New York, NY – In 2018, California passed the United States’ first bill to mandate more women in the boardroom. The law required over 600 public companies headquartered in the state to appoint at least one female director. The law had an immediate impact – raising the percentage of board seats held by women from 24% to 29% in just two years – but some economic studies found that the quota drove down stock prices. New research from Columbia Business School Professor Michaela Pagel disproves that notion, finding that shareholders’ support for mandated female directors is still strong after the law’s passage. They instead found that stock price declines were tied to companies with dysfunctional board dynamics.
Professor Pagel and her research partners University of Melbourne Professor Marina Gertsberg and George Mason University Professor Johanna Mollerstrom hand-collected shareholder voting data from approximately 600 companies to show that prior to the California mandate, female nominees (both new and incumbent) regularly received more supportive shareholder votes than male nominees. After the law’s passage, female directors up for another term on the board continued to receive greater support than their male counterparts, while support for new (mandated) female nominees decreased but is still on par with the level of support for new male nominees. The researchers thus show that the quota accomplished the goal of putting more women on company boards while evading fears that the mandate would lead to less-qualified women being appointed over more-deserving male candidates. Importantly, Professor Pagel and her colleagues debunk the myth that shareholder disapproval of mandated women directors led to a negative stock price reaction. Rather, they find that a firm’s stock price was only negatively impacted for companies where shareholders chose to not replace male directors who previously received very low shareholder support – a sign of a dysfunctional board.
These findings illustrate clear dimensions for success when implementing gender-based quotas. Fears that gender-based quotas decrease the overall quality and preparedness of the board are unfounded and in fact, companies would do well to embrace equality-driven mandates like the 2018 California law. Amidst growing calls from employees and shareholders alike to center diversity, equity, and inclusion in company practices, employees wary of quotas must realize that it’s not about the quota itself but about with how a quota is complied.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit gsb.columbia.edu.
About the researcher
Michaela Pagel is the Roderick H. Cushman Associate Professor of Business at Columbia Business School. She received her Ph.D. from the Economics...Read more.