Study: California falling short of nation’s first board gender quota

CLEMSON, South Carolina — A study by two Clemson University researchers, along with a professor at the University of Arizona, has found there’s work to be done by California public companies that are required by law to have at least one female director on their boards by the end of the year.

Enacted in 2018, California Senate Bill No. 826 (SB 826) requires one female director on every California corporate board by the end of 2019, and as many as three female directors by 2021, depending on a board’s size.

In the study, “Do board gender quotas affect firm value? Evidence from California Senate Bill No. 826,” Daniel Greene and Vincent Intintoli, assistant professors of finance in the College of Business, examined stock market reactions, costs of compliance and board adjustments related to California’s corporate board gender diversity mandate. Kathleen Kahle, professor of finance at the University of Arizona, joined Greene and Intintoli on the research.

The researchers found that more than 1,000 additional female directors need to be added to California corporate boards by 2021. As of July, 14 percent of California companies examined still need to add a female director by year end to comply with the 2019 requirement.

“We started looking into the law and its impact the day after the bill was signed,” Greene said of the research paper, which will soon be published in the Journal of Corporate Finance. “It’s a hot topic, given this is the only law in the country requiring female directors, so we put the project on a fast track to get the paper published. Turns out, it will be just over a year from when we started the research to publication.”

The study was unique in that it examined the universe of California public firms affected by the law, versus other studies, which focus only on Russell 3000 firms, the largest publicly traded companies in the U.S.

“This study looks at the full scope of firms, large and small,” Intintoli said. “Most others examine only companies in the Russell 3000, which can be problematic since smaller firms are more likely to lack female directors and have a difficult time attracting new director talent.”

Other aspects of the research revealed:

• The initial stock market reaction to the law was -1.2 percent. “We didn’t find a negative reaction to the requirement of adding one female director,” Intintoli said. “More onerous was the requirement that companies add up to three female directors by 2021.”
• The negative market reaction does not indicate that the presence of female directors adversely affects a firm’s value. It is more a case of the law imposing a constrained optimization on board composition, which can be costly for some firms. The research found that firms with a greater supply of female candidates can more easily replace existing directors and are less negatively affected by the mandate.
• The costs of board expansion are negligible for the largest firms, but substantial for the smallest. For many firms, the costs of expansion outweigh the 2019 penalty ($100,000) for non-compliance. These costs average 0.76 percent of market value for the smallest firms.
• Since SB 826 was enacted, the aggregate number of board seats held by female directors have increased by 23 percent (143 directors) in California, which is greater than what was observed in states not affected by the law.
• Though 14 percent of companies still have all-male boards, companies have until the end of the year to comply with California’s corporate board gender diversity mandate. For some firms, incurring the 2019 penalty of $100,000 is less than the annual average director’s pay. Though the penalty increases to $300,000 in 2020 if they haven’t added a female director.