An article from Norwegian School of Economics (NHH)

Norwegian legislation secures gender balance in boards in public limited companies. (Photo: Colourbox)

Female board members lead to stock market boom

Share prices indicate that the introduction of gender quotas in Norwegian boardrooms has had a positive effect on Oslo Stock Exchange.

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Norwegian School of Economics (NHH)

NHH was founded in 1936. With its affiliated institutes SNF and AFF, NHH constitutes the oldest and largest centre for research and study in the fields of economics and business administration in Norway.

In 2005, the average proportion of women on the boards of companies subject to the quota requirement was only 15.5 percent. As many as 80 percent of the companies did not meet the new requirement that at least 40 percent of board members must be women. But this would soon change.

In 2008, when the deadline for meeting the quota requirement expired, almost all the companies satisfied the requirement, and the average proportion of women on boards was 40.7 percent.

The authorities were more concerned with gender equality than with value creation when they drafted the legislation, so from their point of view, the scheme was a great success. But what did investors think about women taking up more space in the boardroom?

”On average, we see that the quota scheme has had a positive effect on the share prices of the companies covered by the rule. If we break down the figures, however, we see that certain types of companies also experienced a negative effect of increasing the proportion of women on their boards,” says Knut Nygaard.

The market responded positively on more female board members, which was reflected in share prices on the Oslo Stock Exchange. (Photo: Colourbox)

He started a research project on gender-based recruitment to Norwegian boards in connection with his doctoral thesis at the Norwegian School of Economics (NHH), and is now an associate professor at BI Norwegian Business School.

A natural experiment

Nygaard has analysed how the stock market reacted in the days around December 9 2005, when the quota requirement was introduced.

”The stock market is wonderful in the sense that it reacts almost immediately to relevant information. When the investors had to take the quota requirement into account from December 9, they immediately included it as a factor in their calculations when valuing companies, thus making it possible to see what expectations the market had of more women becoming board members.”

Norwegian legislation secures gender balance in boards in public limited companies. The requirement of the gender representation law is that both sexes shall be represented on company boards by 40 per cent.

The rules regarding representation in public limited companies entered into force on January 1, 2006. According to the act, both sexes must be represented in board of directors by approximately 40 per cent. Companies registered before this date, were given an additional two years until January 1, 2008 to comply with the law.

The legislation on representation of both sexes in boards similarly applies for all state-owned enterprises, inter-municipal companies, large co-operatives and private limited companies where municipalities own 2/3 or more of the shares. There are no similar regulations for privately owned limited liability companies.

Source: Fact sheet from Norwegian Ministry of Trade and Industry

Nygaard explains that the market was aware of the amendment before it entered into force, but it was not expected that the sanctions for violating the quota requirement would be so strict

"So that it was not until December 9 2005 that the market took the quota scheme seriously."

He alludes to the fact that, only a week before the legislative amendment entered into force, Prime Minister Jens Stoltenberg announced publicly that the sanctions for violating the 40 percent-rule would be fines. On the day when the rule was introduced, however, it turned out that the penalty for breaking the rule would be enforced dissolution of the company in question.

”A stronger incentive for complying with the quota rule is hard to imagine. Prior to December 9 2005, the debate centred on the issue of gender quotas, but when the act entered into force with sanctions that were far stricter than expected, the market had to react.”

”As such, this is like a natural experiment, as in the natural sciences. One factor was changed with immediate effect, which allowed me as a researcher to compare the period before and after,” explains Nygaard.

External women directors

Seen as a whole, the market was positive to having more women on boards, and this was reflected in the changes in share prices.

Based on accounting figures for the years after the quota requirement was implemented, the financial performance figures show the same trend, thereby confirming the stock market's reaction.

The researcher thinks that the advantage of having women on the boards is not the fact that they are women, but more that they come from the outside.

Nygaard's study shows that the companies whose accounting information is of a high quality and where it is easy to gain insight into the company's operations benefited from having more women on the board, while companies where this information is less accessible did not experience the same positive effect on share prices.

”Suddenly, there were a lot of women where there used to be very few. These women have to come from somewhere, and we see that an increase in the proportion of women coincides with an increase in external board members.”

”Because of this, companies in which it is easy for new external board members to familiarise themselves with the company’s operations experience a more favourable development in their share price than companies that are more closed. It is easier for external board members to become well-informed, and thereby more effective, board members,” explains Nygaard.

Nygaard's findings indicate that the composition of boards prior to 2005 was not optimal, and that the 40 percent-rule has taken board composition in a more favourable direction for the companies.

”It is natural to assume that a company elects its board on the basis of what is best for the company, but this is not necessarily the case. The management may often prefer certain board members over others in order to avoid scrutiny and to be able to run the company the way it wants.”

”This is a classical principal-agent problem, where the management and the owners of a company have conflicting interests,” says Nygaard.

With the quota system, the management does not have as much power to influence who will be on the board, and there are more independent board members who can ensure that the management works in the company's best interest, not for their own gain.

”So it is not the fact that there are more women that has led to this positive effect, but that there are more external board members,” says Nygaard.

Others following in Norway’s footsteps

Norway was a pioneering country when gender-based recruitment was introduced in the boardroom, and several other countries have looked to the Norwegian model in recent years. One of these countries is France, which introduced the same quota rule earlier this year, with a requirement of minimum 40 percent of each gender.

”It is also a trend among companies in Norway not covered by the quota requirement that the percentage of women is increasing,” says Nygaard.

In 2004, before the reform, 62 percent of limited liability companies that are not subject to the requirement had at least one woman on their boards. In September 2009, i.e. after the introduction of the quota requirement, the proportion of such companies that had at least one woman on the board had increased to 79 percent.

”These companies have increased the proportion of women on their boards completely voluntarily, which could indicate that the quota scheme has raised the profile of qualified women,” concludes Nygaard.

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