Scholars argue that gender-balancing policies will not reduce corporate value.
Among the nation’s largest companies, women hold less than 30 percent of board seats.
What would happen if corporate boardrooms were gender-balanced? According to some scholars, more women in boardrooms would result in more independent boards with a broader skillsets. Other observers, however, worry that a gender-based quota would result in less experienced and less efficient leadership.
These two hypotheses were recently put to the test. In a working paper released this spring, three scholars analyzed the impact of a board gender-balancing mandate in Norway on public companies’ value. They found that companies did not experience a drop in stock price after complying with the mandate. In addition, they observed that boards also did not suffer a reduction in relevant work experience post-compliance.
Based on their analysis, the three scholars—B. Espen Eckbo at Dartmouth College, Knut Nygaard at the University of Sheffield, and Karin S. Thorburn at The Wharton School of the University of Pennsylvania—concluded that the gender-balancing quota in Norway had a net-neutral impact on company value.
The Norwegian “Gender Balance Law” requires that publicly traded companies have at least 40 percent of each gender on its board of directors. For example, if a company board comprises five directors, at least two must be female and two must be male. The law, which took effect in December 2005, afforded companies two years to comply with its mandatory quota.
Eckbo, Nygaard, and Thorburn observed that between 2002—when legislative efforts in Norway to mandate gender equality on boards began—and 2007—two years after the law took effect—the number of female directors grew from 5 percent to 40 percent. This growth in female representation on boards occurred even as average board size remained the same. Moreover, the proportion of five-member boards increased in response to the quota. According to Eckbo, Nygaard, and Thorburn, their data imply that the cost of adding seats to a board is greater than the cost of replacing a male director with a female director.
Data on board composition in Norway also revealed that, after compliance with the 2005 law, female directors were younger than male directors on average, but boards maintained average experience level. Eckbo, Nylaand, and Thorburn explain that investors view directors’ CEO experience in particular as central to board effectiveness, but it is the board’s overall CEO experience that matters. In other words, boards can preserve valuable experience even if there exists a scarcity of female candidates with CEO experience. For example, shareholders can retain experienced male directors and meet the gender quota by replacing those without CEO experience or expanding board size to add female directors.
To ensure that other trends were not skewing their data, Eckbo, Nygaard, and Thorburn explored whether the data reflected alternative means of achieving these numbers than true gender parity in board appointments. For example, Eckbo, Nygaard, and Thorburn looked to whether the same director was seated on multiple boards. They cautioned that if there exists a dearth of experienced female directors, companies might seat the same few on their boards. When directors hold multiple board seats, they may be less able to devote their time and attention to a company—and this may result in failure to monitor its affairs meaningfully.
But Eckbo, Nygaard, and Thorburn found that almost 75 percent of individual directors held a single board seat both before and after the mandate took effect, signaling that increased seat concentration among few women did not occur. In addition, Eckbo, Nygaard, and Thorburn found that directorship distribution was similar for male and female directors, again signaling a lack of disparate treatment. They emphasized that the “deep pool of qualified female director candidates” in Norway allowed boards to rebalance their gender representation while maintaining share prices.
Eckbo, Nylaand, and Thorburn conclude that companies have a desire to minimize quota-induced costs—and when there exists a qualified hiring pool, the cost of gender-balancing is marginal. Because this was the case in Norway, compliance with the gender quota did not have any statistically significant economic impact on companies’ stock prices.
Norway’s gender-balancing mandate holds important lessons for the United States, according to Eckbo, Nylaand, and Thorburn. The U.S. Securities and Exchange Commission, for example, referred to data about Norway’s gender-balancing board mandate when it approved Nasdaq’s board diversity disclosure rule, which requires companies to share information about gender, race, and LGBTQ+ representation on their boards. Because Norway’s gender quota left company values unaffected, Eckbo, Nylaand, and Thorburn contend that gender-balancing policies are unlikely to impact firm value in the United States. They stress that such policies are “unlikely to conflict with directors’ all-important fiduciary responsibility of maximizing firm value.”
