Mis-quota-tation

Last month, California Governor Gavin Newsom signed into law a bill that would require publicly traded businesses headquartered in California to appoint a minimum number of individuals from "underrepresented" groups to their respective board of directors. 

On the surface, this is a well-intentioned move to diversify corporate boardrooms and increase racial representation at the highest levels of business. But is the new law even constitutional? And could the fate of a similar law passed in 2018 bring down this one as well?

I can tell you from experience, those chairs aren't nearly as comfy as they look.

Breaking Up the Boys Club

Back in September 2018, as the #MeToo movement was making headlines, then-Governor Jerry Brown signed into law a bill that required publicly traded corporations headquartered in California to appoint at least one female to their respective board of directors by the end of 2019 and at least three by the end of 2021. Many activists hailed this as a victory to gender equality.

There's just one problem with the law: It's very likely unconstitutional. 

You see, both the California state Constitution and the United States Constitution prohibit discrimination based on sex, race, and other classifications. The quota system set up by this law likely violates both constitutions by requiring that a certain number of positions on each corporate board be "earmarked" for people of a specific sex. 

Furthermore, those close to this law were well aware of its shaky legal footing. The California State Assembly floor analysis of the law admitted that "The use of a quota-like system, as proposed by this bill... may be difficult to defend.” Even Governor Brown, who signed the bill into law, said that “serious legal concerns have been raised” about the law and that “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation.”

Standing Up

For all intents and purposes, both the California State Assembly and the Governor admitted that the bill was unconstitutional even as it was being signed into law. However, the hope among the law's supporters was that no one would choose to challenge it in court.

For almost a year, the strategy seemed to work. No corporations sounded the alarm over the law, and it seemed like all would comply (or at least pay the required fines for non-compliance, which are quite small) quietly. However, in August 2019, a group filed a "taxpayer suit" against the law, arguing that since the law is blatantly unconstitutional, the State of California cannot use taxpayer funds to enforce it.

Whether this suit would be allowed to move forward based on legal standing has been an open question (a similar suit filed in November 2019 was dismissed for lack of standing). However, this past July, the court ruled that the group did have legal standing to challenge the law, allowing the lawsuit to move forward.

Dominoes

The problem for the racial diversity law signed by Governor Newsom is that it's essentially a carbon copy of the gender diversity law signed by Governor Brown, only with the gender quota replaced by a race quota. If the gender diversity law is struck down in court, the racial diversity law will almost certainly fall as well.

Just as a side note, if you're wondering were Affirmative Action fits into this, the Supreme Court held (in Regents of the Univ. of Cal. v. Bakke) that since Affirmative Action is not tied to a strict numerical quota and race is only one of many factors considered (that is, race alone cannot "disqualify" someone from admission), it is permissible under federal law (this is where Harvard got in trouble recently, as it has been accused by the Justice Department of engaging in "racial balancing", which is not deemed permissible based on the ruling).

My Take

For me, the purpose of this post is not to criticize the merit of diversity on corporate boards. Instead, I criticize the clumsy and unconstitutional way the State of California has attempted to mandate diversity in the boardroom. 

There are many who may argue that the ends justify the means. Well, if the means in question violate constitutionally protected rights of individuals, then what use are those rights? That line of reasoning is a slippery slope that could be used to justify trampling on the rights of any group or individual in order to achieve a "righteous" goal.

You can support an end goal without supporting every route suggested to get there. For example, my brother and I both support the principle of Net Neutrality (we both work in IT, so it's a relevant topic for us). However, he supports Title II reclassification of ISPs as a "Common Carrier" by the FCC, while I believe Congress should pass legislation protecting Net Neutrality (instead of the FCC repurposing regulation from the 1930s that was intended to regulate telegraph monopolies, but I digress...).

Ultimately, with any worthwhile undertaking, both the ends and the means must be fair. After all, if the cure is as bad as the illness, then what's the point?

Update (5/16/2020)

Today, the California law (SB826) that required publicly traded businesses based in the state to appoint a minimum number of females to their boards of directors was struck down as unconstitutional. This follows last month's strikedown of the sister law (AB979) that likewise required businesses to appoint a minimum number of individuals from "underrepresented" groups to their boards.

Over the course of the trial, the State admitted that the law had never actually been enforced and that there were no plans to do so. Furthermore, it was revealed that former Secretary of State Alex Padilla had informed former Governor Jerry Brown weeks before he signed the bill into law that it was likely unenforceable; Brown decided to sign the bill regardless as a "statement" in support of the #MeToo movement.

As of this time, the State is currently reviewing the ruling and is undecided whether to file an appeal.

As I predicted, these laws were inherently unconstitutional. While the law's supporters claimed that it was "necessary" to achieve "equitable" outcomes for women and to reverse the damage done by years of discrimination, that argument didn't hold up against the equal protection clause of the California constitution. Furthermore, presiding Judge Maureen Duffy-Lewis said that the State could furnish no evidence that any corporations in California were actually practicing gender discrimination in boardroom selections as policy.

The bottom line is this: You can't violate the constitutional rights of an individual or group in order to achieve a desired outcome, no matter how noble. Appointments to any position should be based on merit, not identity; to do otherwise (except where the candidate's identity is a functional requirement for the position) is discrimination, full stop. After all, the only way to end discrimination is to stop discriminating, not to replace one form of discrimination with another.

Higher (cost) Education

Around this time of the year, the elation of graduation can be seen all around us: On TV, in newspapers, on social media, and elsewhere. However, for most graduates, the euphoria of their achievement is soon tempered by the reality of the burden that now rests on their finances and their future: Student loan debt. Many new graduates will struggle to manage their debt obligations, and some may even wonder if college was worth it in the end. However, the one question that I have noticed that is not being asked enough is this: Why is higher education so expensive in the first place?

Now, that's not to say that the issue of the expense of education has been muted. In recent years, a lot has been made of the cost of attending college, and at a time when a degree is a virtual requirement for success in today's economy, an increasingly high price tag is a particularly tough pill to swallow. Now, there are a lot of different ways to manage the cost of attending college: 529 savings plans, scholarships, grants, co-ops, and student loans are just a few. However, even when employing a mix of savings, scholarships, and loans to help cover costs, the final price tag is still quite high, even prohibitively so. All of this reinforces my curiosity behind my earlier question. In this post, I'll discuss (and dispel) the most commonly cited explanation behind of expense of higher ed, and provide a theory of my own.

Is declining state investment to blame?

When it comes to assessing responsibility for the sharp increase in college tuition over the last few years, state governments tend to shoulder the majority of the public's blame. The reasoning goes something like this: Since public institutions have two primary revenue streams, state funding and tuition, the most likely cause for the sharp increase in tuition rates over the last few years can only be due to an attempt by schools to maintain their revenue levels in the face of a decrease in state funding. The supposed cause of this decrease in public funding varies from state to state, ranging from shifting budgetary priorities to a decline in general tax revenue due to unfavorable economic conditions, but the idea is still the same: Because states are spending less on education, colleges are being force to make up the difference by charging students more.

Graph showing the level of overall state funding for higher education (red) compared to the average price of tuition (blue) from 2000 to 2015

There's just one problem with this theory; it's incorrect. A study conducted by the Bipartisan Policy Center (available here) concludes that from 2000 to 2015, overall state funding levels for higher education have remained mostly flat, while the average tuition price nearly doubled over the same period. Now, it's worth noting that state funding did experience fluctuations, but never more than a few percentage points in either direction. Thus, the most commonly cited explanation for the increase in tuition prices doesn't stand up to scrutiny.

Is bigger really better?

 

My personal theory is quite simple: Schools have gotten too big. Now, this is not to say that the size of the student bodies that schools serve have grown too much, but rather that schools are exceeding their core mission of providing a quality education. You see, back when our public institutions of higher learning were first established, schools were quite Spartan by today's standards; campuses consisted of a few classroom buildings, maybe a dorm or two, an administration building, and that's about it.

Compare that to today, where schools are sprawling cities unto themselves, covering square miles of land, consisting of dozens of structures (that are constantly being demolished, rebuilt, or expanded), many of which house services that have only a tangential relation to education (think supersized football stadiums, food courts, coffee shops, and more student organizations than you can shake a stick at, just to name a few). Now, I understand all of that "fluff" adds to the college experience (the sports venues were particular favorites of mine), but it comes at a cost... literally. Cut it all out and I guarantee that operating a school wouldn't be nearly as expensive as it is today.

So, now the question becomes this: Why hasn't any school done just that? Leave out all of the "fluff", drastically reduce tuition costs, and attract students that way? Simply put, schools know their audience. Wide-eyed 18 year-olds aren't thinking about their financial futures as much as they are thinking about all of the great times they're going to have immersing themselves in the "college experience". In addition, obtaining credit for the purpose of attending school is relatively easy, so regardless of what schools decide to charge for tuition, students won't likely have difficulty getting their foot in the door.

Add all of this up, and it has created a "race to the top" situation, where schools are spending increasingly large amounts of capital to create ever-more premium experiences to attract students. While this does benefit students in the short run (after all, who doesn't like brand-new dorms with a Starbucks in the lobby?), the benefits themselves are largely superfluous and do not outweigh the additional costs they incur.

What's to be done?

 

That's somewhat of a loaded question. Several solutions are been proposed, including offering incentives to schools to keep tuition costs low, restricting access to credit for students, and even having the government subsidize all tuition fees. Personally, I don't have a silver-bullet answer, but this is something that I'm going to continue researching.

In addition, several alternatives to traditional four-year colleges have started to increase in popularity over the last few years. Technical schools, boot camps, and employer training are all becoming more prominent and are gaining acceptance within the private sector, allowing people to obtain the real-world skills they need to be competitive in today's economy without accruing the heavy debt burden of a traditional education. However, only time will tell if this is going to be a viable path forward or simply a passing fad.

For now, costly tuition is a reality that we're going to have to live with. Prices aren't likely to come down anytime soon, and if recent history is any indication, they're probably not finished rising, either. Only time will tell if market forces or public opposition will eventually compel institutions of higher learning to address this issue.

Trial and Error

In my career, I've been through quite a few interviews; some have gone well, a few have gone poorly, and a handful have left me downright puzzled. To be sure, I'm not the world's best interviewee; thinking on my feet is not my strong suit and I tend to lock up under pressure. As a result, I feel I may have missed out on a few opportunities for which I thought I was qualified and well-suited because of a poor interview, and I know I'm not the only one. In fact, people regularly lose out on opportunities not because of a lack of ability or aptitude, but because of poor interview practices and simply succumbing to the pressure of the moment. That said, a new trend is emerging (pioneered by the IT industry) that has the potential to rectify this issue for good... but at a high cost.

The problem that every recruiter faces is that they have to accurately gauge a candidate's ability to perform a job, compare him/her to others, and ultimately decide which one(s) to hire. This is particularly difficult in the IT industry, where technical skills are vitally important but difficult to measure in a traditional interview. To address this, some companies are experimenting with an approach that I call "trial" hiring.

In trial hiring, a company will simply hire an applicant for a "trial" period in lieu of performing a formal interview. During this trial period (typically two weeks), the candidate in question will perform his/her job as normal while being evaluated by a manager. At the end of this trial period, the manager will make a decision on whether or not to hire the candidate permanently. As you can see, the idea (and the benefit) is clear; candidates get to show off their skills doing real work (as opposed to submitting to an arbitrary and potentially inaccurate technical examination), giving the prospective employer a good idea as to whether or not they would be a good fit while also allowing the candidate time to develop a feel for the workplace (making it easier he/she to decide if that is the right place for them).

A downside of this approach is that for the trial period, the candidate is unpaid. Companies don't want to invest capital in unproven quantities and definitely don't want unqualified candidates signing on for a quick paycheck (especially if the position is a particularly lucrative one). However, on the other side, the candidate is giving up a full two weeks of his/her time to perform full-time work for which he/she will not be paid. This could be a deal breaker for many candidates who simply can't afford such an arrangement; traditional interviews typically take no more than a few hours and yield a definite yes/no answer within a day or two, but the trial hiring approach essentially stretches that process out for the duration of the trial.

Additionally, there may be a situation where multiple candidates are being evaluated simultaneously for a single position; in this case, each candidate is essentially in competition with one another for the job. The kind of competition could foster a "Survivor"-like environment that would not be beneficial for the candidates or the company (I've seen this firsthand in IT consulting). For example, the candidates, under pressure to win a position, might elect to work harder than normal and to do so at an unsustainable pace; in the end, they might be giving their future employer an inaccurate reading on their potential for long-term productivity and/or cause themselves to "burn out" (that is, to lose interest in a job and look for opportunities elsewhere), in addition to all of the other ill-effects that accompany excessive work under stressful conditions. Furthermore, candidates in this situation may also become actively hostile and attempt to "sabotage" one another by making unwarranted negative or damaging statements regarding a candidate or actively disrupting a candidate's work; Such actions can tarnish a company's reputation and drive away quality talent (see this article written about Amazon in the New York Times).

Personally, I'm split on the idea of trial hiring. On one hand, I do like the fact that candidates get to perform real work to demonstrate their skills and thus have a greater hand in determining the outcome of the process. However, the time and compensation loss is a tough pill to swallow, not to mention the unpleasantries that could ensue should a candidate find himself/herself in a competition with others for the same position. To help mitigate these two drawbacks, I would recommend that companies offer at least some compensation for the work performed during the trial period (a single check at predetermined percentage of the regular rate for the position, for example) and that companies also avoid placing more than one candidate at a time on trial for a single position (to keep from forcing candidates into direct competition with one another).

In the end, is trial hiring right for corporate America? The strategy has already elicited strong opinions on boths sides of the argument (for both moral and practical reasons), but it is still far from mainstream. Ultimately, as with all practices, the effect of trial hiring on the bottom line will provide the clearest indication of it's future in business.

Fight or Flight

Last week, Carrier Corporation (an air conditioner manufacturer) announced that they would be moving their plant in Indiana (where about 1,400 people are employed) to Mexico. While many see this as an example of corporate greed that should be punished, I believe that it is a symptom of the pressures of a global 21st century economy and an indictment of the outdated regulation of business in the United States. In fact, I think there's an opportunity here to dig deeper into the driving factors behind this move and to consider what steps can be taken to alleviate the pressure that corporate America finds itself under today and prevent this kind of corporate flight in the future.

Now, before I go any further, let me say that anytime anyone is laid off this way, it's a tragedy; I found myself in a similar situation just recently, and let me tell you, it's no fun (to put it lightly). That said, there are three points I'd like to make in this post: Why this happened, what can be done to prevent more moves like it, and why I believe the "progressive" approach is mistaken.

First off, the story here is probably one that you've heard many times before: The cost of labor and regulation is the United States high very high, so to remain competitive, Corporation XYZ has decided to relocate operations to country ABC where regulation is almost non-existent and people work for a buck and a quarter. While this may be a tired line, it's still pretty accurate. In Carrier's case, the cost of labor included a minimum $23/hour base wage plus a comprehensive suite of benefits for every worker. That's a pretty high cost (especially the benefits), so when you consider that, by comparison, Mexican laborers will perform the same work for a quarter of the pay and a fraction of the benefits, it's a wonder that Carrier stayed in the United States as long as it did. In addition, when you note the costly regulation that manufacturers must follow in the U.S. (Worker benefits such as ObamaCare and various EPA rules), the capital expense of day-to-day business is extraordinarily high. These factors considered, the move makes perfect business sense.

So, what can be done? For starters, understand that generally speaking, businesses actually like to stay in America as opposed to moving abroad. In fact, the vast majority of businesses will elect to remain stateside even if it means absorbing a somewhat higher cost of operation. However, manufacturers in particular (like Carrier) are under an existential threat from global competition; for them, it's no longer about how good a "Made in the USA" sticker will look on the box of the product, but whether the company is going to survive another 5 years. That said, there are a few things that can be done to lower the cost of doing business in the United States.

First, lower the corporate tax rate. Right now, the base U.S. corporate tax rate is 35%, the highest in the developed world. This rate needs to be cut to 20%, which is closer to what other developed countries charge. Secondly, end double taxation. Currently, profits made by U.S. companies overseas are taxed there, and then taxed again (at 35%) when the capital is brought stateside; the net result is that companies keep profits offshore and invest over there rather than here. Instead, once revenue is taxed once, allow it to move across borders freely. Finally, curb the power of organized labor. In the past few decades, labor unions have grown very powerful and effective at forcing companies to award their members excessive benefits (usually through threat of strike or legal action). Instead, the entire country needs to be "Right-to-Work", making it illegal for unions to force company employees to join as a condition of their employment (as it is already in most states). This step alone will compel labor unions to bring their demands more in-line with real market value.

Finally, the progressive side of this discussion has their own ideas of how companies that move operations overseas should be treated. In a nutshell, they believe that companies who move operations offshore should be punished with fines, tariffs, and other sanctions. That threat, they reason, will keep companies from moving abroad and force them to stay in America. However, the fault in that logic is that no company wants to be kept prisoner by the government. If the government is willing to impose such harsh penalties on a company that relocates, what else would it be willing to do? Such targeting and corporate prosecution does not create an environment conducive to sustained economic prosperity and will instead accelerate the trend of corporate flight as more businesses will seek to escape such tyranny.

In addition, the imposition of tariffs or other protectionist penalties are likewise a folly, a relic of the 19th century. In a global, 21st century economy, protectionism may prevent short-term loss, but at the cost of long-term development. For an example of this, consider Japan: Once the leading figure in the  technology sector in the post-World War 2 global economy, the Japan has suffered through consecutive decades of economic stagnation. Tentpoles of the Japanese economy like Sony, Sharp, Nintendo, and Panasonic are struggling to catch up to Korean, Chinese, and American competition and are losing cash and market share at an alarming rate. A major contributor to the economic situation these companies find themselves in are the very protectionist policies that they sought to have implemented; Japan imposes more penalties on imports than any other developed economy. As a result, Japanese corporations faced little domestic competition and in the absence of such, they failed to adapt to foreign competition. Companies like Microsoft, Apple, LG, Samsung, and Google are now selling more products in Japan than domestic companies, who are now playing a very difficult (and costly) game of catch-up. We don't want the same thing to happen in the United States.

In conclusion, the realities of competition in a global economy are putting pressure on U.S.-based companies to make tough decisions to remain viable. However, common sense steps can be taken help corporate America compete effectively in the 21st century without entertaining to the punitive approach of the progressive movement. The United States still is and can always be a great place to do business.