Do Board Gender Quotas Affect Firm Value? Academics Explore Effects of California Law

March 17, 2020

A paper by Clemson University researchers in the wake of a California law presents evidence on the effects of board gender quotas by examining stock market reactions to the law, direct costs of compliance, and the resulting board adjustments. Under the 2018 law, California required each public company based in the state to have at least one female director by the end of 2019 with the requirements increasing based on board size by the end of 2021. Penalties for not abiding by the law are $100,000 for the first violation and $300,000 for each subsequent violation. The Clemson academics studied a sample of all 602 public firms headquartered in California and found that 171 (28%) needed to add a female director by the end of 2019 and 531 (88%) need to add one or more women by 2021. The researchers made additional findings one year after enactment of the law that point both to progress and challenges for firms subject to the law:

Negative stock market reaction: The researchers found a “statistically significant and economically large stock market reaction of -1.2% at the announcement, suggesting that [the law] is costly for affected firms.”
High compliance costs: The researchers estimate that the median firm needs to add two female directors by 2021 at a total annual cost of $345,636. Although the dollar cost of compliance is higher for larger firms due to higher director pay, the economic effect of the law is greater for smaller firms.
Significant increase in female directors: The aggregate number of board seats held by female directors increased by 23% (143 board seats) since the law was enacted. The researchers note that this increase is greater for California firms than for control firms in other states, so it is not driven by a general trend of increasing female board representation.
Most firms increased board size: Of the 136 firms that add a female director, 40% replaced male directors while 60% expanded the board.
For some firms, non-compliance is optimal: The researchers found 70 of the 488 firms reviewed continue to have all male boards as of their 2019 proxy filing. For these firms, average annual director pay is greater than the $100,000 fine for non-compliance, suggesting that it may be optimal to delay appointing a new director or pay the fine.