Mandatory Gender Balance and Board Independence

AuthorØyvind Bøhren,Siv Staubo
Published date01 January 2016
Date01 January 2016
Mandatory Gender Balance and Board
Øyvind Bøhren and Siv Staubo
Department of Finance, BI Norwegian Business School, N-0442, Oslo, Norway
We nd that forcing radical gender balance on corporate boards is associated with
increased board independence and reduced rm value. A mandatory 40% gender
quota shifts the average fraction of independent directors from 46% to 67% because
female directors are much more often independent directors than males are. This
shock to board independence via gender quotas is strongest in small, young,
protable, non-listed rms with powerful stockholders and few female directors.
Such rms also lose the most value, presumably because they need advice from
dependent directors the most and monitoring by independent directors the least.
Keywords: corporate governance, regulation, board independence, female direc-
tors, gender quota, Norway
JEL classification: G30, G38
1. Introduction
The low proportion of females on corporate boards has attracted widespread attention
from practitioners, regulators, researchers, and the media (Farrell and Hersch, 2005;
McKinsey & Company, 2007; Terjesen et al., 2009; Langli, 2011; Adams and
Kirchmaier, 2013). Norway was the rst country to act politically on this issue by
mandating gender balance in the boardroom. The gender balance law (GBL) was
proposed to the surprise of many in 2002, passed by Parliament in 2003, and became
mandatory in 2008. The 40% gender quota increased the average fraction of directorships
lled by females from 11% when the GBL was passed to 42% when it became mandatory
ve years later. Since then, non-complying rms face the penalty of liquidation.
We are grateful for valuable comments from two anonymous referees, the Editor (John
Doukas), Renée Adams, Rosemarie Koch, Eva Liljeblom, Øyvind Norli, R. Øystein Strøm,
and Charlotte Østergaard.
France, Germany,Holland, Iceland,and Spain are implementing genderquotas in 20142016,
and similar proposals have been madein Australia, Belgium, Canada, theEU Commission, and
Italy. Gender quotas for state rms are used in Ireland, South Africa, and Switzerland. Prime
Minister Cameronrecently said, There is clear evidence that ending Britains male-dominated
business culture would improve performance, and that Britains economic recovery is being
held back by a lack of women in the boardroom(The Guardian, 2012).
European Financial Management, Vol. 22, No. 1, 2016, 330
doi: 10.1111/eufm.12060
© 2015 John Wiley & Sons Ltd
This paper shows that such a large and unexpected shock to gender balance produces a
large shock to another board characteristic as well. In particular, we nd evidence
suggesting that the GBL strongly increases board independence, and that this upward shift
also reduces rm value. While regulators consider independence the key characteristic of
successful boards (Bhagat and Black, 1998; Adams et al., 2010), the argument that more
independence is always benecial has no support in the research literature. As predicted
theoretically (Adams and Ferreira, 2007) and documented empirically (Linck et al., 2008;
Duchin et al., 2010), optimal board independence requires a tradeoff between the value of
monitoring provided by independent (outside) directors and the value of advice provided
by dependent (inside) directors. This inherent conict between monitoring and advice
suggests that board quality will suffer if mandatory gender balance in the boardroom
forces independence above the optimal level.
Our ndings support this logic. First, the average fraction of independent directors rises
by 21 percentage points from when the GBL was passed until it became mandatory.
Second, the effect of this regulatory shock on board independence via gender quotas
varies in the cross-section. The rms affected the most are those that need independence
the least. Such rms have low need for the monitoring provided by independent directors
and high need for the advice provided by dependent directors. We nd that these rms
tend to be small, young, non-listed, protable, owned by powerful stockholders, and to
have few female directors before the quota became mandatory. The statistical and
economic signicance is particularly strong for the fraction of female directors. Third, the
largest value loss occurs in rms that had to change their board the most radically.
Performance is weaker the more the gender mix deviates from what it was before the GBL
and the more independence deviates from what is predicted by rm characteristics that
motivate the use of independent directors.
These ndings mean that although the GBL regulates just one board characteristic per
se (gender balance), the law has a strong side effect on another characteristic that is
important for board quality (independence). Because independence is a much more
widespread property among female director candidates than among males, a forced shift
towards more gender balance shifts the balance of board skills from advice towards
One may wonder whether this increased board independence is driven not by the GBL,
but rather by the governance code. The code was introduced two years before the GBL
became mandatory and recommends that half the directors be independent. However,
while the GBL applies to both listed and non-listed rms, the code applies only to the
listed. We exploit this difference in exposure and nd the same upward shift in
independence regardless of listing status. Hence, the increased independence is due to the
GBL and not to the governance code.
This result also suggests that, unlike what has been argued, the widespread
independence found among female directors in countries with no GBL does not reect
merely a simple way to comply with the code (Beecher-Monas, 2007). Because we show
that female directors are as often independent in rms not exposed to the code as they are
in rms exposed to it, it seems the pool of dependent female candidates is so small that one
cannot select both many females and many dependent females simultaneously.
Correspondingly, choosing female directors in a GBL environment very often means
having to choose independent directors, even though that was not the intention.
We also nd that stockholders do not ll the gender quota in ways that would have
increased independence less dramatically. First, just adding female directors to the
© 2015 John Wiley & Sons Ltd
4Øyvind Bøhren and Siv Staubo

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