Although perhaps a drastic move from the perspective of many businesspeople, the Norwegian government’s bold adoption of a 40% quota for women on boards, and its short 2-year implementation phase, had no significant impact — either negative or positive — on short- or long-term corporate performance.
In December of 2005, Norway passed a quota law requiring that women make up a minimum of 40% of corporate boards. Corporations had 2 years to comply with the law. As a result of the law, the fraction of women directors went from 5% in 2001 to 40% in 2008.
Opponents of the quota argued that artificially requiring a large percentage of women board directors in such a short time would necessarily reduce the experience on the board, and reduce corporate performance. One problem, they argued, was a shortage of qualified women to be on these boards; as a result, a few “very busy” women would have to shoulder much of the burden.
A team of researchers, analysing data from a wide variety of sources, were able to paint a comprehensive picture of the financial and non-financial impact of the quota. The overall verdict was neutral — that is, the quota had neither a positive nor negative impact.
Specifically, the researchers first analysed the short-run impact of the quota by showing how the market reacted to the events leading up to the new law. The event-study analysis showed no abnormal stock returns (either positive or negative) related directly to quota-related events.
The researchers used long-run stock performance (covering 2002-2008) and accounting performance (2002-2013) to further test the valuation impact of the quota. They analysed the monthly returns of two different portfolios of sample companies and found no significant reduction in stock performance. They analysed Tobin’s Q figures for companies during the sample period, and found no negative impact on Tobin’s Q. Finally, they analysed corporate return on assets (ROA) during the sample period; again, there was no negative impact connected to the quota.
What about the indirect impact of the law on Norwegian business? The research addressed a variety of concerns, beginning with the issue of ASA to AS conversions. The law applied to ASA corporations (equivalent to the British PLC) and not to AS companies (equivalent to Ltd.). The research showed that there was not a rush to convert from ASA to AS to avoid the law, indicating limited concern about the quota.
Using information from nearly 5,000 ASA and AS companies covering the years 1999-2013, the researchers also considered the concern that qualified female directors were and would continue to be in short supply. Their analysis showed that:
The researchers also noted that the number of board members also stayed level at five members. The law allowed boards to add to their numbers to make room for new women members. Most boards opted instead to replace some of the men on the boards — further proof that the quota was not expected to hurt overall board performance and effectiveness.
The naysayers were wrong. By all measures — financial and non-financial — the aggressive quota of female board members did not negatively impact the performance of corporations and their boards. Nor, it should be noted, did it positively impact this performance.
One might consider that the results in Norway, as documented in this study, reject an economic argument for diversity — that is, that diversity will help companies perform at a higher level. The core argument for diversity is of course more of societal fairness: women should have the opportunity to participate in business at the same level as men.
The Norwegian example, which was emulated in several other European countries, also undermines any argument that companies must change slowly. The change on Norwegian boards was dramatic, with no negative impact. There is no excuse (such as the lack of qualified candidates) for companies dragging their feet on diversifying the gender makeup of their boards. If companies in other countries don’t want a government-imposed quota and timetable, they would do well to act.
Does Gender-Balancing the Board Reduce Firm Value? B. Espen Eckbo, Knut Nygaard & Karin S. Thorburn. Tuck School of Business Working Paper & European Corporate Governance Institute Finance Working Paper (March 2016).
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