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Gender-quota boardrooms come at a high price

Monday, February 24, 2014 - By Audun Farbrot

Boardroom gender quotas seem to be a success story. According to a new study, affected companies pay a high price for the gender quota law.

KNOWLEDGE @BI: Corporate Governance

As the first country in the world, Norway adopted a law that requires public limited companies (the ASAs) to ensure at least 40 percent representation of both men and women on the company board.

To make sure this law is obeyed, a death sentence, i.e. liquidation, may be imposed on companies that do not comply.

In practice, many of the affected companies had to replace male board members with female ones. Otherwise, liquidation loomed.

There was also an emergency exit: to abandon the status of public limited company. A company was in practice forced to change its organisational form to circumvent the statutory gender-quota requirement.

The boardroom gender-quota law appears to be a huge success, and it has also garnered considerable attention internationally.

The law and not least the threat of liquidation have brought more women into the boards subject to the law. Other countries have been inspired by this Norwegian experiment to regulate gender representation in the boardroom by legislative means.

However, no other country has followed Norway’s example in threatening to liquidate non-compliant companies.

This shining Norwegian boardroom coin has a flip side that is much less known.

The big company escape

In her PhD project at BI Norwegian Business School, researcher Siv J. Staubo has looked at what it has cost the companies to adjust to the new regulatory requirements and recommendations.

She shows that as many as half the companies that were affected by the new law on gender quotas, chose to escape from their status as a public limited company, thereby evading the requirement for gender-quota boardrooms.

However, they had to pay a price by changing their organisational form and by giving up the potential for prestige and increased latitude which the more advanced organisational form provides.  A public limited company (ASA) has benefits which an ordinary limited liability company does not have, for instance the opportunity to be listed on the stock exchange and the value of stronger protection for minority shareholders.

With Professor Øyvind Bøhren at BI Norwegian Business School, Staubo has examined whether changes in organisational form might be an international trend.

“The escape from the public limited company as an organisational form is unique to Norway and can be attributed to the law on gender quotas,” Staubo explains.

The companies that stuck to their organisational form, also suffered considerable costs by having to change the composition of their board and train new board members.

“Whatever the companies choose to do, the new regulations entail considerable costs,” the finance researcher states.

Increased independence on the boards

This major replacement of board members for public limited companies has not just resulted in more women, it has also led to a dramatic increase in the proportion of independent board members.  The greater the distance between the board and the management and the company, the more independent is the board.

Before the quota law took effect, almost half (46 percent) of board members were independent (in 2002). Once the companies had adapted to the new law, this proportion had increased to two-thirds of all board members (67 percent) in 2008.

This increase in independence is easily explained. More than eight out of ten female board members (84 percent) in the public limited companies are independent, in listed as well as unlisted public limited companies.

“This is an unintended effect of the new law,” says Staubo.

When there is too much independence

But surely it is good for a board to be more independent of its company?

“Many people think increased board independence is a good thing. But a board doesn’t become better just because the proportion of independent board members goes up,” she says.

According to Staubo, a board has two main tasks: Control and advice. The needs for control and for advice will vary from one company to another.

Typically, independent board members will be better able to perform their control role than their advisory role. Being a good advisor normally requires more in-depth knowledge about the business than independent board members have.

“The new law on gender representation has generated far more independent board members than the companies felt was appropriate before the law came into effect,” Siv J. Staubo states.

International press are still writing favourably about the Norwegian board experiment. Now they can add to the story by telling their readers how much our new law has cost the companies.

Reference:

Siv J. Staubo: Regulation and Corporate Board Composition, Series of Dissertation 1/2014, BI Norwegian Business School.

This article is published in the online news service ScienceNordic on February 15, 2014.

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Text: Audun Farbrot, Head of Science Communication, BI Norwegian Business School.

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