02/21/2009 05:12 am ET | Updated May 25, 2011

How the Capital Market Failures and the Inability to Achieve Gender Equity are the Same

There may not appear to be any immediate value in studying the failure of the capital markets to help us understand why gender equity seems so long in coming to pass, but ironically, the attributes of one look similar to the attributes of the other. Iris Bohnet, an economist and professor at the Harvard Kennedy School of Government, talks about how they are more alike than we may think. She asserts that market failures stem from a combination of a number of elements: 1) irrational behavior and psychological responses to market behavior; 2) poor risk modeling; and 3) lack of leadership. Gender inequity fails for the same reasons.

My experience in both the financial world and the field of women's leadership makes me agree with Professor Bohnet. My observations, based on her framework of three reasons of market failure, are the following:

1. With respect to irrational behavior and psychological responses to market behavior, markets certainly appear to act on herd instinct, which can drive stocks to bullishly high levels or unbearably low (pun intended). This may or may not reflect the actual underlying value of the stocks themselves but may be more of a reflection of jumping on or off the bandwagon.

Irrational behavior can also be seen in the lack of gender equity. Research data are becoming clearer that gender presence at critical mass can correlate to better performance for companies. Catalyst research shows that more women on boards and in senior management correlate to higher ROI. Patents produced by gender balanced teams are cited by far more sites than those produced by teams that are not balanced, which fuels innovation of companies or industries.

The World Economic Forum correlates its Competitiveness Report with its Global Gender Gap report. Saadia Zahidi, who co-authored the Global Gender Gap report, indicates that the lower the gap rate between men and women in health, education, political participation, and economic development, the higher the competitiveness ranking of a country.

These are rational arguments. But gender inequity is fueled by irrational behavior. Customs, arch types, beliefs, subtle unconscious inequities, or preference for homogeneity feed irrational thinking about women's performance or abilities.

2. The markets fell into the trap of excessive risk-taking, as a result of poor risk modeling, clinging to assumptions about continued performance based on past performance. This market collapse is predicated on taking enormous risk with little mitigation.

Gender inequity is also about risk. Organizations that rely upon a dominant group that is relatively homogenous in background, outlook, and societal constructs are over weighted with too much sameness and not enough diversity of perspective and experience. Voices singing in harmony too quickly and agreement without another perspective raise the risk that new ideas will not come to light or that questions will not get raised.

3. Markets often go exuberantly up just to go tumbling down because there is a lack of strong and steady leadership at the helm asking the right questions, placing priorities on the organization, ensuring sound business practices, or ignoring the signposts.

Any organization that wants to change to ensure equity within its ranks needs strong leadership to take the organization in that direction. Ships don't steer by themselves. People don't move in a direction without guidance; people only change for three reasons (fear, self-interest, or honor, per Thucydides). Leaders make things change, either for the better or worse by their action or inaction. Gender equity does not happen because it is wished to be so. Leaders must make it so.

One must also consider the effects of short-term thinking in markets and in human talent. The timeline of assessing value and return on investment in the markets has been notoriously predicated on a short timeframe. Quarterly reporting can motivate companies to do the wrong thing in the longer term and compensate for short-term results that are ultimately dangerously obtained.

Gender inequity is also about efficiency. Often managers are not rewarded for the ability to recruit, retain, and promote their diverse talent. Short-term awards of compensation are often focused on profits without the calculus of costs of retention, loss of female talent, and dissatisfied women who "off ramp" from one employer and "on ramp" to another with more opportunities.

The failure to obtain gender equity whether in business or politics, or society in general, might be fixed if we took lessons from the failure of the markets and the disasters that it has created.