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Dr. Sasha Galbraith

Dr. Sasha Galbraith

Posted: September 11, 2010 10:47 AM

Should the United States jump on the female quota bandwagon? Norway has had a quota law in place for the past four years stipulating that all publicly traded companies must have between 33 and 50 percent women on their boards of directors (depending on size). France and Spain are enacting similar laws -- minus the penalties. Any Norwegian company that didn't comply with the law faced penalties and dissolution. Disobedient French companies will simply get a slap on the corporate wrist.

For those who are counting, women occupy a paltry 16 percent of Fortune 500 board seats -- and this number has hardly budged for years. Some common explanations: it's only a matter of time, women don't have the requisite CEO experience; too many women drop out of the corporate rat race before their time; they are unpredictable and want too much too fast and they don't factor in the "right" networks (i.e. those who pick board members).

In Europe and Asia the numbers are even more dismal; less than 10 percent of board members in Europe, on average, are women. And that number includes Norway, which means there are many countries like Italy, Portugal, Greece, Spain and Switzerland with truly pathetic female representation. In Asia, the number is 3.6 percent for developed countries (Japan, Hong Kong, Singapore, Australia and New Zealand) and 4.7 percent for emerging markets.

Critics of the board quota system claim there are just not enough qualified women to go around. In fact, one frequently cited study claims that the average market value of a company dropped by 2.5 to 5 percent in the 3 days surrounding the announcement of the board quota law in Norway. The authors, however, do not place the blame on women, but rather claim it's the lack of experience and young age (46) of the new board members on relatively small boards (7 members on average) which likely contributed to the decline in value.

But maybe market value isn't a good measure. After all, market value is a somewhat subjective measure involving expectations of firm performance in the future. Another group of researchers* found investors systematically penalized companies with at least one woman on the board, since all-male board member companies commanded a market value 37 percent higher than the more female-forward firms. However, when those researchers looked at other measures such as Return on Assets and Return on Equity, the women-populated boards did better than those that were exclusively male.

Combine that result with several other studies indicating higher earnings quality, higher profits, more long-term focus on a firm's holistic value and less risk in companies with more women at the top, and it's hard to argue against the logic of putting more women in senior positions - not least on the board of directors.

So how can we achieve parity on boards? Typically, I'm not a fan of quotas or other affirmative action programs. But in this case, I think that asking companies to "do the right thing" and appoint more women won't happen anytime soon unless we force them to do so. I reject the notion there is a lack of qualified women in the United States. The good old boys on today's boards are just not looking hard enough.

*"Investing with Prejudice: the Relationship Between Women's Presence on Company Boards and Objective and Subjective Measures of Company Performance" by S.A. Haslam, M.K. Ryan, C. Kulich, G. Trojanowski and C. Atkins. British Journal of Management. Volume 21, Issue 2, pp. 484-497, June 2010