Supporters of California’s move toward the nation’s first-ever corporate gender quotas have insisted the bill will be good for business, but that’s not what happened in Norway.
After the Norwegian Parliament required that women make up 40 percent of publicly traded corporate boards in 2006, stock prices plunged and firm values dropped as boards added less experienced female directors, while the numbers of public firms decreased and private companies increased.
“The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance, consistent with less capable boards,” said the 2012 paper by USC professor Kenneth R. Ahern and University of Michigan professor Amy K. Dittmar.
Critics of Senate Bill 826 have pointed to the study, “The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation,” as they warn Gov. Jerry Brown that signing the bill could hasten the exodus of California firms to Texas.
Many Norwegian companies have apparently moved, collapsed or gone private. The number of public limited firms in Norway by 2009 was less than 70 percent of the number in 2001, according to the study, while the number of privately held firms not subject to the gender quotas jumped by more than 30 percent.
Europe has led the way on board gender diversity, with France, Italy, the Netherlands and Germany following Norway’s example, but the argument for mandatory gender quotas has in recent years made the leap across the pond.
California would be the first state to enact mandatory gender quotas, while several other states have passed resolutions urging corporations to increase their gender diversity.
By the end of 2021, the California bill would require boards with up to four members to have at least one female director; boards with five directors to have two directors, and boards with six or more seats to have three directors.
The bill’s sponsored have argued that “publicly held companies perform better when women serve on their boards of directors,” citing Credit Suisse research and a 2017 MCSI study, but Duke University School of Law professor Kimberly D. Krawiec begged to differ.
“[T]hese studies that simply confirm the well-known correlation between board gender diversity and firm performance cannot be taken as evidence that gender diversity causes superior performance,” she said on her blog.
Ms. Krawiec cited research showing a negative effect or no impact, adding that “the point is that evidence cited in SB 826 to justify intervention in the director selection process does not show what the bill and its supporters claim.”
That case has been made most forcibly by the National Association of Woman Business Owners California, which has championed the bill as “good for business” and cited studies showing “gender diversity on corporate boards is associated with increased profitability, performance, governance, innovation, and opportunity.”
“One-fourth of California’s publicly traded companies still do not have a single woman on their board, despite numerous independent studies that show companies with women on their board are more profitable and productive,” said Democratic state Sen. Hannah-Beth Jackson, who sponsored the bill.
The California Chamber of Commerce, which has led a coalition opposing the bill, argued that the European experiment has flopped, citing a February survey in the Economist that found “the evidence so far undermines the business case for quotas.”
“Studies from at least six countries on companies’ performance, decision-making and stock returns fail to show that quotas make a consistent difference, good or bad,” said the article.
Annalisa Barrett, founder and CEO of Board Governance Research in San Diego, warned against viewing the Norwegian experience as a harbinger for California, saying that corporations and board structures are very different in Europe.
“We can think about global markets, but when it comes to board structures, they’re so different in different countries,” said Ms. Barrett. “You’re comparing apples to oranges when you talk about how this might affect companies in the U.S.”
Foes of the quotas have pointed out that that the number of women directors is growing—a Harvard Law School survey found women holding Fortune 500 board seats has jumped by 21.2 percent since 2012—although Ms. Jackson and others have countered that such progress is too slow.
California corporations have 15.5 percent of their board seats held by women, lower than the national average of 19.8 percent on the Fortune 1000.
Hans Bader, Competitive Enterprise Institute senior attorney, said there was a “chicken and egg” problem with studies correlating corporate performance with diversity.
“It seems more likely that companies’ success leads to more women on their boards—as opposed to their success occurring because they have women on their boards,” Mr. Bader said. “Successful business strategies attract women and new blood into a business. The fact that such success continues after the well-run business attracts women doesn’t prove that it would have failed if it had hired men instead.”
Whatever their business impact, Ms. Barrett argued that the European mandates should be viewed as a success.
“The best takeaway from the mandates in other countries that boards did indeed become more diverse,” she said.