Catalyst Blog

Guest blog by Morten Huse, Professor of Organization and Management, BI Norwegian School of Management and President of the European Academy of Management

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In Norway, 40% of the board members of publicly traded companies are women. That’s because they must be—by law.

Norway’s approach is considered progressive. Indeed, many call the country’s initiative the boldest move anywhere to address an issue that one author has flagged as “one of the most durable barriers to gender equality.” Not surprisingly, other countries are thinking about following in Norway’s footsteps. However, business leaders, politicians and women in these countries are first asking whether or not the legislative solution has in fact made a difference in Norway.

Several studies, including one that I recently undertook with co-author Sabina Nielsen, have been conducted to explore the following factors:

- The societal impact of power balance, democracy and culture

- The business impact relating to diversity, competence and critical mass

- The individual impact focusing on the glass ceiling, careers and tokenism

Simple answers about the law’s effectiveness are not yet possible.  Before drawing conclusions, we need to understand and define aspects of value creation, including the tasks boards are to perform, plus the identities and behaviors of women board members compared with those of men board members. We also need to understand the effect of board processes, working styles and leadership.

In our study—based on responses to a questionnaire from 392 board members in 120 firms—my co-author and I did not find differences between women’s and men’s responses. We found that women directors may impact board involvement in strategic decision-making, but that the degree of impact depended upon the diverse values and professional experiences the women brought to board service as well as the perception of equality among the women and men board directors. Furthermore, we found that the degree of impact depended upon how the women used their knowledge and skills in the boardroom. Knowledge and diversity matter only if they are used, and many boards do not have processes or a leadership style that encourage the use of knowledge and skills.

That said, our study did show that the Norwegian law mandating a quota for women on boards has had a significant effect on how boards achieve their objectives. Members and their leaders have started to pay attention, not only to board composition, but also to the inner workings of boards. Moreover, we found that tokenism did not seem to be important for newly elected women who feel they are as influential as their male counterparts and considered as equals.

Finally, our research revealed the importance of critical mass on decision-making. As we noted in our study, “If women with similar (traditional) professional experiences but different values are selected, they may be able to enrich board decision-making.” The impact was considerably greater on boards with at least three women.

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Morten Huse is Professor of Organization and Management at BI Norwegian School of Management and President of the European Academy of Management. He has written, edited or co-authored more than one hundred scientific articles and 15 books, including Boards, Governance and Value Creation: The Human Side of Corporate Governance (Cambridge 2007) and The Value Creating Board (Routledge 2009).

“It is grievous to read the papers in most respects,” wrote Mary Ritter Beard, the renowned early 20^th century author and historian. “More and more I skim the headlines only, for one can be sure what is carried beneath them quite automatically, if one has long been a reader of the press journalism.”

While just skimming print headlines might have been fine in Beard’s day, you can’t always trust them today. I’ve seen bad headlines over the years. But this one from the Harvard Business Review made me gasp: “Adding Female Directors Hurts Norwegian Firms’ Value.”

In the age of Twitter and RSS feeds, headlines that misrepresent a story can inflict more damage than ever. In a matter of seconds, an inaccuracy can spread quickly across the globe. Along the way, it can reinforce negative stereotypes or lay foundations for doubt where none previously existed.

The Harvard Business Review headline above referred to a recent University of Michigan study into the short-term impact of a Norwegian law mandating that 40% of the seats on corporate boards be allotted to women. The headline was featured on HBR’s Daily Stat— a website, Twitter feed, and iPhone app dedicated to delivering “facts and figures to stimulate thought— and action.” Within hours, it was re-tweeted 34 times.

But the sensational headline didn’t tell the whole story.

In 2003, the Norwegian Parliament mandated the 40% quota. At the time, women held roughly 9% of board seats. After voluntary compliance failed, the quota became mandatory on January 1, 2006, and companies had two years to comply. Companies that failed to meet the quota would be forced to dissolve.

The Michigan report first looked at how the initial announcement of the law impacted stock price. Firms with fewer women on board suffered a greater shock. Why? Because they were required to rotate several board members in short order, thereby producing significant uncertainty. Three days after the announcement, the stock price for firms with no women on their boards dropped 5%, while those with women on board did not suffer a statistically significant loss.

The report also looked at market valuation during the first year after the law went into effect. The researchers found that companies with initially fewer women board members suffered more than those with a greater number. According to the researchers, companies were forced to bring on more new women board members very quickly, and in doing so, they selected women who had less management experience than the men they replaced.

The Michigan study focused on the short term, not long-term impact.  Catalyst research shows that over the long term, on average, companies with a higher percentage of women on their corporate board outperform those with fewer. Just as a successful product release can affect share price negatively for a brief moment (think Nintendo’s Wii), so, too, can a controversial new law shortly after its implementation.

But it’s the long-term effect that matters.

That’s why the Harvard Business Review headline was particularly regrettable. In today’s info-soaked society, many people just read a headline, absorb it, and move on. Had I done that, I would have gotten the impression that women make poor board members. Fortunately, I read beyond the headline.