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Why Board Gender Quotas Are Nothing to Fear


When boards were forced to recruit more female members, corporate performance held steady and might have even improved

Graphics: Three people are holding an abstract construction, symbolizing diversity.

One of the last bills that California Governor Jerry Brown signed into law before leaving office in January 2019 was SB 826. It required the state’s publicly traded companies to have at least one female director on their boards by Dec. 31, 2019. 

At the time, a quarter of California’s public companies did not have a single woman on their boards. Still, the new law was controversial. Aside from the quota appearing to amount to a “blatant gender preference,” as Loyola Law School professor Jessica Levinson put it, others argued that it would likely reduce the performance of firms. 

The thinking went like this: Women are not better represented on boards because they generally have less relevant top-level work experience. Therefore, if companies are coerced into recruiting female directors, the lack of experience of these new directors could lead to unfavourable corporate outcomes such as reduced shareholder returns.

The evidence doesn’t seem to support that thinking. In Norway, for instance, where a law requires 40 per cent of firm directors to be women, one study suggested the quota didn’t have any negative impact on financial performance. In fact, it may have been a boost. In Italy, where a similar 40 per cent quota law is in place, researchers found that the quota appeared to enhance the role of internal committees, the organization of meetings and the general modus operandi of the board of directors.  

So how has the story played out in California so far? It seems shareholders need not worry, says Bhargav Gopal, an assistant professor of economics at Smith School of Business. In a research paper currently being submitted to academic journals, Gopal shows that the California quota dramatically reduced the share of all-male boards within one year. And, most tellingly, it led to no reductions in operating performance, firm values or shareholder returns. 

A potential gender dividend 

Gopal’s research interests are at the intersection of labour, finance, law and economics, so when he stumbled upon a data set containing information on all California board members and their employment histories, a light bulb went off. “I realized that this data set was really well suited to analyzing the impacts that an affirmative action policy like the California quota can actually make,” he says. 

Wading into that data, Gopal first discovered that the quota did make a significant impact on board gender diversity. In 2017, 204 California companies had all-male boards. In 2019, just 59 did. That 71 per cent reduction may not be entirely because of the quota. Around this time, Gopal notes, large institutional investors also led campaigns to increase boardroom gender diversity in the U.S. Gopal estimates that SB 826 likely reduced the share of all-male boards by a more modest 26 per cent. 

Next, to determine the financial impacts of the quota on shareholders, Gopal modelled a particular investment strategy over a defined period — from the first day of trading after the legislation’s signing to Dec. 31, 2021. He found that a strategy of buying and holding a value-weighted portfolio of quota-affected companies over that period generated returns 24 percentage points above that of holding the S&P 500. When applying the same investment strategy to a control group of firms with all-male boards, he discovered that a portfolio of these companies would underperform the S&P 500 by 34 percentage points. 

Gopal also found that for quota-affected firms, on average, the legislation increased a firm’s value metric (known as Tobin’s Q) by seven per cent and return on assets by five percentage points. 

“Interpreted conservatively,” writes Gopal, “my results imply that the quota did not worsen firm values or operating performance within three years and, if anything, improved them.” 

Moderate pressure 

As for why Gopal’s results did not confirm the concerns of some SB 826 critics, he says there’s one leading explanation: While quotas may force firms to recruit less experienced candidates, those candidates may have skills that aren’t typically featured on boards but are valuable nonetheless. A 2022 study, for instance, found that women tend to attend board meetings more prepared, do more followup and ask tougher questions to top management.

Gopal is quick to point out, however, that his results should not be taken to imply that quotas are a panacea for addressing the lack of diverse representation in leadership. “This was a relatively small quota I was looking at, mandating just one female director,” he says. “But there’s research from a European context showing that more stringent quotas mandating 40 per cent of directors be women do indeed have negative impacts on financial outcomes.” 

Which is why Gopal says that the biggest takeaway from his study should be the value of moderate pressures to increase board gender diversity. Other research tends to support this temperate approach too. As one example, he points to a recently published paper showing the success of public relations campaigns led by large institutional investors in the U.S. to increase board gender diversity. 

Gopal wonders if the moderate pressure of California’s quota will have a deeper influence on the number of women appointed to boards of firms in that state in the near future. “We know that men are more likely to have employment connections with other men, and women are more likely to have employment connections with other women,” he says. “So I’m curious to see if the installation of one woman on a board has any broader effects on the gender composition of boards.”