Are gender quotas good for business?

By S.C.

LIBERAL California is on its way to becoming the first American state to mandate gender diversity in companies at board level. A bill approved by the state senate on August 30th requires publicly traded firms headquartered in California to have at least one woman on their boards by the end of next year. By 2021 they would be required to give women at least 40% of board seats. “It’s not only the right thing to do. It’s good for a company’s bottom line.” So said Hannah-Beth Jackson, one of the senators who proposed the bill. Some business leaders are unconvinced and are threatening to launch an appeal against the law. Are they right to worry?

It was Norway that pioneered the idea. From 2008 it obliged listed companies to have women in at least 40% of board seats or face dissolution. Over the next five years more than a dozen countries, mostly western European, adopted similar quotas. In Belgium, France and Italy firms that fail to comply can be fined, dissolved or banned from paying directors. Germany, Spain and the Netherlands prefer quotas without sanctions. Britain opted for guidelines, and names and shames companies that fall short. In some countries the share of women among directors of large companies has grown four- or five-fold since 2007.

Nearly two-thirds of public firms in California have fewer than two female directors. Opponents of quotas say that this reflects the scarcity of women in upper management. A quota, they warn, would see boards being stuffed with inexperienced, token women. Another concern is that a small number of highly qualified women, known as “golden skirts”, would be stretched thinly across too many boards. But in Europe, such fears have not been realised. In large listed European companies “golden trousers” are almost as common: 15% of male directors sit on three or more boards; 19% of female directors do. Worries that quotas would lead to the appointment of under-qualified female directors also appear misplaced. A study of Italy’s 33% quota found that female directors at the biggest firms were more likely than their pre-quota predecessors to have professional degrees and qualifications. Norway’s quota led to a similar outcome. Elsewhere the picture has been more mixed, though, with female directors appointed after quotas likely to be younger, less experienced and, in some countries, foreign.

Does any of this affect how well companies do? Some “snapshot” studies show that companies with more women on their boards have better returns and are less likely to be beset by fraud or shareholder battles. But causation is hard to prove. Studies comparing firms’ performance before and after quotas were introduced have been inconclusive. Some have found positive effects on firms’ results; others the opposite. One Italian study found an initial increase in stock price when female directors were elected to firms affected by the quota. But it found no effect on any of seven measures of firms’ performance, including profit, output, debt and return on assets. A French study offers one clue for why the addition of more women has not made a consistent difference. It concluded that the country’s new quota system led to changes in the way the boards made decisions. But there was no change in the substance of the decisions. It also found that the process did not change because the new members were women. It was because they were likely to be outsiders. Perhaps it is too early to judge the effect of quotas on companies’ performance. But if Europe’s experience offers any guidance, expectations that California’s new law could dramatically boost or hurt corporate performance are exaggerated.

Update (September 3rd 2018): This piece has been updated to reflect the result of the vote in California’s state senate on quotas on boards

Papers quoted in this piece
“Gender diversity on corporate boards: an empirical investigation of Italian listed companies”, Silvia Solimene, Daniela Coluccia and Stefano Fontana, Palgrave Communications volume 3, Article number: 16109 (2017)
“Gender Quotas: Challenging the Boards, Performance, and the Stock Market”, Giulia Ferrari, Valeria Ferraro, Paola Profeta, Chiara Pronzato, CESifo Working Paper Series No. 6084
“Breaking the Glass Ceiling? The Effect of Board Quotas on Female Labor Market Outcomes in Norway”, Marianne Bertrand, Sandra E. Black, Sissel Jensen, Adriana Lleras-Muney, NBER Working Paper No. 20256
“More than a Woman: Insights into Corporate Governance after the French Sex Quota”, Darren Rosenblum, Daria Roithmayr, Indiana Law Review, Vol. 48, No. 889, 2015