– Thoughts on Strategy and Management

Women’s quota for Management Boards revisited

Not quite one year ago I raised some questions about the pending pressure to increase the number of women in management boards. This issue is not less important today. ‘EU Justice Commissioner Viviane Reding will propose decisive legislative action on gender quotas for corporate boards next month, after her calls to take voluntary steps to increase the number of women on boards to 40% by 2020 failed to deliver tangible results.’

To my relief, the topic is not only interesting for politicians and lobby groups, but also for re-searchers. American economists Ahern and Dittmar published a Study ‘The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation’ in Quarterly Journal of Economics this summer.

The Abstract says: ‘In 2003, a new law required that 40 percent of Norwegian firms’ directors be women – at the time only nine percent of directors were women. We use the pre-quota cross-sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota. We find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in Tobin’s Q over the following years, consistent with the idea that firms choose boards to maximize value. The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance, consistent with less capable boards.’

Similarily, Adams and Ferreira stated in 2008: ‘…However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.’ To be fair, they also found positive effects ‘… we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that CEO turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards.’

Well, all this corresponds with a number of questions I raised in my previous post. If companies are really forced to have a particular number of female board members, where will all the qualified women come from? Ms. Reding and her colleges will surely not want companies to appoint any woman to their boards just for her gender, regardless of her skills and experience. Ahern and Dittmar write about less experienced boards, increases in leverage, and deterioration in operating performance. This can‘t be what advocates of women’s quotas want.

Again, I have to be fair. Women surely aren’t worse managers than men and the problems described will only be relevant in a transition period. However, these are serious risks, espe-cially in times of the ongoing financial and economic crisis and the uncertain future of the Euro. Despite all good intentions, I think the timing is really bad for European companies. So what would I expect companies to do?
• Take the issue seriously. Analyze your particular situation and start searching for solutions as early as possible.
• If the pending legislation offers any transition periods, use them. I don’t think companies have to be the first mover in fulfilling any quotas. They have, however, to demonstrate that they seriously work on it.
• Develop an idea on how to increase the pool of really qualified women quickly.

In the light of the Ahern and Dittmar study, I think the last point is the most important one. Of course, companies can start to hire away board-women from their competitors. Obviously, that will not be a sustainable solution. Since all companies that are covered from the pending legislation are affected in the same way, I would see a field for cooperation. All companies would benefit from a larger talent pool so why not sit together and develop some new ideas.

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