Print
E-MailMarina Gertsberg is Assistant Professor of Finance at Monash University; Johanna Mollerstrom is Associate Professor of Economics at George Mason University; and Michaela Pagel is Associate Professor of Finance at Columbia Business School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).
In September 2018 a quota for corporate boards was passed in California (CA Senate Bill 826). It requires all publicly held firms headquartered in the state to have at least one appointed female director by the end of 2019, and two (three) female board members by the end of 2021 for boards with five (six or more) members. Following the lead of several European countries, this made California the first US state to impose a binding gender quota on boards. The stock market reacted negatively to the quota (as documented by Hwang, Shivdasani, and Simintzi, 2018; Greene, Intintoli, and Kahle, 2020), a fact which has been interpreted as evidence that shareholders oppose the mandated addition of new female directors (e.g., because of scarcity of qualified female candidates leading to higher search costs, or to suboptimal trustees being appointed, see also Ahern and Dittmar, 2012) and prefer the current composition of the board.
We challenge this interpretation by providing new evidence using hand-collected data on shareholder voting results from annual shareholder meetings for approximately 600 firms, before and after the introduction of the CA quota. Using these data, we conduct a detailed investigation of shareholder support at the level of individual director nominees. We first show that, prior to the quota, female nominees (both new and incumbent) received greater support than male nominees. This is consistent with women facing a higher quality bar than men to become nominated for a board position. Second, we document that, post-quota, now that the number of female appointees has greatly increased, support for incumbent female nominees remains stronger than for male incumbents (for whom support decreased post quota). In contrast, support for new female nominees decreased after the quota and converged to the same level as the support for new male nominees.
Our second result fails to support the argument that shareholders prefer existing board members to the new female nominees introduced by the quota. It is, however, consistent with previous findings that: (i) there is a sufficient supply of suitable women to fill board seats; (ii) new female candidates appointed to boards in response to the quota are not less qualified than male appointees; and (iii) new female candidates are not less qualified than incumbent female board members who were appointed before the quota (Bertrand et al., 2019; Von Meyerinck et al., 2019; Giannetti and Wang, 2020). However, previous findings rely on ex-ante definitions of qualifications, whereas our shareholder voting is a direct measure of shareholders perceptions of director quality. We contribute to this literature by providing the first direct evidence indicating that shareholders view the quota-mandated women as equally qualified as new men.
In light of these findings, a natural question arises: If shareholders view quota-mandated women as good candidates, why did the stock market react negatively to the quota? Our third result reconciles the negative stock price reaction with the evidence that there are enough qualified female candidates. We show that only certain stocks reacted negatively to the quota announcement. These were the stocks of firms that subsequently failed to replace the director with the lowest pre-quota support when adjusting the board to comply with the new law. This also explains the observed decline in shareholder support for incumbent male nominees post quota. It therefore appears that the negative share price reaction has been driven not by a lack of qualified female board members, but by correctly anticipated dysfunctional board dynamics in the form of suboptimal turnover of directors.
Our results are an important reminder that the share price reaction to any new regulation is in part a reaction to the regulation and in part a reaction to firms’ behaviors given that regulation. In the case of our specific quota, we provide evidence that shareholders approve of the female candidates added but disapprove of the way in which boards choose to restructure. This subtlety is often missing in existing debates about new policies and regulations.
We hand-collect our data directly from corporate SEC filings and extract information on voting outcomes for California firms before and after the quota (our data covers all board election outcomes from annual shareholder meetings from January 2016 until July 2020). This approach allows us to include smaller firms that have publicly traded equity, but are not part of a major index. Our sample covers 585 firms. Due to the fact that shareholders vote for every board nominee separately, our approach allows us to consider aggregate measures (like stock price movements), while also observing the support for every nominee standing for election at the annual shareholder meeting. We can thus provide more detailed answers to questions regarding shareholder reactions to gender quotas. We also introduce a new angle for studying open questions about effectiveness and viability of affirmative action policies in general (c.f. Leslie, 2019; Dover, Kaiser, and Major, 2020).
In sum, our study is the first to connect the observed negative stock price reaction to a gender board quota with shareholder votes for individual board nominees. This enables us to derive detailed insights into shareholders’ attitudes toward quota-mandated nominees. Our results challenge the dominant interpretation in the literature that a negative stock market reaction indicates shareholder disapproval toward fem nominees.
The complete paper is available for download here.
3 Comments
Interesting piece.
Another explanation may be a substantial cultural shift such that better publicity and social esteem became attached to:
(a) companies with greater female board representation;
(b) institutional shareholders voting for greater female board representation; and
(c) individual (human) shareholders or agents of institutional shareholders voting for greater female board representation.
If true, those would be factors other than female director quality driving shareholder voting. These could be complementary or alternative to the theory proposed by the paper.
Perhaps I missed it in my review of the article, but I did not see these possibilities considered.
To what extent are these results driven by policies adopted by proxy advisory firms (ISS + Glass Lewis) and asset managers (e.g., Blackrock, State Street, Vanguard) that favor voting for female directors and penalize all/predominantly male boards?
Another possibility that might be considered is the fact that at most institutional investors, particularly at scale — but also that those that largely follow the recommendations of proxy advisory firms, the person(s) making voting decisions are different from the person(s) making investment decisions? Also, are there related effects from differences between “permanent capital” (e.g., broad index holders) and those that can sell if they believe the value will go down — and those groups having differing beliefs regarding the impact of such laws (at least among those person(s) voting)? Does the full paper address these questions?