Gender quotas for NZX-listed company's boards

Eric Crampton

Annick Masselot of Canterbury's Management department wants gender quotas on boards of companies listed on the NZX.

UC associate professor Annick Masselot said the NZX should go further with the introduction of quotas.
"In fact I think they have a duty to do that . . . Diversity is not an option."
She said NZX's diversity rules should at least match rules from the Australian sharemarket that required companies to disclose whether they had a formal diversity policy, and "if not, why not".
Masselot said several studies found that having women on boards led to an improvement in financial metrics.
Countries including Norway had introduced gender quotas in company boards using hard legislative measures. Others, including Australia had increased the number of women on boards with the use of "soft" self-regulation, she said.
The NZX would have the power to introduce gender quotas, but did not consider it appropriate to introduce them and had no intention to do so, a spokeswoman said.

I wouldn't be surprised if there were some studies finding benefits, but I doubt that they'd be sufficient to overturn the general conclusion that quotas aren't necessarily that hot an idea.

Adams and Ferreira, in the Journal of Financial Economics, found that mandating gender quotas for directors reduces firm value for well-governed firms. Forcing Boards to take on more women can help performance where those firms had existing problems that could be solved by greater Board monitoring. But on average, greater diversity yielded worse firm performance in the set of S&P firms (500, MidCaps and SmallCaps) studied.

Given that our previous findings suggest that more gender-diverse boards have stronger governance, these results imply that, on average, tough boards do not improve firm value. But they do not imply that tough boards never add value. There is no reason to expect tough boards to add value in all firms. The value of a tough board should depend on the strength of the other governance mechanisms. If firms have otherwise strong governance, having a tough board could lead to overmonitoring. But if firms have otherwise weak governance, we would expect tough boards to be particularly valuable.

I read this as a strong argument for shareholders' demanding greater female board representation if they think the Board has governance issues. But as for quotas:

Our results highlight the importance of trying to address the endogeneity of gender diversity in performance regressions. Although a positive relation between gender diversity in the boardroom and firm performance is often cited in the popular press, it is not robust to any of our methods of addressing the endogeneity of gender diversity. The true relation between gender diversity and firm performance appears to be more complex. We find that diversity has a positive impact on performance in firms that otherwise have weak governance, as measured by their abilities to resist takeovers. In firms with strong governance, however, enforcing gender quotas in the boardroom could ultimately decrease shareholder value. One possible explanation is that greater gender diversity could lead to overmonitoring in those firms.

More generally, our results show that female directors have a substantial and value-relevant impact on board structure. But this evidence does not provide support for quota-based policy initiatives. No evidence suggests that such policies would improve firm performance on average. Proposals for regulations enforcing quotas for women on boards must then be motivated by reasons other than improvements in governance and firm performance.

Dr Eric Crampton is a senior lecturer in economics at the University of Canterbury. He blogs at Offsetting Behaviour.

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