Is Norway working? The case for women on boards

By Elizabeth Harrin (London)

Norway is considered one of the most progressive countries with regards to increasing the number of women on boards – thanks to it being an early adopter of legislation to force companies to recruit women to the boardroom. It sounded like a great idea to improve diversity and shareholder returns, and since then many other countries have adopted or considered similar laws. It’s been seven years since the law took affect. Has it made any difference?

Amy Dittmar, associate professor of finance at the University of Michigan’s Ross School of Business has recently analysed the impact of the Norwegian decision, and she doesn’t think so. Dittmar and her colleague Kenneth Ahern studied what happened after Norway required public-limited firms to have at least 40% of board seats filled by women in 2003. Voluntary compliance in the country failed, so the law made it compulsory in 2006, with a two year transition period. “Boards are chosen in order to increase shareholder wealth,” says Dittmar. “Placing restrictions on the composition of a board will reduce value.”

Dittmar and Ahern’s study found that when a board had a 10% increase in the number of women, the value of the company dropped. The bigger the change to the structure of the board, the bigger the fall in returns.

Was it the women?

More women on boards, lower profits. Not the kind of thing we want to hear. So what caused the companies to struggle? Firstly, let’s be clear that it is not as simple as adding women and taking away shareholder returns.

“The constraint imposed by the 40-percent women quota-led firms to recruit women board members that were younger and had different career experiences than the existing directors,” says Dittmar. “It is reasonable to suggest that these changes led to decreases in firm value because new directors did not have the same monitoring or advising capabilities of the other directors before the imposed change. When firms were free to choose directors before the rule, they tended to choose women that were similar to men directors. This is consistent with the idea that the large demand and small supply for women directors after the adoption of the 40-percent quota forced firms to choose directors that they would not have chosen otherwise.”

Professor Doug Branson, the W. Edward Sell Chair in Law at the University of Pittsburgh and an expert in women in the boardroom, agrees that the supply of capable women vastly outstripped the demand. “One woman, capable in the extreme no doubt, went onto 18 Norwegian boards of directors,” he says. “No director can serve well on more than three or four modern corporation boards. Time commitments alone limit the number of masters anyone can adequately serve. The selection of the same women over and over, as in Norway as well as here in the U.S., crowds out other deserving women candidates, lessens the variety of views we are trying to achieve, and help keeps the glass ceiling in place.”

Waiting for the longer term results

The experience in Norway hasn’t had the quick results that many people predicted, but there’s an evolving opinion that says it is too early to really evaluate what the economic impact of this change will be.

“In hindsight, with the benefit of a longer time horizon, I predict that these businesses will have better results but we may not see them in the near term,” says Betty-Ann Heggie, former senior VP at PotashCorp and a member of Canada’s Top 100 Most Powerful Women Hall of Fame. “Boards with more women will be more stakeholder-oriented which will create a long-term advantage but it will have a short-term cost,” she adds. “Thus, their short-term results may not be as favourable.”

However, Heggie believes that there are benefits to sticking with it. “Research shows that organisations with more women on boards will have more women in senior management. As women earn more money, they have a greater say in how it is spent and that affects the economic prosperity of a country. Far from being a doomed exercise, I believe that it will be a shining example for other countries in the future. Hopefully, they won’t throw the baby out with the bath water.”

Unfortunately, while in general research does show that organisations with women on boards have more women in senior management, that hasn’t been Norway’s experience to date. They haven’t seen a significant increase in female CEO’s or the amount of women on executive committees.

Lessons for other countries

“While the new law has not been termed a success, neither has it been a failure,” says Branson. “Spain, France, Belgium and the Netherlands, among others, are among the imitators.” Other countries looking to adopt an enforced quota scheme would do well to look at the results in Norway and plan accordingly. For a start, Branson advises that it would have been better to phase in the requirement over a longer period of time. “In the rush to comply, Norwegian companies grabbed anyone they could,” he says. “They did not always select the best women.” There could also have been limits on the ‘trophy directors’ – the women that everyone wanted – encouraging them to only take boardroom jobs for a small number of companies.

Countries should also take into consideration the impact that quotas will have on the perception of performance on a board. Did the woman get there through merit or affirmative action? “A mandated quota with respect to any form of diversity on the board has the potential to be counterproductive by suggesting that the presence of a diverse director is because of the quota rather than that the individual director’s merit,” says Jessica Lochmann Allen, Partner in law firm Foley & Lardner’s Transactional & Securities practice who routinely counsels corporate boards on best practices in boardroom diversity.

Lochmann Allen believes that this attitude can minimise the perspectives and insights that such a director brings to the Boardroom, and she’s skeptical about how a quota scheme would work in the U.S. “The institution of a quota system may further inspire a backlash against the directors that are ultimately chosen to fill such quota because of the attitude in corporate America that the SEC and other regulatory bodies have no place in ‘legislating the boardroom’,” she says.

Finally, don’t expect overnight results. If your country adopts quotas, it might make it easier for you to reach the boardroom one day – but nothing about this type of legislative change is short-term.