The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation

At the time of the passage of the law, only nine percent of board seats in Norway were held by women. The quota dramatically changed the gender composition of board and full compliance was achieved in April 2008, increasing the number of women on boards to 40%. However, simultaneously, companies experienced profit loss and changes in firm value and efficiency.

• To comply with the law, firms replaced former male board member rather than increase the size of the boards.
• New female board members were significantly younger than exiting male board members (on average, by 7 years) and retained female board members were younger, on average, by 2 years. New female board members had significantly less CEO experience (31%) than existing (65%) and retained (69.%) male directors, and retained female directors (43%). A 20% increase in female representation on the board levels estimated to lead to a decline of nearly 12% in the fraction of directors with CEO experience.
• New female directors were more likely to be a vice president, a nonexecutive manager, or a consultant, compared to retained male directors. Over 14% of new female directors are nonexecutive managers, compared to just 2.5% of retained male directors.
• After the announcement of the quota mandate, the industry-adjusted stock returns was -3.5% for firms with no female directors (versus 0.02% for Norwegian firms with at least one female director).
• Furthermore, the introduction of mandatory quotas led to a significant drop in long-term market value of the Norwegian firms. A forced 10% increase of women representation on the board led to an estimated decline in Tobin’s Q (a measure of firm’s market value) of 0.19, compared to the mean Tobin’s Q of 1.53 across all firms and year.
• Many public limited firms evaded the quota and its residual costs entirely by becoming private limited firms or incorporating in another country. By 2009, there were less than 70% as many public limited firms in Norway as there were in 2001. In contrast, there were 30% more private limited firms in 2009 than in 2001.

In short, although mandatory gender quotas are effective at increasing women’s representation on boards, they can decrease shareholder value if the quotas force firms to choose board of directors with less operational/CEO experience.

The study is based on a panel dataset containing information for 248 publicly listed Norwegian firms from 2001 to 2009. To compile the dataset, the authors collected the names of all public limited Norwegian firms that traded on the Oslo Stock Exchange anytime from 2001 to 2009. Data on CEOs and board members was collected from annual reports and other publicly available records. The authors used data on companies and board members of firms in Denmark, Finland, Sweden, and the United States to construct comparison groups for some of the tests. Tobin’s Q (defined as the ratio of the market value of a firm to the replacement cost of its assets; a ratio above 1.0 indicates that a firm is valued higher than the replacement cost of its assets) serves as the main measure of firm value in the analysis.

The authors evaluate several research questions with varying statistical methods. The authors use instrumental variable analysis to evaluate the whether firm values improve or decline as a result of the new board structure mandate, to assess the quota’s long-run firm value over the period when firms implemented the mandated board changes, to assess how the quota impacted board characteristics, and to evaluate the effect of gender quotas on firm policies. The authors then use difference-in-difference techniques to evaluate the effect that the announcement of the gender quota has on stock prices. Finally, the authors use multivariate regression analysis to compare new, retained and exiting directors by gender, and examine the effect of the gender quota on incorporation rates.