Men dominate the upper echelons of the business world: Women hold only 15 percent of seats on the boards of the S&P 1500, up a mere 3.7 percent over the last seven years. There are more directors with the first names James, Robert, William, and John than there are women directors. Just 2.8 percent of Fortune 500 directors are women of color.
Confronted with similar disparities, a set of countries around the world—Norway, Italy, Belgium, France, Iceland, and Germany—have resorted to the force of law, adopting quotas that require corporate boards to maintain particular levels of gender balance. The law in Norway goes so far as to authorize the state to dissolve firms that do not comply. In my new book, published this week, I offer an in-depth study of this turn to regulation.
In the United States, quotas may not be constitutionally, much less politically, viable. The debate, to the extent it exists, tends to rest on conjecture. But this need not be the case: Norway has had a compulsory quota for all publicly traded firms since 2008, making it the oldest such requirement. So what do those who live under the world’s most mature quota regime have to say about legally required gender diversity? To answer that question, I interviewed corporate directors in Norway—male and female—about their lived experiences both before and after the law came into effect.
According to the participants in my study, the heterogeneity brought about by quotas has enhanced the quality of boardroom deliberations and overall corporate governance. The directors I interviewed believed that women were more likely than men to thoroughly deliberate and evaluate risks. Women, in their view, showed a greater propensity to monitor firm management. Many directors thought that women’s status as outsiders to the corporate boardroom, and the male networks that constitute it, contributed to their independence and introduced new perspectives born of different experiences into board work. These findings resonate with scholarly studies documenting that diverse groups tend to do a better job than homogeneous ones of tackling complex issues.
But beyond the benefits to firm decision-making and governance, the quota law has also had a broader social effect by redistributing power in Norwegian society.
Before the quota came into force, Norwegian board members were largely selected in the same way as they are in the U.S. today: by tapping into the networks of existing directors and executives. Not surprisingly, these networks tended to be male and insular. Further, the dominant perception among directors and officers was that qualified women did not exist. A wealth of social-science research has documented the assumption that men are more effective leaders than women. This unconscious bias only compounds the structural obstacles that keep women away from the boardroom table.
But the quota forced companies to extend their searches for new directors beyond the typical spheres; they had no choice but to look beyond their go-to networks. As one director told me, the quota compelled companies to expand their “one-dimensional picture of what [a] board member should be.” This included considering candidates who did not have prior CEO or C-suite experience, or directly related industry experience, but had analogous experience and transferable skill-sets and competencies from other professional domains. As a result, Norwegian society’s understanding of high-level leadership is changing, valuing a wider variety of backgrounds and experiences.
Many of the directors I interviewed told me that they initially opposed the quota law but have now come around after seeing the law in action and directly experiencing its effects. And yet, Germany’s recent decision to adopt a quota has once again reignited the controversy. Commentators in The New York Times and the Washington Post impugned the wisdom of positive discrimination, both relying on a 2012 study to argue that quotas harm firm financial performance and are inappropriate as a policy measure.
While this study found that the board restructuring required by the Norwegian quota led to a decline in firm valuation, the authors did not ascribe the decrease to qualities inherent to gender, but to the challenges of having more inexperience on the board. Many of the incoming females were less senior and less likely to have been CEOs, for example.
But as new female directors gain more experience, these costs are likely to diminish. More importantly, some initial value reduction—a one-time transaction cost—may be an acceptable trade-off for the longer-term benefits of gender diversity on corporate boards, which my research suggests may enhance the quality of corporate governance and promote broader social equality goals. And the negative performance effects could be mitigated through regulatory design. States, for example, could require a more gradual increase in gender representation than Norway did, beginning with initial lower targets and giving firms a more extended period to come into compliance.
Even if the worries about firm valuation can be addressed, quotas still present a variety of concerns worth engaging. Are quota regimes viable strategies in countries whose social and political cultures differ from Norway’s, or whose corporate governance structures differ? In Norway, a number of publicly traded firms turned private before the law came into effect, possibly to evade the mandate. If this is what occurred, how likely is it that companies in other places will follow suit? If women cease to be outsiders and become part of existing male networks, will they lose their valuable independence?
It will take more time to answer these questions with clarity. But for now, such questions are peripheral to the situation here in the United States, where quotas are an unlikely prospect and efforts to address the gender gap have been anemic at best, such as a 2009 regulation promulgated by the Securities and Exchange Commission that requires listed companies to disclose whether they take “diversity” into account when composing their boards and, if so, how. The rule does not define diversity and corporate America has given it a range of meanings. In my book, I analyze the disclosures submitted to the Commission between 2010 and 2013 by the S&P 100. My findings will not inspire confidence among those concerned with the gender imbalances I noted at the outset.
Though virtually all companies I studied complied with the rule, only half defined diversity to include socio-demographic characteristics such as gender or race. Instead, most firms construed diversity to entail diversity of background or experience. Ford Motor Company, whose board consists of two women and 14 men, submitted the same disclosure each year for the four years I studied: “Ford recognizes the value of diversity and we endeavor to have a diverse Board, with experience in business, government, education and technology, and in areas that are relevant to the Company's global activities.”
Even cursory reporting can amount to compliance. Berkshire Hathaway disclosed that it “does not have a policy regarding the consideration of diversity in identifying nominees for director. In identifying director nominees, the…Committee does not seek diversity, however defined.” Compliance thus does not require meaningful engagement with the diversity question.
There is of course no one-size-fits-all solution to the puzzle of corporate board homogeneity. While quotas might not be palatable in the United States, it is clear that a more forceful regulatory shove is needed to disrupt the status quo. There are many arguments for boardroom diversity but, in my view, one of the most important is that corporations can have as much, if not more, impact on our lives as government. Qualified women and other currently absent groups ought to be in the leadership of these sites of power.
Law is a powerful tool that can shape social norms, and we should not be afraid to use it to address the biases that infect our society. The integrity of our institutions depends on it.