Mandatory Gender Quotas vs. Voluntary Targets in Corporate Boards: Can we Expect Different Types of Women Being Hired?

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Mandatory Gender Quotas vs. Voluntary Targets in

Corporate Boards: Can we Expect Different Types

of Women Being Hired?

Evidence from Norwegian and Australian Corporate Boards

`

Master Thesis

By

S.B. de Vries (S2772833); email:

s.b.de.vries.1@student.rug.nl

Double Degree International Business & Management, and Managing

Multinationals

Faculty of Economics and Business, and

Ekonomikum

University of Groningen, and

University of Uppsala

January 2020

Supervisor

Dr. E. Mendiratta; email:

e.mendiratta@rug.nl

Co-assessor:

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Abstract

The objective of this study is to empirically investigate the differences in human capital profile of new appointed female directors to corporate boards as a result of mandatory quotas and voluntary targets. By exploring differences in age, and human capital differences in board tenure, executive experience (CEO, CFO), number of qualifications, and the number of directorships held by these women, this study contributes to the important and current international public policy decision debate on relevance and wisdom of adopting a mandatory gender quota or introducing voluntary targets. The study uses human capital theory to evaluate the profiles of 41 new female directors appointed through a mandatory quota in Norway and 397 new female directors appointed through voluntary targets in Australia and extends the current corporate governance literature on board gender regulation by exploring whether female directors differ in human capital as a result of the two types of regulations. The results of this study show that new female directors hired through a quota are on average younger than new female directors hired through a target; new female directors hired through a quota are less likely to have more years of board experience than new female directors hired through a target; new female directors hired through a quota are likely to have more years of executive experience than new female directors hired through a target; and new female directors hired through a quota have lower number of qualifications than new female directors hired through a target. These results, albeit contrary to the hypotheses developed in this study, propose several important implications from an academic, management, and policy point of view while at the same time have limitations that present opportunities for future research.

Keywords: Corporate Governance, Affirmative Action Policy, Mandatory Gender Quotas,

Voluntary Targets, First-Time- and Seasoned Female Directors, Human Capital

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1 | Introduction

The absence of women in decision-making processes, especially on corporate boards has become a crucial concern (Burke and Vinnicombe, 2009). Gender diversity in top corporate positions is a central theme in the public debate on corporate governance (Buchwald and Hottenrott, 2019). Over the past few years, this has led to an increasing interest among policy-makers and academics in ensuring that corporate boards are more gender balanced (Seierstad and Opsahl, 2011). Given the slow pace at which business is integrating more female representation in its governance and senior management, governments have started to get involved (Labelle, Francoeur and Lakhal, 2015). Hence, policy-makers have issued different types of regulations to improve female representation on corporate boards (Terjesen, Aguilera and Lorenz, 2015). One type of regulation is the board-level mandatory quota, as established by several European countries (e.g. Norway, France, Belgium, and Germany). Across countries, enacted mandatory quotas takes a variety of forms but generally consist of a set quota of 33-50 percent, a time period of 3-5 years and penalties for non-compliance (Terjesen et al., 2015). However, other countries refused to implement mandatory gender quotas mainly because this type of regulation is inconsistent with the merit principle. Support for the merit principle is based on beliefs that the hiring process leads to the selection of the best person for the job (Whelan and Wood, 2012). Casey, Skibnes, and Pringle (2011) show that countries using a mandatory gender quota see women as quota-filling members rather than competent for the job. Therefore, other countries (e.g. Australia and Austria) have enacted a different type of regulation instead, namely the voluntary-based target encouraging firms to enhance diversity within the corporate boards of listed firms. While voluntary targets are non-binding, there are strong arguments to comply with them given stakeholder expectations, the need for legitimacy, and value and efficiency gains (Klettner, 2016).

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group of women with prior corporate board experience (Seierstad and Opsahl, 2011). In this study referred to as ‘seasoned female directors’. Mandatory quotas have induced a prompt adjustment in the gender mix, more quickly than voluntary targets. “The quota radically shifted

the hiring practices of firms, by forcing them to select women (first-time female directors) with a priori specific human capital and resources” (Rebérioux and Roudaut, 2019: p. 437). For

voluntary targets, this process is more flexible since firms can develop their own policies and management practices without a defined timescale to hire women that suit their needs and organizations to achieve the regulatory or corporate goals. Existing literature documents that new female directors differ from male directors in their choices, preferences, and human capital (Adams and Funk, 2012; Singh, Terjesen and Vinnicombe, 2008). For instance, new women on the board of directors significantly hold higher educational qualifications than men. In addition, new female directors tend to have less board experience than their male counterparts (Singh et al., 2008). Furthermore, existing research either looks at the human capital of female directors under the two regulations in isolation (Rebérioux and Roudaut, 2019; Bertrand, Black, Jensen and Lleras-Muney, 2018; Wang and Kelan, 2013; Ahern and Dittmar, 2012). Although previous research hints towards differences in human capital outcomes under the two regulations, there is no systematic examination of the different human capital outcomes of new appointed female directors under the two types of affirmative action regulations. For example, Casey et al. (2011) suggest that in a forced compliance situation such as a mandatory quota, women may be seen as quota-filling members who are less qualified and less competent in their role. In addition, Rhode and Packel (2014) document, “chief executives say they will look

for female board members… who will look decorative and not rock the boat”. In contrast,

voluntary targets have the required time to look for appropriate female directors, train women in lower management to ensure they are not lacking the experience needed for promotion, and support them in executive positions (Klettner et al., 2016). This may lead to more female directors with executive experience and qualifications. I extend this line of research by using a comparative analytical approach to compare the human capital of new appointed female directors under the Norwegian mandatory quota and the voluntary targets in Australia. This study focuses on the following research question:

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Norway and Australia provide ideal contexts to compare because of the differences in legislation on the regulations based on gender in boardrooms. Norway was the first country adopting a mandatory gender quota in 2006 which required all publicly listed firms to increase female representation on their boards of directors to 40 percent within two years (Matsa and Miller, 2013). Australia has taken a softer voluntary approach by recommending that firms set targets and/or a disclose policy on gender diversity in boards as a solution to the lack of women in corporate boards and in leadership (Klettner, Clarke, and Boersma, 2016). Despite this difference in regulation between the countries they do show strong similarities on some crucial factors. For instance, each of these countries exhibits shared policy commitment and aspirations towards gender equalities as part of its social model (Casey et al., 2011). These authors also suggest two other similarities that increase the comparative study of Norway and Australia, namely that they both achieved successes on gender equality in employment and political representation (Casey et al., 2011). Therefore, it can be said that their policy efforts towards social goals that are internationally shared lend to their analytical interest as comparative cases (Casey et al., 2011). In this study I make a distinction between all new women in the corporate boards, the first-time female directors, and the seasoned female directors hired to the corporate boards to obtain a deeper understanding of the differences between the women appointed to the board of directors as a result of the two types of regulations. In this research paper I focus on the differences in age, board tenure, executive experience, qualifications, and the number of directorships being held by new female directors in the board of directors.

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to help a group of people suffering from discrimination” (Labelle, et al., 2015: p. 341). More

and more countries are adopting mandatory gender quotas. In other countries the decision to adopt quotas is pending or still discussed (Buchwald and Hottenrott, 2019). The objective of this study is to contribute to this important and current international public policy decision debate on the relevance and wisdom of adopting mandatory gender quotas or introducing voluntary targets to promote gender diversity on corporate boards. Therefore, this study contributes to the corporate governance literature on board gender regulation by enhancing our understanding of the differences in age, board tenure, executive experience (CEO, CFO), qualifications, and the number of directorships held by female directors in the two different types of regulations.

The remainder of this study is structured as follows. In the following section a theoretical background based on relevant secondary literature is provided and the development of the hypotheses are described. Section three explains the methods used to obtain the sample and data, and the empirical analysis. The fourth section provides the results of the study. Finally, in the conclusion and discussion section the results will be examined and discussed including implications and recommendations.

2 | Theoretical background and hypotheses development

2.1 | Institutional Setting

In recent years, two equality strategies implemented through corporate governance to achieve gender balance in the board of directors have been the subject of research, namely mandatory gender quotas and voluntary targets. Gender quotas are defined as “government or industry

mandated percentages of representation or numbers of each gender in leadership positions paired with clear enforcement mechanisms” (Sojo, Wood, Wood, and Wheeler, 2016). Gender

quotas force firms to respond quickly to identify, develop, promote, and retain suitable female directors for the corporate board leadership structure (Terjesen, Aguilera, and Lorenz, 2015). Sanctions range from ‘soft’ penalties (e.g. Spain limits noncompliant firms access to public subsidies and state contracts) to forcing a non-complying firm to de-list from a particular country’s stock exchange and/or to relocate the headquarters to another country, which is the case in Norway (Bøhren and Staubo, 2013; Terjesen et al., 2015; Hughes, Paxton, Krook, 2017;). Voluntary targets, “set goals for the expected percentage or number of women to either

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quotas and voluntary targets have different elements of regulatory approaches: quotas are enforced by the law but are supported by policies which may change over time, while voluntary targets are often proposed by more representative bodies, associated with a degree of mutual acceptance of all the affected parties (e.g. shareholders, managers, and board members), and often lead to rivalry between firms in terms of achievement (Klettner et al., 2016).

2.2 | Different Types of Regulation: Binding, Management-based and Disclosure-based

2.2.1 | Gender Quotas in Norway

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perception of tokenism. Elizabeth Corley, the CEO of Allianz Global Investors Europe claims:

“Quotas have a disproportionately negative effect because there will always be a question in people’s mind that somebody only got onto a board or into a certain position because of a quota” (Sweigart, 2012). The gender quota in Norway is described as a binding regulation that

prevents firms lacking a gender-balanced board from remaining listed on a stock exchange, and compensating the board members or even operating because noncompliant firms faced stiff penalties such as delisting, nonregistration, and fines (de Cabo, Terjesen, Escot, and Gimeno, 2019). While radical gender quotas are successful at increasing the number of women in the boardroom, quotas may do little to help women advance to leadership positions or more powerful positions outside (Kerevel, 2019)

2.2.2 | Voluntary Targets in Australia

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within two categories of regulation: management-based regulation and disclosure-based regulation. Management-based regulation is defined as an approach that, “involves firms

developing their own process and management system standards, and developing internal planning and management practices designed to achieve regulatory or corporate goals”

(Klettner, 2016: p.719). In the case of Australia, an example of management-based regulation is that the ASX code recommendations encourage firms to set and implement their own gender targets and policies for their board of directors in order to achieve the regulatory goal of increasing women in boards and leadership, and their corporate goals (Klettner, 2016). The ASX Principles of Corporate Governance were amended in 2010 to include recommendations on diversity. The recommendations indicated that all listed firms: 1) establish a diversity policy; 2) disclose a summary of that policy; 3) measure the number of women in leadership positions and throughout their workforce; and 4) set measurable objective for achieving gender diversity (Clarke, Nielsen, Nielsen, Klettner, and Boersma, 2012). Since firms have to disclose a summary of the policy in order to achieve the goal of increasing female directors in the board of directors, the voluntary target can also be placed in the category disclosure-based regulation. This type of regulation is described as an approach that compliance with the voluntary target can be achieved even if all recommendations are rejected, as long as the reasons are explained in the firm’s annual report. However, research suggest that the large majority of listed firms do adopt the ASX recommendations (Klettner, 2016). Two theoretical explanations for this are: 1) external expectations of stakeholders and the need for legitimacy drives compliance; 2) intrinsic motivation to hire women in the board because the firms see genuine value and efficiency gains. Corporate leaders can affect strategic change in the participation of women in leadership if they are convinced of the need to do this and devote the required time and resources (Aguilera et al., 2007).

2.3 | The Characteristics of New Female Directors: Gender Quota vs. Voluntary Target

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aims to provide inside in the understanding whether different types of regulations lead to different human capital outcomes. In this research paper I focus on the differences between age, board tenure, executive experience, qualifications, and the number of directorships being held by new female directors in the board of directors.

2.3.1 | Average Age of New Female Directors Post-intervention

Previous research suggests that, “gender quotas are associated with lower age, by including

younger female directors on boards” (Ferrari, Ferraro, Profeta, and Prontazo, 2018).

Interestingly, what stands out in existing gender quota literature is that when investigating the age of female directors in corporate boards, this always seems to correlate with experience (Rhode and Packel, 2014; Ahern and Dittmar, 2012; Singh et al., 2008). Research suggest that when firms are being forced to comply with a gender quota, they massively appoint first-time female directors with no board experience to fill the corporate boards (Rebérioux and Roudaut, 2019; Casey et al., 2011). This is in line with the research of Ahern and Dittmar (2012) who reported that there was a lack of qualified female directors to fill the reserved board positions, which led to the appointment of more young and inexperienced women to comply with the mandatory gender quota in Norway (Rhode and Packel, 2014). The gender quota law was effective from January 2006, and firms established after this date had to comply immediately whereas already established firms had to comply within two years. This could account for the result that they were likely to appoint first-time female directors who were younger and more inexperienced as they had to comply within a certain period of time (Nygaard, 2011; Rhode and Packel, 2014). In contrast, the business argument of voluntary targets indicates that firms appoint female directors on corporate boards to make use of the talent of this half of the workforce, incorporate more diverse perspectives and life experiences. Spender (2012: p.23) suggests that, “women must have already attained elite positions in order to be within the

purview of [board] nominating committees and search firms”. Which suggest that these

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experience that suit the needs of the firms. Therefore, I suggest that female directors appointed through mandatory quotas will more likely be younger and less experienced than female directors hired through voluntary targets. Hence, I posit the following:

Hypothesis 1: New female directors hired through a mandatory quota are more likely to be

younger than new female directors hired through a voluntary target

2.3.2 | Average Board Tenure of New Female Directors Post-Intervention

One way to gauge the depth of a potential female directors’ human capital is through board tenure (Lester et al., 2008). In this research paper, board tenure is defined as the number of years since the board member has been appointed to a board of directors (Ahern and Dittmar, 2012). Members of the board of directors acquire knowledge and skills from their current and previous professional experience, as well as their own personal experience in the firm as a director (Leticia, Ma Del Mar, and Carmen, 2016). Moreover, the length of the directors’ tenure on the board of directors is an important aspect for board members. During their board tenure, directors develop specific skills and tacit knowledge about how the corporate board and the firm operate (Leticia et al., 2016). As female directors bring a unique set of human capital resources to the board of directors, those who select new female board members may be interested in hiring directors with particular experience to complement the board’s existing capabilities (Singh et al., 2008). However, research has shown that mandatory gender quotas have to a large extent succeeded in increasing the representation of female directors at the top of the listed firms (Rebérioux and Roudaut, 2019). These authors suggest that in order to achieve this within a specific timeframe, these firms opened their corporate boards to a new population of female directors, the first-time female directors with no prior corporate board experience and who had not have been hired through the corporate board absent the mandatory gender quota. “Chief executives say they will look for female board members… who will look

decorative and not rock the boat” (Rhode and Packel, 2014). In contrast, voluntary targets

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achieving corporate goals while first-time female directors lack sought-after characteristics, for instance board tenure and executive experience (Rebérioux and Roudaut, 2019).

Many existing studies have examined the influence of board composition on the value of the firms, focusing on the board tenure of board members (Campbell and Minguez-Vera, 2010). For instance, research suggest that female directors with more years of board tenure are seen as more legitimate (Bao, Fainshmidt, Nair, and Vracheva, 2014). As mentioned in section 2.2, one reason for firms to adopt voluntary targets to encourage women on corporate boards may be because of the external expectations of stakeholders and the need for legitimacy. Corporate leaders can effect change in board of directors to encourage participation of women in leadership if they are convinced of the need to do this and devote the required time and resources (Aguilera et al., 2007). Firms taking time to appoint female directors with more years of board tenure to their corporate boards may gain legitimacy benefits, which might increase the value of these firms. Therefore, I expect that firms with voluntary targets are more likely to hire new female directors with board experience to their board of directors than firms under a mandatory gender quota. I posit the following:

Hypothesis 2: New female directors hired through a quota are likely to have less years of

board tenure compared to new female directors hired through a voluntary target

2.3.3 | Executive Experience of New Female Directors Post-Intervention

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women through it. Fairfax (2006) shows that experience in line positions, where the individual has direct responsibility for profit and loss or client service, is seen as essential for rising to the most powerful positions in the company, and only 6 percent of all line positions in Australia is filled by women (EOWA 2012). This pattern is also clear in Norwegian firms where 14 percent of line positions is filled by women (Teigen, 2015). Evidence shows that when firms are being pushed to find female directors, they do initially look into the existing pool of female directors and executives (Seierstad and Opsahl, 2011). However, as mentioned above, there is a lack of female executive directors to fill the reserved board positions and to comply with the mandatory gender quota. Therefore, in order to achieve the regulatory goal of the gender quota within a specific timeframe, firms are forced to expand the pipeline and open their corporate boards to non-executive female directors (Klettner et al., 2016; Rhode and Packel, 2014). In contrast, voluntary targets can be placed within disclosure-based regulation and management-based regulation which respectively indicate that firms are not bound to a specific time scale because of the comply-or-explain policy, and firms are able to look for female directors who suit their needs and organization in order to achieve the regulatory and corporate goals. While there are still few women in the line positions and the executive suites, firms under voluntary targets have the required time to look for appropriate female directors, train women in lower levels of management to ensure they are not lacking the experience needed for promotion, and support them in executive positions (Klettner et al., 2016). Elizabeth Bryan, Chair of Caltex Australia, often said: “what I argue is that the focus on boards is inappropriate because if you

want women everywhere with influence and in power structure, you need them in the executive teams” (Klettner et al., 2016). By doing this, the pool of female directors with executive

experience will increase allowing firms to appoint these female directors in their corporate boards. For that reason, I posit the following:

Hypothesis 3: New female directors hired through a quota are less likely to have high-level

executive experience (CEO, CFO) compared to new female directors hired through a voluntary target

2.3.4 | Qualifications of New Female Directors Post-Intervention

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perceived (Labelle, Francoeur and Lakhal, 2015). Rhode and Packel (2014) state that critics further argue that mandatory quotas will simply lead to more unqualified directors, either because the increasing demand imposed by the quota in Norway for female directors was exceeding the supply of well-prepared qualified female directors, or because the board of directors filled seats with first-time female directors “who won’t speak up” (Rhode and Packel, 2014: p. 415; Ahern and Dittmar, 2012). Ahern and Dittmar (2012) conclude that the magnitude of the impact in Norway was large, consistent with a massive reorganization of corporate boards to respond to the mandatory quota. Rebérioux and Roudaut (2016) show that seasoned women represent a minor and decreasing part of female appointments made after the gender quota. They find that overall, only 36 seasoned female directors get at least a new seat after the quota. By contrast, 291 first-time female directors enter the pool of directors’ post-quota. This is in line with the argument of Ahern and Dittmar (2012) who state that there was a lack of qualified seasoned female directors to fill the reserved board positions, which may lead to the appointment of more young and inexperienced women (Rhode and Packel, 2014). Research suggest that voluntary targets will result in an organization-wide gender diversity strategy at management levels, corporate board, and senior executive levels (Klettner et al., 2016). As mentioned before, firms with voluntary targets are able to develop their own policies and management practices to develop women leaders. Klettner et al. (2016) shows that aspects of those policies include the implementation of training programmes and skills development, support of mentors, and sponsorships. Rhode and Packel (2014) indicate that providing mentors with board experience may be especially critical in bringing qualified women to the attention of board nominating committees. They document that Australia has had success in educating potential female directors and then pairing them with seasoned directors who assisted them for a year and at the end of this process to help them on a corporate board. Therefore, I expect that new female directors hired through a voluntary target will have higher number of qualifications than new female directors hired through mandatory quotas.

Hypothesis 4: New female directors hired through a quota will have lower number of

qualifications than new female directors hired through a voluntary target

2.3.5 | Multiple Directorships of Seasoned Female Directors Post-Intervention

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replaced the ‘old boys’ network (Seierstad and Opsahl, 2011). Creating an external shock through legislative mandate generate a temporal shortage of skilled and qualified women available to take up such positions (Seierstad and Opsahl, 2011). The easiest way to implement the gender quota bound to a defined time scale is to select from the available seasoned female directors who are part of multiple boards. The resource dependency theory also suggests that, given an increasingly uncertain business environment, boards should be composed of individuals who can provide access to a breadth of resources (Singh et al., 2008). Seierstad and Opsahl (2011) found that the number of seasoned female directors holding multiple directorships increased extensively after the gender quota, from 7 to 107. Moreover, the number of directorships that a single female director holds has increased adequately. Their research shows that this number has doubled (Seierstad and Opsahl, 2011). However, economists theorize that these seasoned female directors will hold fewer directorships in the future, once more and more first-time female directors are seen as competent and have gained more management experience (Sweigart, 2012). Given that voluntary targets are not bound to a defined time scale and can be seen as a wider development to provide access for new female directors on boards, we expect that seasoned female directors hired through a quota are more likely to have higher number of held directorships than seasoned female directors hired through a voluntary target. I posit the following:

Hypothesis 5: Seasoned female directors hired through a quota are more likely to have

higher number of held directorships than seasoned female directors hired through a voluntary target

2.4 | Conceptual Framework

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TABLE 1 Conceptual Framework

Affirmative Action Policy

Hypotheses Mandatory Gender Quota Voluntary Target

H1: Age Female Directors Likely to be younger Likely to be older H2: Board Tenure Female

Directors

Likely to have less years of board tenure

Likely to have more years of board tenure

H3: Executive Experience (CEO, CFO) Female Directors

Likely to have less years of executive experience

Likely to have more years of executive experience H4: Number of

Qualifications of Female Directors

Likely to have lower number of qualifications

Likely to have higher number of qualifications H5: Number of held

Directorships of Female Directors

Likely to have higher number of held directorships

Likely to have lower number of held directorships

Source: made by the author based on existing literature

3 | Empirical Study

This section will elaborate more on the research design that is used in this research paper to test the hypotheses. In order to answer the research question: “Can we expect mandatory

gender quotas and voluntary targets lead to different types of female directors being hired?” I

adopted a quantitative research design. In this section, explanations for the data collection, sample size, and empirical model are provided, following by a description of the dependent variables, independent variable and control variables used in this research paper.

3.1 | Data and Sample

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comply-or- explain, or “if not, why not” principle; to provide firms with the necessary focus to improve the gender balance within the firm, and clarify accountabilities (Commonwealth Government of Australia, 2013). This research paper uses data from the Norwegian and Australian listed firms and is particularly interested in the post-intervention period to compare the female directors who are hired through a quota and target. The board data were collected from the BoardEx database and the financial data (e.g. market capitalization, number of employees, ROA, and revenue) were obtained from the Thompson Reuters Eikon database. The initial sample consisted of all OSE-listed Norwegian companies in 2003 and 2009 and ASX-listed Australian firms in 2009 and 2017. Since the aim of the study is to analyze pre- and post- regulation period in these two countries, these years seem appropriate for analysis as 2003 in Norway and 2009 in Australia are pre-intervention years, whereas 2009 in Norway and 2017 in Australia are post-intervention years. To answer the research question of this paper, I focus on female director characteristics in post-intervention years, after controlling for the pre-intervention years. The sample period in Norway ending in 2009 should be adequate to observe the impact of the quota effect on the women being hired. For Australia, the Australian Code of Corporate Governance recommended that the “representation of both genders shall be

reasonably taken into account, with a target of 30 percent done by 2018 and an interim target of 25 percent by 2013” (Terjesen et al, 2015). However, the most recent data available in

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3.2 | Measures and methods

3.2.1 | Dependent Variables

In order to compare the new female directors hired through a quota and target, I used demographic characteristics and human capital as the dependent variables. Since I am interested in the differences between the group of women hired through a quota and the group of women hired through a voluntary target, I aggregated the director-level data to the firm level averages.

Average age of all new female directors post-intervention

The first dependent variable in this study is the average age of new female directors post-intervention. To gather the age of new female directors the BoardEx database was used. This database offers biographical data on most board members and executives around the world. The average age of all new female directors was calculated by the total age of all female

directors on the board of a firm post-intervention/ the total number of female directors on the board of a firm post-intervention.

Average board tenure of all new female directors post-intervention

The second dependent variable is the average board tenure of all new female directors post-intervention. Board tenure is defined as the number of years since the board members have been appointed (Ahern and Dittmar, 2012). In this study, the average board tenure of all new female directors was calculated by the total time on board of female directors on the board of

a firm intervention/ the total number of female directors on the board of a firm post-intervention.

Average CEO/CFO experience of all new female directors post-intervention

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Average number of qualifications of all new female directors post-intervention

The fourth dependent variable is the average number of qualifications of all new female directors post-intervention. This variable is defined as the number of qualifications at undergraduate level and above for all the directors at the annual report date selected (BoardEx, 2015). In this study, the variable was calculated by the total number of qualifications of all new

female directors on the board of a firm post-intervention/ the total number of female directors on the board of a firm post-intervention.

Average number of held directorships of all new female directors post-intervention

The fifth dependent variable is the average number of held directorships of all new female directors post-intervention. The first step in calculating this variable was to summarize the total number of quoted current boards, the total number of private current boards and the total number of other current boards for the female directors on board in order to get insight in the number of current directorships the new female directors hold. To calculate the average per firm I divided the total current directorships of all new female directors on the board

post-intervention by the total number of female directors on the board of a firm post-post-intervention. First-time female director or seasoned female director

As mentioned before, a distinction is made between the female directors hired as a result of an affirmative action policy. On the one hand, an affirmative action policy has induced the massive arrival in boards of a new population- namely, first-time female directors, defined as female directors with no prior board experience (Rebérioux and Roudaut, 2019). On the other hand, seasoned female directors are being hired to boards after the introduction of an affirmative action policy. Seasoned female directors are female directors with prior board experience. For every dependent variable, we also looked at the differences between these types of women (e.g. the average age of first-time female directors post-intervention, and the average age of seasoned female directors post-intervention). To calculate whether or not the new female directors were first-time female directors, we looked at the number of directorships

to date in the BoardEx database. I considered female directors with less than two directorships

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3.2.2 | Independent Variable

Affirmative action policy (AAP)

This variable describes the policy that is used to support female representation in the boards of listed firms. The variable is used as a dummy variable in this research that equals 1 if the observation uses a gender quota and 0 if the observation uses a gender target.

3.2.3 | Control Variables

In order to control for other variables that can affect the relationship between the dependent variables and the affirmative action policy, I included control variables in the analysis which will be elucidate below.

Firm size

The first control variable is firm size. Research of Fakhih and Ghazalian (2015) indicate significant implications of firm-related factors, such as firm size, for female representation in boards. Larger firms generally have larger inertia forces (Xie, 2014) and more hierarchical structures (Li and Chen, 2018), which may lead to the fact that they can respond less quickly to an affirmative action policy than smaller firms. Research suggest that smaller firms are more likely and quicker to implement creativity and innovation (Li and Chen, 2018), which may suggest that they are more likely to respond more quickly to an affirmative action policy. Therefore, I argue that firm size would ultimately influence the type of women being hired as a result of an affirmative action policy, and should be controlled for in this study. Firm size was operationalized as market capitalization, number of employees, ROA, and revenue. The market capitalization of a particular company is defined as the number of shares outstanding and the closing price of the share. Where the number of outstanding shares refers to the issue size of the stock (Sontakke, 2016). I gathered the market capitalization, number of employees,

ROA, and revenue of the companies from the Thompson Reuters Eikon database.

However, firm size is often non-normally distributed. This was also the case in this sample, and therefore the market capitalization, number of employees, ROA, and revenue were transformed into log-variables. A typical use of log-variables is to “pull outlying data from a

positively skewed distribution closer to the bulk of the data in a quest to have the variable be normally distributed”. In the regression analysis, the logs of variables are taken for

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Board size

Corporate board controls include board size, and total women on the board. Board size is measured by the total number of directors on the board. Total women on the board is defined as the proportion of women to the total board size (Alkalbani, Cuomo and Mallin, 2019). These two corporate governance controls have been widely used by previous studies (Alkalbani, 2019). I gathered these control variables from the BoardEx database in the worksheet Board

Summary. Pre-intervention

I also control for the pre-intervention year, including the average age, average board tenure,

average CEO/CFO experience, average number of qualifications, and average held directorships of the female directors in the board of directors pre-intervention. Which means

that for Norway I control for the year 2003 and for Australia I control for the year 2009 in order to ensure that the outcomes are the results of the intervention in that country.

Industry

As indicated by Helfat (2006) there is a large difference between industries in the representation of women. Consequently, the industries are used as control variable to control for the effect it has on the relationship between the dependent variable and independent variable. The industry of the firms is available in the BoardEx database.

3.3 | Empirical Analysis

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generally considered weak correlations, .36-.67 moderate correlations, and .68-1 high correlations. In this study, there is a moderate positive correlation between the revenue and market capitalization (.6592) with a statistical significance level at the 1 percent, which is explainable due to the fact that these variables both measure firm size. There is a highly negative correlation between the AAP and the average age of all women pre-quota (-.7245) which is significant at the 1 percent level. This indicates an inverse relationship whereas when the AAP is 1 (a quota in Norway) the average age before the quota of women on board is lower as compared to the average age of the women on board when the AAP is 0 (a target in Australia).

3.3.1 | Pair-wise t-test

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TABLE 2

Differences between the female directors

TABLE 2 (Cont.)

Notes: (a) Panel A: averages of female director characteristics in the post-intervention period; Norway 2009 and Australia

2017. Panel B: averages of female director characteristics in the pre-intervention period; Norway 2003 and Australia 2009. (b)

T-statistics for tests of average differences are indicated in parentheses. (d) Statistical significance at the 1%, 5%, and 10%

levels is indicated by ***, **, and *. (e) Source: made by the author based on data downloaded from BoardEx and Thompson Reuter Eikon All female directors Seasoned female directors First-time female directors

Target Quota Target Quota Target Quota Differences (1) (2) (3) (4) (5) (6)

(1)-(2) (3)-(4) (5)-(6)

Panel A. Post-intervention period

CEO, CFO experience (average) 0.006 0.29 0.007 0.42 0 0 -.286596*** (-4.6097) -.409897*** (-5.2404) - Board tenure (years)(average) 3.31 1.64 3.44 1.88 2.29 1.21 1.66723*** (5.4964) 1.562035*** (4.0762) 1.078011** (2.6034) Age (average) 56.08 45.46 56.99 44.40 49 47.68 10.61971*** (9.7585) 12.58905*** (9.6382) 1.32 (.5397) Number of qualifications (average) 2.45 1.43 2.53 1.52 1.95 1.05 1.020713*** (5.2724) 1.012173*** (4.1492) 0.9005836*** (3.8091) Number of held directorship (average) 4.06 3.73 4.46 4.79 1 .92 .324296 (.6767) -.3271213 (-.6011) .0769231 (1.000) All female directors Seasoned female directors First-time female directors

Target Quota Target Quota Target Quota Differences (1) (2) (3) (4) (5) (6)

(1)-(2) (3)-(4) (5)-(6)

Panel B. Pre-intervention period

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3.3.2 | Ordinary Least Square Regression Model

In order to test the hypotheses of this study and to show a more detailed impact of the affirmative action policy on female directors being hired, I conducted several analyses using the program Stata/SE 15.1. More specifically, I performed an Ordinary Least Square (OLS) regression analysis to test the relationship between the dependent variables (described in section 3.2.1) and the affirmative action policy using equation 1:

Yn = α+ βnX+e (1)

Where Yn is equal to the dependent variable. This empirical analysis uses n=1-5 different dependent variables. X is equal to the independent variable (affirmative action policy), which is a dummy variable (equals 1 if quota and equals 0 if target). In this equation, α andβn are respectively the constant coefficient and the coefficient associated with the affirmative action policy. And e is the error term, also known as residuals.

3.3.3 | Multicollinearity, Normality, and Homoskedasticity

Before performing the OLS regression analysis, I tested assumptions for this analysis to ensure the best linear unbiased estimator (BLUE) of the coefficients (Smidt and Finan, 2018). The first assumption that is checked for is multicollinearity. This study includes one independent variable; therefore, multicollinearity problems will not occur between different independent variables. Nevertheless, it is possible that multicollinearity issues occur between the independent variable and the control variables or among the control variables. Therefore, the variance inflation factors (VIFs) were tested for every variable included in the models. Following Bowerman and O’Connell (1990), a VIF above 10 indicates the possible existence of a multicollinearity issue. The mean VIF of models 1-5 are respectively, 1.91, 1.91, 1.91, 2.03, and 2.03. The results show that all VIFs are below 10, indicating no multicollinearity issues between the variables used in this study. The second assumption that I tested is

normality. This assumption suggest that the residuals are normally distributed. To test whether

or not the residuals were normally distributed I performed the Jarque-Bera normality test after the regression analyses. This is a goodness-of-fit test and analyses the skewness and kurtosis of the data. The JB p-values > 0.05, which indicates that I can accept the null hypothesis of a normal distribution of the residuals. Appendix 2 shows the results of these tests.

Homoskedasticity is an important assumption in OLS regression. I checked for

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suggests heteroskedasticity. The BP p-values > 0.01 for model 1, model 4, and model 5, which indicates that I can reject the null hypothesis. However, for models 2 and 3 the BP p-values <0.01 which suggest that the residuals do not have a constant variance. In order to ensure the BLUE of the coefficients, I performed for these models a regression with robust standard errors.

4 | Results

4.1 | Descriptive Statistics

Appendix 3 shows the mean, standard deviation, minimum, and maximum of all variables including the control variables sorted by country, which is an extension of the descriptive statistics in Table 2. In Australia, the average age of first-time female directors is 49 with a standard deviation of 5.327848, and the average age of seasoned female directors is 56.99332 with a standard deviation of 4.822876. In Norway, the average age of first-time female directors is 47.68 with a standard deviation of 8.449268, and the average age of seasoned female directors is 44.40427 with a standard deviation of 7.246304. Interestingly, in Norway the first-time female directors are on average older than the seasoned female directors on board, which is the opposite in Australia where the seasoned female directors are on average older than the first-time female directors. Another noteworthy descriptive is that in Australia the average board size with female directors on board is 6.357683 with a standard deviation of 1.783205, and in Norway 8.487805 with a standard deviation of 3.202514. The average board size in Australia is approximately 6.4 members with a relatively low standard deviation, which indicates that most of the firms are close to this average, however, in Norway the average board size is approximately 8.5 with a relatively high standard deviation, which suggest the firms are more diffused.

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4.2 | Regression Results

Table 3 presents the results from the OLS regression analyses. Model 1 represents hypothesis 1 which states that quotas are more likely to lead to younger new female directors than voluntary targets. This model has an R2_{of .2827 which suggest that 28,27 percent of the} variation of the average age of all new female directors is explained by the affirmative action policy. The results shown in model 1 indicate that there is a negative and significant relationship between the average age of new female directors and the affirmative action policy (β= -14.47186, p=.000). This means that when the affirmative action policy is 1 (indicating a quota) the average age of new female directors is 14.47186 lower compared to a voluntary target. There is enough evidence to support hypothesis 1.

Model 2 proposes hypothesis 2 which suggest that all new female directors hired through a quota are likely to have less years of board tenure compared to all new female directors hired through a target. Model 2 has an R2_{of .0473, which indicates that 4,73 percent of the variation} of the average board tenure of all new female directors is explained by the affirmative action policy. The results suggest that there is negative significant relationship between the average board tenure of all new female directors and the affirmative action policy (β= -2.038715, p=.034). This indicates that when the affirmative action policy is 1 (quota) the average board tenure of new female directors is 2.038715 lower than of new female directors hired through a target. There is enough evidence to support hypothesis 2.

Model 3 represents hypothesis 3 which states that new female directors hired through a quota are less likely to have high-level of executive experience (CEO/CFO) compared to new female directors hired through voluntary targets. The R2_{of this model is .4069 which suggest that} 40,69 percent of the variation of the high-level of executive experience of new female directors is explained by the affirmative action policy. The results show that there is a positive significant relationship between the high-level of executive experience of new female directors and the affirmative action policy (β= .3024591, p=.000). This means that when the affirmative action policy is 1 (quota) are more likely to have high-level of executive experience (CEO/CFO) compared to new female directors hired through a voluntary target. Hypothesis 3 is not supported.

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average number of qualifications of new female directors is explained by the affirmative action

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TABLE 3

Results OLS regression analyses

Note: Statistical significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *. Source: made by the author based

on data downloaded from BoardEx and Thompson Reuter Eikon

4.3 | Robustness Check

I also examined the robustness of the main results. Previous research suggests that a robustness check examines how certain “core” regression coefficient estimates behave when the regression is modified by adding or removing regressors (Lu and White, 2014). Since control

Model 1 Av. age new female directors Model 2 Av. board tenure new female directors Model 3 Av. CEO/CFO exp. new female directors Model 4 Av. number of qualifications new female directors Model 5 Av. held directorships seasoned female directors Constant 55.21943*** (11.32768) 7.800542 (5.720659) -.7545815*** (.5207114) 1.401498 (2.483598) .6710307 (5.658243) AAP -14.47186*** (1.72759) -2.038715*** (.6003993) .3024591*** (.075143) -.9569763** (.3787749) 1.061506 (.9174742) Log Market cap. .3803088

(.6310943) .1230254 (.3023246) .0064349 (0198618) .2360724* (.1383677) .5573136* (.3050876) Log Number of Employees -2.621624*** (.9154108) .7746601 (.4354974) -.0022114 (.0406595) -.2012441 (.2007042) .2155871 (.4050566) Log ROA -1.522263 (1.590979) -1.247323 (.5637836) .003409 (.0177634) .08498 (.3488229) -.84864 (.6979177) Log Revenue 1.107673 (.7807958) -.588015 (.5022361) -.001118 (.0224054) -.0744163 (.1711898) -.6149983* (.3594879) Industry -.0285237 (.0260371) .0009892 (.01275515) .0000288 (.0006274) -.0041459 (.0057086) -.0025565 (.0119607) Total directors on the

board .4471739*** (.1639281) .0946514 (.1166119) .0041474 (.0065084) -.0305458 (.0359413) .0968886 (.0764798) Total women on the

board -.3242749 (.3917733) .0692144 (.220218) .0097385 (.0103339) .0505277 (.0858965) .0549276 (.1775394) Average age all

women pre-intervention

.0193468

(.1910979) -.0181448 (.1081194) .0105369** (.0106318) .0062889 (.0418983) .0230295 (.0934603) Average board tenure

all women pre-intervention

-.4489466

(.352604) -.1195897 (.1429605) -.0156455** (.0202162) -.0083037 (.0773086) -.124466 (.180367 Average CEO/CFO

experience all women pre-intervention 1.699436 (3.691144) -1.091489 (1.299436) .6848993*** (.2026595) -.2520588 (.8092849) 2.986079* (1.767462) Average number of qualifications all women pre-quota -1.576769 (.9709041) -.2541368 (.4040878) .0076244 (.0495534) .0950305 (.2128712) .301914 (.5647127) Average number of

held directorships all women pre-quota

.1539134

(.2800523) -.1070598 (.0921303) .0209017*** (.0164141) -.0203051 (.0614016) .3342791*** (.1288423)

R2 _.2846 _.0473 _.4069 _.0742 _.0683

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variables are also predictors in a regression model, I decided to remove control variables in the OLS regression, namely the pre-intervention control variables in order to check whether or not the significance of the model will change dramatically. Table 4 shows the results of the robustness test performed to check whether or not the results are structural valid. Consistent with the original OLS regression model, the models 1-4 are all significant in the robustness test, and model 5 is not. It can be concluded that the coefficients are plausible and robust, which shows evidence of structural validity (Lu and White, 2014).

TABLE 4 Robustness check

Note: Statistical significance at the 1%, 5%, and 10% levels is indicated by ***, **, and *. Source: made by the author based

on data downloaded from BoardEx and Thompson Reuter Eikon

Model 1 Av. age new female directors Model 2 Av. board tenure new female directors Model 3 Av. CEO/CFO exp. new female directors Model 5 Av. number of qualifications new female directors Model 6 Av. held directorships seasoned female directors Constant 51.16908*** (11.32768) 4.80145 (3.043757) -.0194015 (.1389986) 1.202354 (1.811504) 4.653287* (2.48113) AAP -13.27622*** (1.13115) -1.461827*** (.6253163) .278098*** (.0285562) -1.013575*** (.2470143) .3871381 (.5347207) Log Market cap. .378253

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5 | Conclusion and Discussion

5.1 | Conclusion

The aim of this study is to answer the research question:

“Can we expect mandatory gender quotas and voluntary targets lead to different types of female directors being hired?”

Based on a sample of Norwegian and Australian corporate boards of listed firms, the results indicate that these two different types of regulations, indeed, lead to differences in human capital of female directors. This study uses the human capital theory to evaluate the profiles of 41 new female directors appointed through a mandatory quota in Norway, and 397 new female directors appointed through voluntary targets in Australia, and shows that female directors hired through mandatory quotas are on average younger than female directors hired as a result of voluntary targets. In addition, voluntary targets are more likely to hire new female directors with more years of board experience than mandatory quotas. Additionally, new female directors hired through a mandatory quota are more likely to have more years of executive experience than new female directors hired through a target. Furthermore, this study shows that new female directors hired through voluntary targets have higher number of qualifications than new female directors hired through a mandatory quota. However, this study did not find support for hypothesis 3 and 5 which expected, respectively, that new female directors hired through a quota would be less likely to have high-level of executive experience than new female directors hired through voluntary targets, and that seasoned female directors hired through a quota would be more likely to have higher number of held directorships than seasoned female directors hired through a voluntary target.

5.2 | Discussion of the Empirical Findings

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TABLE 5 Overview of the results

Hypotheses Results

Hypothesis 1: Quotas will lead to younger new female directors than voluntary targets

Supported Hypothesis 2: New female directors hired through a

quota are likely to have less years of board tenure compared to new female directors hired through a voluntary target

Supported

Hypothesis 3: New female directors hired through a quota are less likely to have high-level executive experience (CEO, CFO) compared to new female directors hired through voluntary targets

Not Supported

Hypothesis 4: New female directors hired through a quota will have lower number of qualifications than new female directors hired through voluntary targets

Supported

Hypothesis 5: Seasoned female directors hired through a quota are more likely to have higher number of held directorships than seasoned female directors hired through a voluntary target

Not Supported

Source: made by the author

Hypothesis 1 expected that mandatory quotas would lead to younger new female directors than voluntary targets. The results in section 4 show that there is a significantly negative relationship between the average age of new female directors and the affirmative action policy. The coefficient of the average age is -14.47186, which indicates that female directors appointed through a mandatory quota to the board of directors are approximately 14.5 years younger than female directors appointed through voluntary targets. As mentioned in section 3.3.3 I tested the assumptions for the OLS regression analysis to ensure the best linear unbiased estimator of the coefficents. In addition, I performed a robustness check to test whether the significance of the model would change dramatically. Table 4 shows that the results were robust. Therefore, I can assume that the result is structural valid. The finding is in line with the research of Ferrari et al. (2018) who stated that “Gender quotas are associated with lower age, by including

younger female directors on boards. Interestingly, when considering the descriptive statistics,

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first-time female directors appointed through the quota. It is possible that as a result of a mandatory gender quota firms appointed, on average, the younger women from the pool of seasoned female directors. The overall result is in line with existing literature which state that mandatory quotas are likely to appoint younger female directors than voluntary targets (Rhode and Packel, 2014; Ahern and Dittmar, 2012; Spender, 2012; Nygaard, 2011). When looking at the results of the pair-wise-t-test (Table 2), it becomes clear that the average age of all women on the board of directors decreases after the introduction of the quota while the average age of all women on corporate boards increases after the introduction of a voluntary target. This could indicate that firms with voluntary targets indeed look for, on average, older and likely more experienced female directors to appoint to the board of directors, while firms with a mandatory gender quota are more likely to appoint younger female directors.

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Hypothesis 4 presumed that new female directors hired through a quota will have lower number of qualifications than new female directors hired through a voluntary target. The results of this study indicate that there is a negative and significant relationship between the number of qualifications of new female directors and the affirmative action policy. The coefficient is -.9569763, which indicates that new female directors appointed through a mandatory quota have on average approximately 1 qualification less than new female directors hired through a voluntary target. Table 4 shows this result is robust. When looking at the descriptive statistics in Table 2, it becomes clear that the qualifications of the women decreases after the implementation of a mandatory quota, and increases as a result of a voluntary target. This is in line with existing literature which suggest that mandatory quotas will simply lead to more unqualified women, either because the increasing demand imposed by the quota in Norway for female directors was exceeding the supply of well-prepared qualified women, or because the board of directors filled seat with inexperienced women “who won’t speak up” (Rhode and Packel, 2014). In addition, Klettner et al. (2016) shows that firms with voluntary targets are able to develop policies, for instance, the implementation of training programs and skill development, support of mentors, and sponsorships, which may increase the qualifications of the female directors. Rhode and Packel (2014) indicate that mentors with board experience who assist potential female directors for a year, could help them get appointed on a corporate board.

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Therefore, I cannot conclude that this is a result of the implementation of the two types of regulations. However, this is not in line with the finding of Seierstad and Opsahl (2011) who show that the number of seasoned female directors holding multiple directorships increased extensively after the implementation of the mandatory gender quota, from 7 to 107. A possible explanation for my insignificant results may be that the sample size in the study of Seierstad and Opsahl (2011) of Norwegian firms was significantly higher than the sample size I used in this research as they used a different database to collect their data. It is possible that due to the relatively small sample size of Norwegian female directors in this study, there occurred a general loss in statistical power which could lower the probability that the statistically insignificant result reflects a true effect (Button et al., 2013).

5.3 | Theoretical Contribution and Managerial Implications

From an academic, management, and policy point of view, this study contributes in several ways. Firstly, it contributes to the need in the literature to examine the different effects when diversity occurs voluntarily or through mandatory quotas as mandatory quotas become more common (Hillman, 2015). The study uses the human capital theory to evaluate the profiles of 41 new female directors appointed through a mandatory quota in Norway, and 397 new female directors appointed through voluntary targets in Australia, and extends the current corporate governance literature on board gender regulation by exploring whether female directors differ in human capital when firms appoint women to the board of directors through voluntary targets rather than through mandatory quotas. This research paper enhances our understanding of the differences in age, board tenure, executive experience (CEO, CFO), qualifications, and the number of directorships held by female directors in the two different types of regulations. Existing research investigated the different human capital outcomes between female directors and male directors (Adams and Funk, 2012; Ahern and Dittmar, 2012; Singh et al., 2008). In addition, scholars looked at the human capital of female directors under the two regulations in isolation (Rebérioux and Roudaut, 2019; Bertrand et al., 2018). This study started to fill the gap in the corporate governance literature by exploring the differences in human capital between female directors under the two types of regulations.

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to hire female directors with more years of board tenure than mandatory quotas. This may indicate that these women developed specific skills and knowledge, which could complement the corporate boards’ existing capabilities. The female directors with more years of board tenure are also seen as more legitimate, which could lead to legitimacy benefits for those firms. Additionally, this study shows that new female directors hired through a voluntary target will have higher number of qualifications than new female directors hired through a quota. Educating potential female directors and pairing them with seasoned directors who assist them for a year, may lead to more qualified women on corporate boards. Corporate leader can effect change in the board of directors to encourage female representation in leadership if they devote the required time and resources. These results could provide awareness to international firms about the different human capital outcomes of new appointed female directors as a result of the two types of regulations.

Lastly, given that more and more countries are adopting mandatory gender quotas, while in other countries this decision is still pending or discussed, this study also contributes to the important and current international public policy decision debate on the relevance and wisdom of adopting mandatory gender quotas or introducing voluntary targets to promote gender diversity on corporate boards.

5.4 | Limitations and Future Research

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of data in the Boardex database, I had to deal with missing values. Dropping all firms with missing data was not an option, because this would lead to a very small dataset which would made it impossible to perform this study. Therefore, I chose to resolve this by replacing the missing values with the mean of the variable in which they occur (e.g. average age all female directors, average age first-time female directors, and average age seasoned female directors, etc). Because I worked with averages in this study, for instance, average age, I decided this was the most appropriate approach to use because this method did not change the averages of the data. However, this could have led to skewed data, for the reason that the variables (for instance, age) were not all normally distributed. For future research, it is important to search corporate board data in different databases, for example, the Norwegian Business Register. Fourthly, this study uses observable human capital, such as board tenure, executive experience, and number of qualifications, to examine whether there are differences in human capital outcomes of female directors hired through the two types of regulations. However, future research could include other characteristics to explore whether there are more differences between those female directors, for instance their social capital (e.g. the network size of their relationships). Furthermore, future research could further investigate this topic by using a different research design with the aim to shift the attention from the human capital of female directors to possible other effects when diversity occurs voluntarily or mandatory. For example, future studies could incorporate male directors and examine whether males behave differently if a new female director is hired to the board of directors voluntarily or mandatory. In an ideal world, majority directors would welcome diverse newcomers (Hillman, 2015).

6 | Acknowledgements

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7|

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Mandatory Gender Quotas vs. Voluntary Targets in Corporate Boards: Can we Expect Different Types of Women Being Hired?