Norway Companies Negatively Affected by Female Quotas, but Because of Inexperience Not Gender

A new study conducted at the University of Michigan finds that public companies in Norway have been negatively affected by a recent law requiring corporate boards to have female membership of at least 40 percent -- but not because of gender. When Norwegian companies increased the proportion of women on their boards under a new diversity law, the firms' market value suffered, according to Amy Dittmar and Kenneth Ahern of the University of Michigan. If a firm achieved at least a 10 percent increase in the proportion of female directors, its Tobin's Q — the ratio of market cap to asset-replacement cost — dropped 18 percent. But gender wasn't the reason: the decline was due to the new directors' young age and lack of high-level work experience. In fact, gender effect is not significant once they accounted for these other experience-related differences.

The study analyzed the impact of a 2003 Norwegian law requiring all public-limited firms to have at least 40 percent representation of women on their boards of directors by 2005. At the time, only 9 percent of board seats in Norway were held by women. After voluntary compliance failed, the law became effective Jan. 1, 2006, with a two-year transition period. Firms that did not comply by January 2008 would be forced to dissolve. Using a panel of 130 publicly listed Norwegian firms from 2001 to 2007, the researchers found a negative impact of the mandated board changes on firm value—a result that may be applicable to the United States and Britain since Norway's system of governance is similar. A few other European countries are also considering gender quota laws or initiatives.

New SEC rules will require public firms to disclose what role, if any, diversity plays in appointing members to their corporate boards, but Ross School researchers say any forced restructuring of boards in the name of equality could hurt companies. "Boards are chosen in order to increase shareholder wealth," says Amy Dittmar, associate professor of finance. "Placing restrictions on the composition of a board will reduce value." Currently, there is no SEC-mandated definition of what constitutes diversity and there are no restrictions on who companies can appoint to their boards. Corporate nominating and governance committees may consider such factors as professional experience, education, gender, race or national origin.

University of Michigan Press Release, 2/15/10; http://www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=18682