Study Says Female Board Members Hurt Stock Prices. Really?

Last Updated Mar 25, 2010 8:39 AM EDT

Look at the non-executive directors of most public companies, and you will see an array of pale, male faces with perhaps the occasional token woman who is usually from HR. So, late last year, the Securities Exchange Commission (SEC) introduced new diversity rules requiring companies to disclose whether nominating committees considered diversity when appointing directors.

Whether the rule will change the complexion of boards is unclear. For years, Catalyst, the non-profit that champions women in business, has campaigned to make corporate boards more diverse, and even attempted to prove the positive impact diversity has on a firm's financial performance. But the links here are always contentious and hard -- maybe impossible -- to prove. Now along comes a University of Michigan Ross School of Business study that finds that adding women on your board will make your company less valuable. The study, published last fall by finance professors Amy Dittmar and Kenneth Ahern, looked at the impact of a 2003 Norwegian law, requiring that 40 percent of directors be female; the result, according to the study, was that the stock price of an average company (one that might have had a woman at some point) dropped 2.6 percent in the three days following the announcement of the quota law. Firms that had never had a single woman at all lost 5 percent, according to the academics.

So the firms that had to make the biggest changes to their boards suffered the biggest drop. The conclusion the academics drew from this? That companies lose value because their new female directors are younger and less experienced. "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," Dittmar wrote.

It's hard to know where to start unraveling this nonsense, but let me try:

  1. The companies that had no women on the board in the first place clearly had dumb, old-fashioned, biased management. They deserved a lower valuation.
  2. A few years of change is way too short a time to measure anything meaningful at all in corporate governance.
  3. The idea that the new young women board members couldn't add value suggests these authors haven't spent much time in a boardroom. In my experience, it is the younger members who do pay attention and don't just collect the check. They're usually more in touch with the market and more skeptical of established, cozy business habits.
  4. The academics made the classic logical error of thinking that, because one thing follows another, the first must have caused the second. This goes to the heart of why business is an art not a science. You can't do a controlled experiment where the same company contrasts their decisions with women and without. What would have happened to the Norwegian companies if they'd stuck to their good ol' boy network of company directors?
  5. The reason we want this kind of new blood in boardrooms is not just because it's morally right but because they're not just like all the other guys. If you have a whole room full of people who are all the same -- in age, race, gender or, frankly, hair color -- then you may as well save yourself time and money and just have one person. Healthy, robust boards consist of people of different ages, thinking styles and backgrounds, because that is the best way to identify multiple solutions to hard problems.
When you're choosing your board -- whether for a public company or just an advisory board for a private business -- make sure you find people with different skills and the confidence to argue and pose alternatives.

Even if not a very bold move, the SEC rule is at least a start. But it's hard to see how it will come close to transforming corporate governance in my lifetime. I will never forget hearing Dennis Stevenson, chairman of HBOS, lauding the bank's board for being "as one" in the face of the banking crisis.

Didn't he see that that was the problem in the first place?

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    Margaret Heffernan has been CEO of five businesses in the United States and United Kingdom. A speaker and writer, her most recent book Willful Blindness was shortlisted for the Financial Times Best Business Book 2011. Visit her on