How Effective Are Gender Quotas on Corporate Boards?

Introduction

Countries have pursued the goal of creating gender-equal societies by increasing female representation on corporate boards voluntarily or by mandate. The United States does not mandate gender diversity for corporations on a federal level, but some business entities such as the NASDAQ Stock Market, require gender and racial diversity. Even California attempted to impose gender and racial quotas, but lower courts overturned these mandates.¹

The issue of quota mandates is not settled, nor will cultural pressure to increase diversity, equity and inclusion (DEI) through representation on boards and leadership abate. Often, legislation and regulation that affect for-profit entities spread to nonprofit organizations, resulting in a shift from their mission and increased costs that can divert resources away from the individuals and causes they serve.

With little data from the United States, Philanthropy Roundtable examined two other countries that have increased female board representation through mandates or voluntary action: Norway and Sweden. This policy brief summarizes the three key points from the research on gender board diversity efforts and its application for the charitable sector:

A diverse board doesn’t guarantee a bigger bottom line. Empirical research is mixed at best on questions of board effectiveness and firm performance but offers no causal evidence linking the two.
Board gender diversity fails to advance most women. The only women who have measurably benefited from greater female representation on boards are the female board members themselves, so-called “golden skirts.”
Mandates are unnecessary and counterproductive. Voluntary measures are as effective as government mandates, without the downsides of regulation.

Overview

Boards of directors serve a critical governance role in corporations and noncorporate organizations including providing direction, strategy, oversight, and accountability. Board independence has long been recognized as key to effectiveness. Conventional wisdom holds that board members harboring conflicts of interest would not execute their monitoring role as effectively.

Diversity of board membership has gained steam as a signal of independence and thereby, effectiveness. The basic argument is that heterogeneity allows boards to engage in deeper conversations or debates and then develop a broader range of alternatives. Whereas members of homogeneous boards share similar opinions, which leads to conformity and the potential failure to challenge the thinking of management—a critical board function.

Diversity should be broadly defined to include both visible (race, ethnicity, gender, age, etc.) and less visible characteristics (religion, educational background, geographic background, occupation, worldview, etc.). Unfortunately, it is often reduced to observing one or two visible dimensions: gender and race. This approach overlooks the characteristics that can add insight, experience, and knowledge to a board even if the members share the same gender or ethnic background.

The private sector embraced women on corporate and noncorporate boards on economic and ethical grounds. The percentage of female directors of S&P 500 boards has grown 28 percent over the past five years and 77 percent over the past decade.² Policymakers are no longer waiting for the private sector to embrace greater female representation voluntarily but legislating it, despite whether empirical research validates the need for government action.

Board Diversity and Firm Performance

The most substantive argument in favor of board diversity is that gender composition can improve a firm’s financial performance. However, much of the large body of research examining the relationship between gender diversity on corporate boards and firm performance is inconclusive.

Some studies find that companies with board gender diversity enjoy a better firm performance by market and accounting measures, greater participation in philanthropy, and potentially increased innovation and problem-solving.³⁴ Other studies found that neither ethnicity nor gender had an impact on firms’ financial performance, or conflicting results (both positive and negative relationships). One study pointed to a negative impact on firm performance if women are only selected out of societal pressure.⁵

The most compelling results are from two meta-analyses within the past few years. The first synthesized findings from 140 studies covering more than 90,000 firms from over 30 countries and the other examined data from 20 studies.⁶ The conclusion was that a higher representation of females on corporate boards is “neither related to a decrease nor to an increase in firm financial performance.”⁷

One economist theorizes that nonrigorous, non-peer-reviewed studies conducted by consulting firms, information providers, and financial institutions provide unsupported claims of causation that the media popularize.⁸ When that claim of caution is rigorously tested, there is no definitive evidence that gender diversity on boards leads to improvements in company performance.

Women’s Uneven Advancement

Female board representation can lead to positive outcomes for some women. It boosts female representation at the leadership level, leads to positive behaviors among female board members such as debating issues and collaborating, and holds their organizations to higher ethical standards.⁹¹⁰

However, the argument that increasing the number of women on boards would lead to better outcomes for all women, especially younger women, does not bear out in the data. In Norway, labor market outcomes for women aged 16 to 64 changed little after mandates were instituted.¹¹ Young women weren’t particularly drawn to degrees that would lead to the C-suite track nor were there significant increases in women at the executive or managerial levels.

Mandates vs. Voluntary Action

Norway implemented gender mandates on its firms, and Sweden increased female board representation through voluntary actions. Empirical research on diversity efforts of corporate boards in each of those countries sheds light on two questions: Whether the presence of women increases corporate performance, and whether economic or nonfinancial benefits can only be achieved through mandatory diversity requirements rather than voluntary action or self-regulation.

Norway became the first country to regulate board gender composition. Although it is held up as evidence that quotas work in accelerating boardroom culture change, the economic impacts are not entirely positive. The quota prompted some firms to delist rather than comply. This resulted in fewer board positions reserved for women than what lawmakers expected.

Various studies of Norwegian companies demonstrated mixed results following the mandate in some cases with short-term losses. However, a study conducted twenty years after Norway’s gender quota had been in place found no effect on firm profitability.¹² Two researchers concluded that the mere presence of women directors was not enough to influence the board’s strategy, but the experiences and values women brought did improve board decision-making.¹³ Also as noted above, the expected trickle-down effect to female workers outside of the boardroom did not materialize.

Sweden diverged from Norway and other European nations by not imposing a gender quota for its corporate boards. Yet, Norway is recognized as a model for gender equality as it boasts gender-balanced assemblies and strong female representation in the public sector. Some credit the fear of mandates with spurring companies to add women to their boards. Sweden has the third-highest female representation on corporate boards with 38 percent of board members being women.¹⁴

However, increased female representation on boards did not lead to an increase in female CEOs, either in the short or long runs. When women CEOs were recruited to sit on boards, their executive chairs were filled by men.¹⁵ Gender diverse boards also had no effect on firms’ financial performance.¹⁶

Conclusion

Contrary to conventional wisdom, gender diversity at the board level does not necessarily lead to better corporate performance or guarantee better outcomes for women along the professional ladder. Even positive non-economic outcomes do not necessarily warrant public interventions such as mandates, especially if the same outcomes can be achieved through voluntary means.

Mandates can also pose hardships on those serving citizens with the least means. Nonprofit organizations are mission- driven, and diversity requirements may not lead to recruiting individuals who best help achieve their missions or incur added recruitment costs despite having constrained budgets.

Gender mandates for corporate boards should not be adopted based on false assumptions about economic payoffs or ethics, especially as companies are already embracing greater gender diversity on their own.

For more on this topic, read Philanthropy Roundtable’s research paper: “Improving Board Diversity: Lessons from Sweden and Norway”.

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