Women on the Board and Market Failure (Part 3)

The Michigan study referenced in the piece by the Economist, The Changing of the Boards: The Value Effect of a Massive Exogenous Shock, focuses on the Norwegian experience and concludes that when companies added a large number of women to the board,  they saw a decline in value.  As the piece concludes:  "These results indicate that boards do matter and that a shock to the board structure can have a large impact on value."  

The paper wasn't controlling for gender per se.   Because the average size of boards of Norwegian companies did not change (6.5 directors), each woman added to the board effectively replaced an experienced director.  "The average size of the board is unchanged at six members, however. Since board size is not dictated by the new law, a constant board size indicates that for each woman ‘hired,’ a man was ‘fired,’ rather than simply adding new women."

The women joining the board had a different profile from the men departing.  As the study noted:

• We find that compared to men, women directors have significantly less CEO experience, are significantly younger, are significantly more likely to have an MBA, are significantly less likely to sit on other boards, and are significantly more likely to be a non-executive manager.

In other words, the women had more education but less industry experience. 

The degree to which any of these conclusions are transferable to the US situation is unclear (it is not an issue discussed in the study).  First, the data set in Norway involved only 130 companies.  Any similar study in the US would likely involve substantially larger numbers.  Thus, some very precise conclusions from the study may be specific to the particular data set used.  

Second, the study contains some sweeping conclusions that do not seem to fit circumstances in the US.  It concludes, for example, that the greatest value is provided by "an average age of 46 years old and an average board size of 7 members."  This reflects the result of the particular data set used in the study.  Intuitively, it would seem that in the United States, the most efficient board size would likely vary depending upon the size of the company and perhaps the particular industry involved. 

Third, some of the other conclusions seem less likely in the United States.  Thus, the study concludes that value increases with CEOs but decreases with CFOs.  In a post-SOX universe in the United States, the number of directors with a financial background are increasing.  There has been little indication that somehow this has resulted in less qualified or efficient boards. 

Moreover, the conclusions in the study are not simply that managerial experience increases value.  The study also concludes that the presence of professors also increases value.  Thus, in Norway, a professor is worth more than a CFO on the board, a conclusion that may reflect the particular data set in use and not be true here.   

Fourth, Norwegian boards are different from those in the US.  Foremost, firms with more than 200 employees must allow employees to elect one-third of the board.  In other words, Norwegian boards already have a component of non-management nominated directors who are likely to come from a non-management background. 

Finally, the study occurred during a period of traumatic shock to Norwegian boards.  The data may simply stand for the proposition that during traumatic shifts, professors and CEOs are more valuable on the board than CFOs and MBAs.  But it leaves open the possibility that this may not be the case during less traumatic times.

he characteristics of the women added to the board?

• We find that compared to men, women directors have significantly less CEO experience, are significantly younger, are significantly more likely to have an MBA, are significantly less likely to sit on other boards, and are significantly more likely to be a non-executive manager.