California Law Mandating Women on Corporate Boards Hurts Shareholder Value, UNC Study Shows

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The effects of the first U.S. state to mandate women directors on corporate boards is the subject of a new study by researchers at the University of North Carolina Kenan-Flagler Business School.

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The effects of the first U.S. state to mandate women directors on corporate boards is the subject of a new study by researchers at the University of North Carolina Kenan-Flagler Business School.

Firms headquartered in California saw a significant decline in shareholder value after the Sept. 30 passage of a law to mandate women directors on boards of publicly held firms.

California’s Senate Bill 826 (SB 826) passed on September 30, 2018, is the first law in the U.S. requiring women on corporate boards. It was based on the premise that publicly held companies perform better when women serve on their board of directors.

The decline in shareholder value was directly related to the number of women directors companies are required to add to their boards, according to a new study by researchers at the University of North Carolina Kenan-Flagler Business School. UNC Kenan-Flagler researchers Anil Shivdasani, Wells Fargo Distinguished Professor of Finance; Elena Simintzi, Assistant Professor of Finance; and Sunwoo Hwang, a PhD candidate in finance share their findings in “Mandating Women on Boards: Evidence from the United States.”

Their findings show:

  • The costs of mandated female board membership arise from supply constraints on the pool of female board candidates.
  • Smaller firms, which facer greater constraints in attracting qualified board candidates than large firms, experience more negative abnormal returns.
  • Location matters. Firms that can access a larger pool of female directors by virtue of their proximity to a major airport do not experience a decline in shareholder value.
  • The negative wealth effects are concentrated among firms with weak corporate governance. Firms with strong corporate governance do not experience significant changes in shareholder wealth.

The law and its effects
Women are starkly underrepresented on corporate boards. In the U.S., women represent on average 16 percent of the board for Russell 3000 firms and 21 percent of the boards do not have a single female director. Female representation is only slightly better in Europe where women make up an average of 23 percent of boards at large publicly listed European firms.

There is substantial regulatory push across the globe to address this imbalance. France and Norway have mandated board quotas for women, and the European Commission recently advanced proposals for female director quotas for EU member nations.

SB 826 mandates that all publicly traded companies incorporated or headquartered in the state have at least one female director by the calendar-year end of 2019. It also 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.

At the announcement of the signing of SB 826, companies headquartered in California experienced a statistically significant abnormal return of -1.4 percent.

While the UNC researchers’ evidence comes from just one state, the law encompasses a sizeable number of U.S. firms. As of June 2017, 446 publicly traded companies in the Russell 3000 index were headquartered in California and these firms represented nearly $5 trillion in market capitalization or about 15 percent of the Russell 3000 index.

The impact of California’s law has implications for firms in other U.S. states. In passing it, California legislators, including Governor Jerry Brown and Senator Hannah Beth Jackson, expressed the desire that other U.S. states would follow. News outlets have reported that California’s law might provide other states with the impetus to advance similar legislation.

“Indeed, we find suggestive evidence that expectations of similar legislation could have been impounded into the valuations of companies in other states as a result of this law,” said the study.

What the study doesn’t address
While the study’s results show that mandated gender diversity on corporate boards is detrimental to shareholder value, they do not answer the question of whether these policies should be implemented.

“Our results do not speak to whether these policies have positive long-term effects on women’s labor market outcomes, whether they enhance fairness and equity in the workplace, and ultimately lead to improved outcomes for firms’ stakeholders,” said Shivdasani.

“The negative wealth effects we document appear to be driven by the limited pool of qualified female director candidates, a factor that likely is tied to the under-representation of women on corporate boards,” said Simintzi. “Higher demand for female directors as a result of the gender quotas could help disturb this equilibrium with positive, long-term effects for society, an issue beyond the scope of our research.”

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About the University of North Carolina Kenan-Flagler Business School
Consistently ranked one of the world's best business schools, UNC Kenan-Flagler offers a broad range of programs – Undergraduate, MBA and Master of Accounting, PhD and Executive Development – and extraordinary, real-life learning experiences. Faculty demonstrate unparalleled dedication to students’ learning and a commitment to world-class research that addresses critical business challenges. Contributing to the School’s thought leadership is the Frank Hawkins Kenan Institute of Private Enterprise, which promotes innovative, market-based solutions to vital economic issues. UNC Kenan-Flagler’s collaborative culture is rooted in core values that date back to its founding in 1919, and graduates are renowned as effective, principled leaders with the technical knowledge and leadership skills to deliver results in the global business environment.

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