«Marianne Bertrand Chicago Booth School of Business, CEPR IZA and NBER Sandra E. Black University of Texas, Austin, IZA and NBER Sissel Jensen ...»
Breaking the Glass Ceiling?
The Effect of Board Quotas on Female Labor Market Outcomes in Norway
Chicago Booth School of Business, CEPR IZA and NBER
Sandra E. Black
University of Texas, Austin, IZA and NBER
Norwegian School of Economics
UCLA and NBER
In late 2003, Norway passed a law mandating 40 percent representation of each gender on the
board of publicly limited liability companies. The primary objective of this reform was to increase the representation of women in top positions in the corporate sector and decrease gender disparity in earnings within that sector. We document that the newly (post-reform) appointed female board members were observably more qualified than their female predecessors, and that the gender gap in earnings within boards fell substantially. While the reform may have improved the representation of female employees at the very top of the earnings distribution (top 5 highest earners) within firms that were mandated to increase female participation on their board, there is no evidence that these gains at the very top trickled-down. Moreover the reform had no obvious impact on highly qualified women whose qualifications mirror those of board members but who were not appointed to boards. We observe no statistically significant change in the gender wage gaps or in female representation in top positions, although standard errors are large enough that we cannot rule economically meaningful gains. Finally, there is little evidence that the reform affected the decisions of women more generally; it was not accompanied by any change in female enrollment in business education programs, or a convergence in earnings trajectories between recent male and female graduates of such programs. While young women preparing for a career in business report being aware of the reform and expect their earnings and promotion chances to benefit from it, the reform did not affect their fertility and marital plans. Overall, in the short run the reform had very little discernable impact on women in business beyond its direct effect on the newly appointed female board members.
2 Introduction Despite significant labor market progress over the last decades, women remain heavily underrepresented in high-earnings, high-status occupations. This is particularly true in the financial and corporate sectors of the economy. In a recent census of Fortune 500 companies in the U.S., Catalyst found that in 2013 women held only 16.9% of corporate board seats and 14.6% of Executive Officer positions in those companies, about the same as a half a decadeearlier.
In Europe, women represent only 11.9% of membership on boards of directors, despite being 45% of the labor force, and these numbers are even smaller in the other parts of the world (Pande and Ford, 2011).
This phenomenon—that at the top of the labor market women are under-represented and wages gaps are larger than average—is often referred to as the glass ceiling. It is pervasive, observed even in countries that are otherwise thought of as having achieved the most progress in terms of gender equality. Norway is one of these countries. While the gender gap in wages in Norway was less than 14% on average among full time workers in 2002, it was 20% among college graduates.1 In 2000, only 5% of board members were women, and their annual earnings were 20 percent lower than those of male board members.
To address this disparity, in December 2003 Norway passed a law requiring 40% representation of each gender on the board of directors of publicly limited companies. Because most firms did not comply, in January 2006 the law became compulsory and firms that did not comply by January 2008 would be dissolved. While a number of firms switched corporate status to avoid complying with the law, those that remained did comply and the median percentage of female board members among publicly limited companies reached 40% by 2007, from a median of 0% in 2003 (see Figure 1 and Appendix Table A1).
Following Norway’s lead, Spain, Iceland, Italy, Finland, France, and the Netherlands have all passed similar reforms. The idea of mandating gender quotas on corporate boards has been gaining further political traction in Europe over the last years. In 2014 the new German coalition government passed legislation requiring that corporate boards be comprised of at least 30% women by 2016 (or else the seat would be left vacant). On November 20 2013, the European parliament voted in favor of a proposed draft law that would require 40% female board members
1 Background figures in the Norwegian Technical Calculation Committee for Wage Settlement committee's report submitted to the Ministry of Labor and Social Inclusion before the income settlement in 2012, Norwegian Ministry of Labor and Social Affairs (2012), tables 1.17 and 1.18 (NOU 2012: 11). 3 in about 5,000 listed companies in the European Union by 2020; state-owned companies would be required to comply by 2018. Yet there is no evidence on whether these quotas work. Prior work has examined the secondary impact of the Norwegian reform on the stock market valuation, accounting performance and corporate policies of targeted companies (see among others Johansen and Sandnes 2008, Nygaard 2011, Ahern and Dittmar 2012, and Matsa and Miller 2013). In this paper we investigate whether the reform has been successful so far in its primary objective of reducing gender disparities in the corporate sector.
In theory, quotas can be an effective tool to improve gender equality. This is particularly true if path dependence is a key factor for the under-representation of women in the highest corporate echelons. Because qualified women might be harmed by an absence of networks to help them climb the corporate ranks, quotas can provide the initial step up that women need to break this cycle. If discrimination is the key factor for the under-representation of women, quotas might help overcome any business prejudice (and improve efficiency) by forcing more exposure to talented women in positions of power (Beaman et al 2009, Rao 2013). However, if highquality women cannot be found, the quotas may backfire and reinforce negative stereotypes, resulting in a “patronizing equilibrium” with fewer women investing further in their careers as they see that it does not “take much” to become a board member (Coate and Loury 1993).
We start by investigating effect of the Norwegian reform on the qualifications of board members. Opponents of the reform claimed there were not enough qualified women in Norway to fill the reserved board seats. Businesses were particularly vocal in expressing this concern in their lobbying against the reform (Criscione 2002).2 As a result, businesses may have decided to “game” the reform by strategically appointing sub-par women to their boards, expecting such women would be only minimal participants in board decisions. If unqualified women are appointed then the possible benefits of the reform to others might be also muted, as they would not improve role models, have better business networks, or be vocal proponents of pro-female changes within the reforming companies.
We show that these concerns were not relevant in practice. The average observable qualifications of the women appointed to the boards of publicly limited companies significantly
2 Storvik and Teigen (2010) and Heidenreich (2010). According to Heidenreich (2010), there is little evidence that the reform increased search costs for firms. She finds that that the recruitment process became more professionalized after the reform, and that women were recruited through the same professional networks and circles as male board members.
4 improved after the reform. While there is a substantial gap in observable qualifications between male and female board members both before and after the reform, this gap is substantially smaller after the reform. In addition, the gender gap in residual earnings within boards fell after the reform.
We then explore how the reform impacted the labor market outcomes of women working in the companies that were mandated to increase female representation on their board. Does an increase female share in the boardroom translate in the recruitment or promotion of more women within these firms? If boards play a direct role in the selection of C-suite executives, female board members might be vocal proponents of female candidates for these positions, or might be able to leverage their own female-heavier business networks, to recommend female candidates for these positions. A higher share of women in the C-suite might then trickle down to a higher share of women in lower-down executive positions. Finally if boards can help shape human resource policies, female board members might be more likely to support changes in corporate policies that improve work-family balance, such as more part-time work or more amenities for women with children.
Following Ahern and Dittmar (2012), we exploit variation across publicly limited companies in the pre-reform (2003) fraction of women on their board to identify the effect of the reform on firms. Companies that started with a larger share of women on their board had to make fewer changes to comply with the mandate, while companies that started with a smaller share had to make more changes. We find evidence suggestive of a growing representation of female employees at the very top of the earnings distribution (top 5 highest earners) within the companies that had to increase female representation on their board more to comply with the mandate. However, the representation of women does not improve anywhere else in the firms’ income distribution (top 95th percentile, top 90th percentile, top 75th percentile). We also see no improvements on gender wage gaps among top earners and find no evidence of changing work environments in affected firms.
We then look at the impact of the mandate on a broader set of highly qualified women in the Norwegian labor market, women whose qualifications mirror those of board members but were not (yet) appointed to a board. There are several theoretical reasons as to why the mandate may indirectly improve labor market outcomes for these women. First, if board membership is an attractive prize, these women have additional motivation to remain on the business “fast-track” 5 after the reform as the odds of winning this prize went up. Second, since the search for female board members helped in bringing these qualified women to the attention of businesses (e.g.
many of these women may have been featured in the database), this may have reduced search frictions in the filling of other executive positions by women throughout the economy.
We identify these effects by comparing the gender gap in labor outcomes of 3 cohorts of men and women with similarly high business qualifications, with 2 cohorts pre-dating the reform and one cohort post-dating the reform. We find no evidence of significant differential improvements for women in the post-reform cohort, either in terms of average earnings or likelihood of filling in a top position in a Norwegian business. However, standard errors are large enough in some specifications that we cannnot rule out economically meaningful effects.
Finally we consider broader possible effects of the reform on younger women interested in a business career and who are considering a business education, enrolled in a business education program, or recently graduated from such a program. While these young women are unlikely to be directly impacted by the reform (they are too young to be considered for a board position or a top executive position), it is possible that the reform inspired them to consider a business career, and that they see greater benefits in investing in such a career as a result.
However we find no evidence of such an effect. There was no differential increase in female enrollment in business programs after the reform. A qualitative survey we performed in the Fall 2013 at the Norwegian School of Economics suggest that female (and male) students are well aware of the reform and many of them expect to professionally benefit from it in terms of future earnings and likelihood of holding a top executive position. Yet very few female students report that the reform got them to reconsider their fertility plans (such as delaying fertility), which prior research suggests might be one of the biggest hurdle in keeping women with a business degree on the fast track (Bertrand, Goldin and Katz, 2011). Finally, comparing 3 cohorts of recent graduates from business programs (2 pre-reform and one post-reform), we see no apparent reduction in the large gender gap in earnings that emerge in the first few years post graduation.
1.A. The Corporate Board Gender Quota Reform Gender quotas legislating minimum representation of women on boards of directors were first introduced in Norway in 1981 and, at that time, only applied to government appointed 6 boards, councils, and committees. This remained the status quo for almost twenty years. In 2001, the Norwegian government began official discussions to implement a more expansive board quota. Teigen (2012) suggests that the privatization of state-owned firms in the 1980s and 1990s had led to concerns about fairness because these newly privatized firms would no longer be covered under the existing legislation. The first change in the law was proposed in 2002, and in December 2003, the Norwegian Company Act was revised. The previous quota for publicly appointed boards, council, and committees would now also apply to public limited liability companies (known as ASA firms in Norway). This new law stated that all publicly limited liability companies were required to have at least 40% representation of each gender.3 By 2005 however, the fraction of women on boards of directors of ASA firms was still only 17% (see Appendix Table A1), so sanctions were introduced. Affected firms had until January 1, 2008 to comply or would be subject to forced dissolution. By 2008, the average share of women on boards of ASA firms was 40% (Figure 1).