product.

As always, I approach this problem in the way I would like the Court to, by looking at the Commission's own arguments and judging whether they are at least plausible. In dubio pro reo, when in doubt the dealer wins, but the argument has to achieve at least some minimum level of plausibility. Moreover, it has to be internally consistent.

In the gender quotas proposal - it is not strictly speaking about women quotas, because it treats men and women equally, with the minimum representation for each being 40% - the discussion of subsidiarity is on page 9-10. The key point raised in the opening paragraphs is that gender equality is a fundamental objective of the Union, which is correct but irrelevant. This is what it says in art. 19 TFEU:
1. Without prejudice to the other provisions of the Treaties and within the limits of the powers conferred by them upon the Union, the Council, acting unanimously in accordance with a special legislative procedure and after obtaining the consent of the European Parliament, may take appropriate action to combat discrimination based on sex,(...) .
(Emphasis mine.)

One of those limits is the principle of subsidiarity, a principle that applies in all cases, unless the Treaties give the Union an exclusive competence, i.e. a right to act that is not shared with the Member States. That is quite clearly not the case here. Incidentally, the proposal is not based on the general equal treatment article, but on art. 157(3) TFEU:
3. The European Parliament and the Council, acting in accordance with the ordinary legislative procedure, and after consulting the Economic and Social Committee, shall adopt measures to ensure the application of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation, including the principle of equal pay for equal work or work of equal value.
(I would like to note for the record that, assuming that it is shown that less drastic measures do not work, I have no problem with art. 157 TFEU as a legal basis for this proposal.) Then the argument once again goes on to say that "action by Member States individually will not achieve the objective of a more balanced gender representation on company boards (...) by 2020 or at any point in the foreseeable future." This, again, seems quite correct but also quite irrelevant. The mere fact that the Member States "do not show any willingness or face resistance [sic]" is not sufficient reason to propose a directive at the European level. Quite the contrary, the manner in which European legislation is frequently used to strong-arm Member States into doing things they would never be willing to do at the national level alone is exactly what gives the EU such a bad reputation. The fact that desirable but unpopular legislation can be passed at the EU level because of the lower level of public scrutiny there is unfortunate and not to be exploited at the pain of even lower levels of legitimacy for the EU.

Fortunately, the proposal proceeds to make an argument that is at least based on positive and negative spillovers. It argues that "Member States may indeed hesitate to regulate in this area on their own, as they could perceive a risk of putting their own companies at a disadvantage with companies from other Member States." Wit the reader's permission, I would like to leave this point to one side for the moment, and return to it later. But please make sure to remember it.

Next, the Commission argues that differing rules in this area form an obstacle to the functioning of the Internal Market. That is still rubbish, just like it was when I discussed the draft proposal in September. Company law rules vary in many, many respects, which is why the EU has passed more than a dozen harmonizing directives in the last four decades. As long as every company has to comply only with the rules of its own home country - and it is difficult to see how it could be different -  I don't see how this creates a substantial problem.

Which brings us to competitiveness and growth. Remember how, two paragraphs ago, the Commission explained that the Member States might be hesitant to put their own companies at a disadvantage? Well, now it turns out that having gender balance on the board of companies is good for competitiveness and growth. Yes, feel free to take a moment to admire the awe-inspiring internal contradiction at work here. 


Now I believe that the balance of academic research shows that teams work better if they include a reasonable balance of men and women. The first question is, however, to what extent that research applies here. As I already wondered when I spoke with Sophie in 't Veld MEP about the appointment of Yves Mersch to the executive board of the ECB, is meeting once a week - or, in the case of most companies' supervisory boards, once a quarter - sufficient to make a group of executives a "team" as that concept is used in the relevant management literature? Having read some of that literature, I highly doubt it. A team, in the theoretical sense, involves a much closer collaboration with a much greater frequency, something that is more commonly found lower on the corporate ladder.

But even if we grant that an economic benefit is to be expected from a gender balanced board, why does this justify EU-level legislation? As noted, if this were true, the Member States would be fools not to enact such laws on their own initiative. The fact that they do not suggests that they are not convinced. Moreover, if this were true, the companies in question would be fools not to appoint more women on their boards voluntarily. Why don't shareholders demand more women executives? The same goes for the argument that it is important to make "full use of the talent pool of the best qualified women". This final version of the proposal does offer one new argument in reply:
"[The low numbers of women board members that are to be expected absent legislation] would not be sufficient to bring about the “critical mass” of women on boards across the Union which, as research shows, is needed to generate positive effects on company performance."
This is a tantalising statement, which makes one wonder about that "research". Fortunately, the impact assessment that goes with the proposal gives more details about said research:
As to the share of women which is necessary to make a substantive change, it has to be noted, that one or two women are easily marginalised when their presence in a larger group is modest and they are viewed as a token. Only if the size of the female group increases to the point that it is no longer a token minority this can this cause a fundamental and sustainable change in the boardroom and enhance corporate governance. Only then are women no longer seen as outsiders and are able to influence the content and process of board discussion more substantially. Studies have shown that only after a 'critical mass' of about 30% women has been reached – or where the board size permits where at least three board members are female -, gender diversity can produce significant effects in terms of catalysing board activities and better corporate governance and performance. The research on the 'critical mass' suggests that there are two elements to the critical mass, first the percentage share of directors of the under-represented sex and second the absolute number of persons from the under-represented sex holding a director's post. There is a high degree of consensus among scholars that for the benefits of gender diversity to fully materialise it is preferable to reach the critical mass in both respects where the board size so permits.
(page 16, footnote omitted)

Here is why this is stupid: The research cited (I have omitted the references in the above quote, for reasons of brevity) is undoubtedly correct that having one woman in a board room full of men is unlikely to make much of a difference. But that is not the essential question of subsidiarity purposes! If the Commission is to make an argument for intervention, it needs to show that the benefit of having more women in one board room is diminished if other companies do not follow suit. If such a thing were shown, it would indicate a collective action problem that requires legislation to correct. Likewise, if the benefits of a woman quota in one Member State can be undermined by other Member States, that suggests a collective action problem at a European level that requires EU legislation to fix. But the question of how many women it takes in an individual board room to make a difference has nothing to do with any of that.

(All the more so because the Commission ignores the difference between the percentage women among board members and the percentage of companies that have more or less balanced boards. If half the companies in Germany had a perfectly balanced board while the other half were all men, the Commission would say that 25% women board members is not very good, while perhaps the better view is that 50% of companies are doing what they are supposed to, begging the question of why the other 50% do not.) 

Without further arguments, I do not even see why any government intervention is justified, much less EU intervention. None of this comes even close to explaining why the EU should commit what is perhaps the ultimate EU-evil: having politicians do in Brussels what they cannot do at home.

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