The problems with appointing on merit. A human capital analysis

ABSTRACT

The principle of being valued, in the employment context, according to effort and talent is appealing. Despite its appeal in principle, a consideration of the construction and application of merit in practice reveal fundamental underlying issues. Examined here in the context of corporate boards, it is argued that the meritocratic ideal can be more harmful than helpful. Human capital (including social and cultural capital) is decisive in merit-based decisions. But human capital is also flawed because measuring people in this way fails to account for structural inequalities. So long as boards are guided to implement and disclose a merit-based appointment policy, without sufficient focus on outcomes, they will continue to lack diversity of gender, ethnicity and socio-economic background. Even to the extent that it is possible to make a truly merit-based appointment, the privilege upon which human capital and merit is built makes truly meritocratic boards an impossibility in the current context. Despite these problems, a lack of feasible alternatives necessitates the continued use of merit. It is argued here that modifications should be made to the meaning and usage of merit in practice in order to mitigate its failings.

KEYWORDS:

• Corporate governance
• board appointments
• human capital theory

Acknowledgement

I am very grateful to the anonymous reviewers for their valuable comments. Many thanks to Cheryl Thomas, Martin Petrin, Ruth Sealy and Iris Chiu for comments on earlier versions. All errors are my own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes on contributor

Dr Eleanore Hickman is a research associate and teaching fellow at the University of Cambridge, a teaching fellow at University College London and a Modern Law Review Early Career Fellow. Her research interests include corporate governance and financial regulation.

Notes

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2 Amy Hillman and Thomas Dalziel, ‘Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives’ (2003) 28 Academy of Management Review 383, 383.

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4 Robert D Putnam, Our Kids: The American Dream in Crisis (Simon and Schuster 2016) 34.

5 Daniel Markovits, The Meritocracy Trap: Or, The Tyranny of Just Deserts (Penguin UK 2019) 16.

6 Eleanore Hickman, ‘Diversity, Merit and Power in the c-Suite of the FTSE100’ (Doctoral, University College London 2020).

7 Hilary Sommerland, ‘The Social Magic of Merit: Diversity, Equity, and Inclusion in the English and Welsh Legal Profession’ (2014) 83 Fordham Law Review 2325, 2346.

8 Michael C Withers, Amy J Hillman and Albert A Cannella, ‘A Multidisciplinary Review of the Director Selection Literature’ (2012) 38 Journal of Management 243, 262.

9 ibid 247.

10 ibid 255.

11 Sir Philip Hampton and Dame Helen Alexander, ‘Hampton-Alexander Review. FTSE Women Leaders’ 13.

12 See OECD, ‘Inequality – OECD’ <http://www.oecd.org/social/inequality.htm> accessed 17 August 2020.

13 Emilio J Castilla, ‘Gender, Race, and Meritocracy in Organizational Careers’ (2008) 113 American Journal of Sociology 1479, 1483.

14 Francesca Cuomo, Christine Mallin and Alessandro Zattoni, ‘Corporate Governance Codes: A Review and Research Agenda’ (2016) 24 Corporate Governance: An International Review 222, 226–228.

15 UK Corporate Governance Code 2018, 4. Listing Rule 9.8.6(6).

16 ‘OECD Corporate Governance Factbook 2019’ 184, 12.

17 UK Corporate Governance Code 2018.

18 275 responses were received from a wide range of sources including academics, law firms, corporations, investment firms, professional bodies and industry organisations (Financial Reporting Council, ‘Feedback Statement. Consulting on a Revised UK Corporate Governance Code’ [2018]).

19 Financial Reporting Council, ‘Proposed Revisions to the UK Corporate Governance Code’ (2017) 15.

20 ibid 13.

21 Financial Reporting Council, ‘Feedback Statement. Annex – Code Changes since the December 2017 Consultation’ 10.

22 UK Corporate Governance Code Principle J.

23 Business reasons have been provided for increasing diversity in the government reports introducing and expanding board gender targets i.e. Lord Davies of Abersoch, ‘Women on Boards’ (2011)., Sir Philip Hampton and Dame Helen Alexander (n 11). Business reasons are often referred to in research such as: S Vinnicombe, R Sealy and E Doldor, ‘Female FTSE 2018: Busy Going Nowhere with the Female Executive Pipeline’ (2018); Siri Terjesen and Ruth Sealy, ‘Board Gender Quotas: Exploring Ethical Tensions From A Multi-Theoretical Perspective’ (2016) 26 Business Ethics Quarterly 23; Mark McCann and Sally Wheeler, ‘Gender Diversity in the FTSE 100: The Business Case Claim Explored’ (2011) 38 Journal of Law and Society 542.

24 Tracy Vegro, ‘Why Diversity Makes a Positive Difference to Organisational Culture’ (Financial Reporting Council, 22 October 2018) <https://www.frc.org.uk/news/october-2018/why-diversity-makes-a-positive-difference-to-organ> accessed 21 August 2020.

25 Roland Bénabou, ‘Groupthink: Collective Delusions in Organizations and Markets’ (2012) 80 Review of Economic Studies 429.

26 Daniel P Forbes and Frances J Milliken, ‘Cognition and Corporate Governance: Understanding Boards of Directors as Strategic Decision-Making Groups’ (1999) 24 Academy of Management Review 489, 496.

27 This suggestion is further developed at page 31–33.

28 UK Corporate Governance Code 2016 (B.2).

29 UK Corporate Governance Code 2018, Principle J.

30 Australian Corporate Governance Principles and Recommendations 2019.

31 Austrian Code of Corporate Governance 2020.

32 Danish Recommendations for Corporate Governance 2019.

33 New Zealand Corporate Governance Code 2017.

34 G20/OECD Principles of Corporate Governance 2015 (OECD Publishing 2015) <https://www.oecd-ilibrary.org/governance/g20-oecd-principles-of-corporate-governance-2015_9789264236882-en> accessed 14 July 2020.

35 ‘The German Corporate Governance Code. Translation from Deutscher Corporate Governance Kodex’ (2019) principle 11.

36 Corporate Governance Code of Listed Corporations 2018. (France).

37 Commisión Nacional Del Mercado de Valores, ‘Good Governance Code of Listed Companies’ (2015) Recommendation 14. Knowledge, skills and experience are referred to in the context of appointments to specific committees (Ibid ii (3)).

38 Japanese Corporate Governance Code 2018 Principle 4.11.

39 Emilio J Castilla and Stephen Benard, ‘The Paradox of Meritocracy in Organizations’ (2010) 55 Administrative Science Quarterly 543; Eric Luis Uhlmann and Geoffrey L Cohen, ‘Constructed Criteria: Redefining Merit to Justify Discrimination’ (2005) 16 Psychological Science 474, 477.

40 Benoit Monin and Dale T Miller, ‘Moral Credentials and the Expression of Prejudice’ (2001) 81 Journal of Personality and Social Psychology 33, 33.

41 Castilla and Benard (n 39) 567.

42 Cheryl R Kaiser and others, ‘The Ironic Consequences of Obama's Election: Decreased Support for Social Justice’ (2009) 45 Journal of Experimental Social Psychology 556, 558.

43 Castilla and Benard (n 39) 567.

44 Jeffrey Pfeffer, ‘Size and Composition of Corporate Boards of Directors: The Organization and Its Environment’ [1972] Administrative Science Quarterly 218, 226.

45 Paul Dunn, ‘Breaking the Boardroom Gender Barrier: The Human Capital of Female Corporate Directors’ (2012) 16 Journal of Management & Governance 557.

46 Erik Olin Wright, ‘Understanding Class: Towards an Integrated Analytical Approach’ (2009) 60 New Left Review 101, 105.

47 Margaret M Blair, ‘An Economic Perspective on the Notion of “Human Capital”’ [2011] The Oxford Handbook of Human Capital 49, 49.

48 Theodore William Schultz, Investing in People: The Economics of Population Quality (Univ of California Press 1982).

49 Gary S Becker, ‘Investment in Human Capital: A Theoretical Analysis’ [1962] The Journal of Political Economy 9, 9.

50 Janine Nahapiet, ‘A Social Perspective: Exploring the Links between Human Capital and Social Capital’ [2011] The Oxford Handbook of Human Capital 71, 78. Referring to Tom Healy and Sylvain Cote, ‘The Well-Being of Nations. The Role of Human and Social Capital’ [2001] Organisation for Economic Cooperation and Development.

51 Tom Schuller, Stephen Baron and John Field, ‘Social Capital: A Review and Critique’ [2000] Social Capital: Critical Perspectives 1, 24. A distinction can be drawn between general human capital (such as simple math and literacy skills) with specific human capital (such as those skills useful for a particular role or industry) (Georg von Krogh and Martin W Wallin, ‘The Firm, Human Capital, and Knowledge Creation’ [2011] The Oxford Handbook of Human Capital 267.) Notably, Withers et al include gender and ethnicity (along with business expertise, director status, home firm strategies and other directorships) as part of a director's human capital (Withers, Hillman and Cannella (n 8) 262).

52 ‘Goldman Sachs | Human Capital Management’ (Goldman Sachs) <https://www.goldmansachs.com/careers/divisions/human-capital-management/> accessed 20 March 2020. This example was found in Markovits (n 5).

53 ‘Human Capital | Deloitte UK’ (Deloitte United Kingdom) <https://www2.deloitte.com/uk/en/pages/human-capital/topics/human-capital.html> accessed 27 June 2020.

54 Definitions from ‘The Cambridge English Dictionary’.

55 Sabina Nielsen and Bo Bernhard Nielsen, ‘Why Do Firms Employ Foreigners on Their Top Management Team? An Exploration of Strategic Fit, Human Capital and Attraction-Selection-Attrition Perspectives’ (2010) 10 International Journal of Cross-Cultural Management 195, 198.

56 Amy J Hillman, Albert A Cannella and Ramona L Paetzold, ‘The Resource Dependence Role of Corporate Directors: Strategic Adaptation of Board Composition in Response to Environmental Change’ (2000) 37 Journal of Management Studies 235, 240.

57 Blair (n 47) 65. This research grouped individuals according to indicators such as years of education or degree classifications and analysed them according to personal income. It revealed almost as much variance within each category as between each category.

58 Mary Ellen Guy and Meredith A Newman, ‘Women's Jobs, Men's Jobs: Sex Segregation and Emotional Labor’ (2004) 64 Public Administration Review 289, 289.

59 ibid 290.

60 ibid 292.

61 Becker (n 49) 45.

62 Nan Lin, Karen S Cook and Ronald S Burt, Social Capital: Theory and Research (Transaction Publishers 2001) 6.

63 Scott E Seibert, Maria L Kraimer and Robert C Liden, ‘A Social Capital Theory of Career Success’ (2001) 44 Academy of Management Journal 219, 220.

64 ibid 232.

65 Mark Granovetter, Getting a Job: A Study of Contacts and Careers (University of Chicago Press 1995) 32.

66 Lee Biggerstaff, David C Cicero and Andy Puckett, ‘FORE! An Analysis of CEO Shirking’ (2016) 63 Management Science 2302, 2306.

67 William B Stevenson and Robert F Radin, ‘Social Capital and Social Influence on the Board of Directors’ (2009) 46 Journal of Management Studies 16, 23; James D Westphal and Ithai Stern, ‘The Other Pathway to the Boardroom: Interpersonal Influence Behavior as a Substitute for Elite Credentials and Majority Status in Obtaining Board Appointments’ (2006) 51 Administrative Science Quarterly 169, 184.

68 Granovetter (n 65) 149.

69 ibid 32.

70 James D Westphal and Ithai Stern, ‘Flattery Will Get You Everywhere (Especially If You Are a Male Caucasian): How Ingratiation, Boardroom Behavior, and Demographic Minority Status Affect Additional Board Appointments at US Companies’ (2007) 50 Academy of Management Journal 267, 284.

71 Westphal and Stern (n 67) 169.

72 Westphal and Stern (n 70) 270.

73 Westphal and Stern (n 70).

74 Roos Vonk, ‘Self-Serving Interpretations of Flattery: Why Ingratiation Works’ (2002) 82 Journal of Personality and Social Psychology 515, 525.

75 Robert B Cialdini and Noah J Goldstein, ‘Social Influence: Compliance and Conformity’ (2004) 55 Annual Review of Psychology 591, 612.

76 ibid 598.

77 Vonk (n 74) 525.

78 Westphal and Stern (n 70) 272.

79 Cialdini and Goldstein (n 75) 612.

80 Pierre Bourdieu, The Forms of Capital, vol 1 (1986) 17.

81 David Throsby, ‘Cultural Capital’ (1999) 23 Journal of Cultural Economics 3, 5.

82 Stephen J McNamee and Robert K Miller, The Meritocracy Myth (Rowman & Littlefield 2009).

83 Mairi Maclean, Charles Harvey and Jon Press, Business Elites and Corporate Governance in France and the UK (Springer 2005) 39.

84 Scott Johnson and others, ‘Antecedents of New Director Social Capital’ (2011) 48 Journal of Management Studies 1782.

85 James R Faulconbridge and others, ‘The “War for Talent”: The Gatekeeper Role of Executive Search Firms in Elite Labour Markets’ (2009) 40 Geoforum 800.

86 ibid 805.

87 Derek Channon, ‘Leadership and Corporate Performance in the Service Industries’ (1979) 16 Journal of Management Studies 185.

88 Hickman (n 6).

89 Maclean, Harvey and Press (n 83) 45. For an analysis of the educational institutions attended by the c-suite of the FTSE100 in 2016 and 2017 see Hickman (n 6).

90 Donald C Hambrick and Phyllis A Mason, ‘Upper Echelons: The Organization as a Reflection of Its Top Managers’ (1984) 9 Academy of Management Review 193, 200.

91 Markovits (n 5) 7.

92 Privilege is understood here to mean a person's unearned advantages Alison Bailey, ‘Privilege: Expanding on Marilyn Frye's’ Oppression’’ (1998) 29 Journal of Social Philosophy 104. For a consideration of the concept of privilege see Michael J Monahan, ‘The Concept of Privilege: A Critical Appraisal’ (2014) 33 South African Journal of Philosophy 73, 73.

93 The Sutton Trust, ‘Oxbridge over recruits from 8 schools’, (2018).

94 ‘Parliamentary Privilege 2019’ (Sutton Trust) <https://www.suttontrust.com/our-research/parliamentary-privilege-2019/> accessed 20 March 2020.

95 Jörg Schindler SPIEGEL DER, ‘How Eton College Perpetuates Problems in the UK – DER SPIEGEL – International’ <https://www.spiegel.de/international/europe/how-eton-college-perpetuates-problems-in-the-uk-a-1280694.html> accessed 18 August 2020.

96 G Green and others, ‘Private Benefits? External Benefits? Outcomes of Private Schooling in 21st Century Britain’ [2019] Journal of Social Policy <https://doi.org/10.1017/S0047279419000710> accessed 29 September 2020.

97 Sommerland (n 7) 2341.

98 Maclean, Harvey and Press (n 83) 86.

99 Bourdieu (n 80) 17.

100 Hillman, Cannella and Paetzold (n 56). This taxonomy has subsequently been applied to a diversity related study of the FTSE100 corporate boards (Siri Terjesen, Val Singh and Susan Vinnicombe, ‘Do Women Still Lack the ‘right’ Kind of Human Capital for Directorships on the FTSE 100 Corporate Boards’ [2008] Women on Corporate Boards of Directors: International Research and Practice 152, 160).

101 Max Weber, Economy and Society: An Outline of Interpretive Sociology, vol 1 (Univ of California Press 1978). This was adapted by Singh et al in their study of female board members in France (Val Singh and others, ‘Legitimacy Profiles of Women Directors on Top French Company Boards’ (2015) 34 Journal of Management Development 803).

102 Weber (n 101).

103 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance art 9(1),(4) and art 4(1).

104 Australian Corporate Governance Principles and Recommendations Recommendation 2.6.

105 Becker (n 49) 65.

106 Uhlmann and Cohen (n 39) 479.

107 Sommerland (n 7) 351.

108 Interview on 20 August 2018. On file with author.

109 Hambrick and Mason (n 90) 196.

110 Iris Marion Young, Justice and the Politics of Difference (Princeton University Press 2011) 204.

111 ibid 102.

112 Alchian and Demsetz have made a similar argument relating to corporations Armen A Alchian and Harold Demsetz, ‘Production, Information Costs, and Economic Organization’ (1972) 62 The American Economic Review 777, 779.

113 Young (n 110) 202.

114 Sommerland (n 7) 351.

115 Wright (n 46) 104.

116 McCoy and Major (n 3) 351.

117 Westphal and Stern (n 70) 267.

118 Barry Oshry, Benjamin E Hermalin and Michael S Weisbach, ‘The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey’ (2010) 48 Journal of Economic Literature 58.

119 Westphal and Stern (n 70) 283.

120 Herminia Ibarra, Robin Ely and Deborah Kolb, 'Women Rising: The unseen barriers’ (2013) 91 Harvard Business Review 60.

121 Edmund S Phelps, ‘The Statistical Theory of Racism and Sexism’ (1972) The American Economic Review 659.

122 Phelps (n 6) 661.

123 Peggy M Lee and Erika Hayes James, ‘She’-e-os: Gender Effects and Investor Reactions to the Announcements of Top Executive Appointments’ (2007) 28 Strategic Management Journal 227, 237.

124 Ibid 492 In contrast, research on the Italian stock market on the day board gender quotas were mandated, revealed increases to the value of firms who would need to add more women in order to comply Christopher Groening, ‘When Do Investors Value Board Gender Diversity?’ [2018] Corporate Governance: The International Journal of Business in Society.

125 S 172 Companies Act 2006.

126 Becker (n 2) 14.

127 David Wozniak and Timothy MacNeill, ‘Racial Discrimination in the Lab: Evidence of Statistical and Taste-Based Discrimination’ (2020) 85 Journal of Behavioral and Experimental Economics 101512.

128 R Øystein Strøm, 'Gender discrimination before mandated quotas? Evidence from Norway: 1989–2002' (2015) 31 Scandinavian Journal of Management 303. 305.

129 James R Elliott and Ryan A Smith, ‘Race, Gender, and Workplace Power’ (2004) 69 American Sociological Review 365. 376.

130 Susan Vinnicombe, Doyin Atewologun and Valentina Battista, ‘The Female FTSE Board Report: Moving beyond the Numbers’ [2019] Cranfield University 23. 3.

131 ibid 10.

132 Lauren B Edelman and others, 'When Organizations Rule: Judicial deference to institutionalized employment structures’ (2011) 117 American Journal of Sociology 888.

133 McCoy and Major (n 3) 349.

134 Eric D Knowles and Brian S Lowery, ‘Meritocracy, Self-Concerns, and Whites’ Denial of Racial Inequity’ (2012) 11 Self and Identity 202, 202.

135 Markovits (n 5) 17.

136 See above at pgs. 23–24 for the meaning of statistical and taste-based discrimination.

137 Markovits (n 5) 275.

138 Norman Daniels, Democratic Equality: Rawls's Complex Egalitarianism (2003) 1. Referring to John Rawls, A Theory of Justice (Belknap Press 1999) 13.

139 Susan Vinnicombe, Doyin Atewologun and Valentina Battista (n 130).

140 Leon Windscheid and others, ‘The Paradox of Diversity Initiatives: When Organizational Needs Differ from Employee Preferences’ (2017) 145 Journal of Business Ethics 33, 35.

141 Derek R Avery and Patrick F McKay, ‘Target Practice: An Organizational Impression Management Approach to Attracting Minority and Female Job Applicants’ (2006) 59 Personnel Psychology 157.

142 Kenneth R Ahern and Amy K Dittmar, ‘The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation’ (2012) 127 The Quarterly Journal of Economics 137, 173. See also David Matsa and Amalia Miller, ‘A Female Style in Corporate Leadership? Evidence from Quotas’ [2010] American Economic Journal: Applied Economics.

143 Lauren B Edelman and others, ‘When Organizations Rule: Judicial Deference to Institutionalized Employment Structures’ (2011) 117 American Journal of Sociology 888.

144 Alon and Tienda (n 1) 507.

145 ibid 491.

146 Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, No. 15-1823 (1st Cir. 2015), See also Nick Anderson, ‘Harvard Admissions Trial Opens with University Accused of Bias against Asian Americans’ The Washington Post (2018).-against-asian-americans/?utm_term=.52f01ca211e7> accessed 23 November 2018.

147 Anemona Hartocollis, ‘Harvard Does Not Discriminate Against Asian-Americans in Admissions, Judge Rules’ The New York Times (1 October 2019) <https://www.nytimes.com/2019/10/01/us/harvard-admissions-lawsuit.html> accessed 18 March 2020.

148 In addition to diversity of gender and ethnic and social background it seeks diversity of cognitive and personal strengths. UK Corporate Governance Code Principle J.

149 Young (n 110) 209.

150 Alon and Tienda (n 1) 507.

151 Discussed in Elizabeth S Anderson, ‘What Is the Point of Equality?’ (1999) 109 Ethics 287, 310. Referring to Friedrich A Hayek, The Constitution of Liberty (Chicago: University of Chicago Press 1960).

152 Cheryl Thomas, ‘Judicial Diversity in the United Kingdom and Other Jurisdictions’ [2005] The Commission for Judicial Appointments.

153 As set out in section 2, the wording of the Code is “appointments and succession plans are based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths” UK Corporate Governance Code 2018 Principle J.

154 Young (n 110).

155 Andrea Prat, ‘The Wrong Kind of Transparency’ (2005) 95 American Economic Review 862, 863.

156 ‘OECD Corporate Governance Factbook 2019’ (n 16) 132.

157 Financial Reporting Council, ‘Proposed Revisions to the UK Corporate Governance Code’ (n 19) 13.

158 Financial Reporting Council, ‘Feedback Statement. Annex – Code Changes since the December 2017 Consultation’ (n 21) 15. The majority of the 275 respondents did not want more disclosure obligations.

159 ibid.

160 FRC, ‘Annual Review of the UK Corporate Governance Code’ (2020) 13.

161 There are significant difficulties in categorisation of ethnicity, both from a practical perspective and from the perspective of intersectionality. A binary approach, such as using white and BAME may solve some of the practical problems but not those of intersectionality. More research is needed on how to address the intersectional ramifications of the meaning and application of merit in boardrooms.

162 Commisión Nacional Del Mercado de Valores (n 37). For details see page 7.

163 Discussed at page 8.

164 Young (n 110) 209.

165 ‘The Cambridge English Dictionary’ (n 54).

Additional information

Funding

This work was supported by Arts and Humanities Research Council [grant number 1311180].