California Governor Jerry Brown must decide by month-end whether to sign a bill that would set a quota for the minimum number of women serving on a company’s board. Some have said such a law would be a step forward in governance. Others have called it an example of “government overreach.” But almost nobody participating in the debate has brought up the impact that such a law would have on workers.
Research I conducted with Amalia Miller of the University of Virginia suggests that impact could be positive.
In 2006, Norway required all publicly listed companies to hire more female board members—within two years, the boards had to have 40% female representation. Miller and I compared Norwegian companies forced to add women on their boards to other companies (in Norway and other Nordic countries). We found no significant differences in revenues, in rates of mergers and acquisitions, or in most costs. But costs were higher in one area: labor. The cause wasn’t higher wages, but higher relative employment. Companies affected by the quota were more likely to retain workers during downturns.
In fact, during the 2008-2009 financial crisis, companies required by the quota to have a significant female board member presence undertook 65% to 80% fewer layoffs.
Another insight into the impact of female leadership on governance comes from a study Miller and I conducted of women-owned firms in the US, which showed these companies were less likely to use temporary workers and leased workers (workers who are actually employees of a third-party, making their work arrangement less secure). We found that women-owned companies reduced their workforces less than other firms during the 2008-2009 recession—the implication being that women-owned and/or women-led firms are often more employee friendly.
It may be that women leaders place more value on relationships and therefore tend to act with compassion toward people. Alternatively, or in addition, these female leaders may simply prefer to retain workers because it’s a sound long-term economic strategy. While layoffs save money in the short-term, hiring and training a new workforce is a large expense that hurts in the long run. In many cases, developing talent and engendering loyalty by building relationships may be more beneficial than the transactional gains from short-term layoffs.
Given Silicon Valley’s ongoing talent war, taking a longer-term view of retaining talent even during an economic downturn may provide strategic benefits for employers and employees alike. As companies seemingly offer more to compete with every other organization trying to hire scarce talent, a new perspective may be needed in the boardroom. Women directors, it seems, could provide that point of view.
Governor Brown has not indicated whether he will sign the bill. If he does, California companies would be required to have at least one woman board member by the end of 2019. At the end of 2021, at least two members of a five-member member board would have to be women, while boards with six or more directors would need at least three women.
Some opponents of the mandate argue that it does a disservice to women leaders by inferring that a quota is necessary to increase their board membership. Other detractors highlight the difficulty of finding highly qualified board members with specific expertise.
These arguments merit careful consideration, but the quota’s potential positive impact on workers also shouldn’t be overlooked. If the Norwegian experience is any indication of what could happen should the California bill become law, the increase in female board members may result in more protections for workers than they have today.
David Matsa is a professor of finance at Kellogg School of Management at Northwestern University.