Mandating Women on Boards: Evidence from the United States

On September 30, 2018, California enacted Senate Bill 826 mandating that all publicly-traded companies headquartered in the state to have at least one female director by the end of 2019. The law further requires that by year-end 2021, all firms have at least one female director if the board has four members or fewer, two female directors if the board has five members, and three female directors if the board has six members or more. With the passage of this law, California has become the first state in the United States to mandate female directors on boards of publicly held firms. Not surprisingly, the law has generated substantial debate with proponents praising efforts towards balanced gender representation. Opponents have raised concerns over appointments of less qualified female board members and discrimination against male candidates.

A priori, the effects of board regulatory mandates are ambiguous. If discrimination or biases prevent women from being appointed to corporate boards, endogenously determined boards will not be optimal for shareholders since they will not reflect the benefits of gender-diversity. Studies suggest that diversity in decision making facilitates consideration of a more comprehensive range of strategies and can lead to higher quality decision-making. However, if the pool of qualified female director candidates is limited, firms will incur costs from the appointment of inexperienced or less qualified directors that can outweigh the benefits of increased gender diversity. By perturbing an equilibrium outcome in the director labor market, board mandates can also impose externalities on firms that rely on a shared director labor market.

In our paper, we present evidence suggesting that mandating board gender diversity through legislation is costly for shareholders. At the announcement of the signing of SB 826, companies headquartered in California experienced a statistically significant abnormal return of -1.58%. Using the pre-legislation variation in board composition and the differing thresholds on female representation mandated by the law as a source of exogenous variation, we show that the decline in shareholder wealth effects is related to the requirements for female director additions. Announcement returns are more negative for companies for which the legislation is more binding and firms with a greater shortfall of female directors experience sharper declines in shareholder wealth than firms closer to the legislative requirements.

We argue that the costs of mandated female board membership arise from supply-side constraints on the pool of female board candidates. In addition, the negative wealth effects associated with the law are concentrated among firms with weak corporate governance or low profitability while those with strong corporate governance or strong profits do not experience significant changes in shareholder wealth. This suggests that supply-side constraints on female directors result in weakly governed boards being unable to attract the most qualified women directors.

Our results contribute to the debate over the impact of legislative mandates on board composition. Our findings suggest that regulatory mandates, as a means to overcome biases against women in the professional workforce, may be insufficient to create shareholder value in firms. Our results do not speak to the value of gender diversity in endogenously chosen boards. Rather, our message is that considering the implications of supply-side factors is important in evaluating the economic effects of legislation on board composition. We are, however, silent on whether such mandates are warranted based on societal and welfare considerations.

The complete paper is available here.