Artillery Row

The politics of biology and its share price

Can talent quota restrictions based on biology really deliver increased profits, productivity and gain?

“Making a speech on economics is a lot like pissing down your leg. It seems hot to you, but it never does to anyone else” said Lyndon B. Johnson.

Over the course of decades, and with quickening speed after the 2008 recession when the discipline’s credibility slumped – not yet fully to recover – hot and damp effusions about economics have given way to ones on Diversity.

Scarcely a day goes by without an article, report or opinion column telling us about how the business case for diversity is now overwhelming or that diversity increases profits or gain, and more directly, that “diversity wins”.

Diversity in this context, however, is about biology and not about opinion or background. Interestingly, the politics of biology has been rediscovered after having lost so much lustre since the 1930s.

No institution can escape the new orthodoxy. The promotion of this interpretation of diversity comes at the price of restricting diversity of thought, attitude and outlook.

However, can talent quota restrictions based on biology really deliver increased profits, productivity and gain?

A few things are worth nothing. In 1999, the year Putin became Russian president, the value per share of the FTSE, the aggregate value of our top 100 listed companies, was around £65. Both still hold their positions today.

The pound though doesn’t quite have the same purchasing power now that it did then. If we assume a range of between 2 per cent and 5 per cent constant rate of inflation over the last two decades, the real value of the FTSE 100 falls to between £22 and £42. We use the 5 per cent range because if it is applied to house prices, for instance, we find that a property bought for £150,000 in 1999 would now be worth around £450,000.

In either case our top 100 companies have not held their value as might have been expected, the current nominal value representing less than that of 21 years’ ago.

Having lost between one-third to two-thirds of their aggregate value in real terms over the last twenty years, the FTSE 100 has been value destructive.

By 2011, FTSE 100 leaders had given themselves a 3000 per cent pay rise over three decades

During the same period, Britain’s productivity has languished, its rate of increase comparing poorly by the standards of key international competitors. Whatever the reasons, it is not because of Britain’s comparatively poor boardroom diversity. With nearly 35 per cent of women on boards, the FTSE 100 has around 40 per cent more gender diversity on corporate boards than the United States’ S&P; 216 per cent more than Singapore’s Straits Times Index; 250 per cent more than Germany’s DAX; and 1129 per cent more than in South Korea’s entire corporate sector.

How can this be, given the repeated assurance that biological diversity wins?

It is true that recent years have been profitable ones for our CEOs. By 2011, FTSE 100 leaders had given themselves a 3000 per cent pay rise over the previous three decades. The High Pay Centre, a non-partisan think tank, calculates that since 1 January 2020, the average FTSE 100 CEO has earned £3,274,413. With just two weeks to go until the end of the year, our average CEO can look forward to receiving an extra £130,000. That level of pay would be fine if the results warranted them, but they do not.

We have on the one hand a laser-focused, self-created diversity inspectorate on the lookout for companies that don’t comply with enough alacrity, in part backed by large insurance companies who threaten our willing corporate giants of the consequences of not going further.

Indeed, Legal & General recently warned that it will vote against corporate leaders unless they reach arbitrary sex and racial quotas; on the other, we are promised a land of milk and honey in which investors will be duly rewarded with more profits, higher productivity and capital gains.

The threats, of course, are real as are the consequences for daring to interpret diversity to mean that of opinion, background and understanding as much as biology. The promises so far, however, have been left totally unfulfilled.

It is not just that the returns of our top listed companies have been so abysmal. It is also that the composition of our FTSE index feels a little bit like a museum piece with the three main sectors being consumer staples, financials and materials, mostly sectors that are in an existential battle for survival from new challengers. In 1999, the top three sectors were financials, telecoms and Oil & Gas.

Information Technology, however, lingers at the bottom. Today, 1 per cent of our top 100 companies are involved in software and information technology, a 500 per cent shrinkage from the 5 per cent in 1999, the sector that has generated the most returns globally over the last decades.

Our diverse boards just seem to have watched the world accelerate past them as they soaked in warm waters.

Our top listed companies have delivered precious little to their long-suffering investors

That is not to for any lack of innovation in Britain. Indeed, INSEAD ranks the United Kingdom as being among the top four most innovative countries in the world, behind Switzerland, Sweden and the United States. But the innovation, and our hope for the future, is concealed in the private capital segment of our investment landscape, out of reach therefore of retail investors and concentrated in the hands of those with the spare liquidity to allocate their surplus money to venture capital and private equity risk.

Currently, our top listed companies have delivered precious little to their long-suffering investors, many of whom will depend for their retirements on the good offices and performance of the distracted CEO class.

Based on returns, our corporate leaders have seemingly lost their focus. To compensate, they have instead chosen to pontificate with monotonous regularity and through the set priorities of their Human Resources departments about the need for more diversity, forgetting that their duty is to the shareholder first and foremost.

For instance, although the Hampton-Alexander Review, an independent, business-led framework, supported by the UK government, found that there was considerable progress made over the last few years in terms of meeting abstract targets, the review’s chief executive, Denise Wilson, said that problems such as unconscious bias and gender stereotypes were preventing further progress, adding, “we have a lot further to go before we see a good gender balance in the leadership of British business“.

Do diversity-proud corporations and their HR departments sustain this flow of rhetoric to hide the fact that they have run out of ideas or because they think it is the only way to survive in their position, choosing intellectual subjugation in the hope of surviving a few more quarters in situ? At any rate, they know how to operate within the confines of the new diversity orthodoxy.

Given how deeply ingrained the intellectual habits of our leaders have become in acclimatising themselves to the warm feeling that talking about diversity provides, we can expect them to double down on their bet that more of the same will lead to better results in the future. For the investor, that future may be a distant one.

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