The Impact of Gender Diversity in the Boardroom

Matt Hawksley from the Center for Entrepreneurship, Innovation and Social Impact at the Smith School of Business interviews Bhargav Gopal, an Assistant Professor of Business Economics, about the power of gender diversity in the boardroom. Bhargav explains that his interest in this topic came about during his PhD studies when he came across a dataset called BoardX that tracked the employment histories of corporate board members. He found that legislation in California in 2018 that mandated gender diversity in corporate boards had a dramatic impact on compliance, with firms adding female directors and expanding the size of their boards. However, there is debate about whether tokenism is occurring. Bhargav's research also shows that women are less likely to have the same networks and top-level experience as men, which contributes to the lack of female representation at the highest levels of companies. The quota implemented in California helped to address this issue in the short term, but Good afternoon, everybody. This is Matt Hawksley here with the Center for Entrepreneurship, Innovation and Social Impact at the Smith School of Business. This is the Innovation in Motion series. I'm super excited to have our guest today, Bhargav Gopal, who is Assistant Professor of Business Economics at Smith. And we're going to be talking about the power of gender diversity in the boardroom. Welcome, Bhargav. Great to see you. Great to see you, too. And thanks for having me. Absolutely. So it's a pleasure to have you on board here. I know you are a recent addition to the team here at Smith in the business economics, and you grew up in Los Angeles, right? That's right. I grew up in Los Angeles, did my grad school in New York, and came here last August, so August 2023. Nice. And what do you think of Kingston so far? It's good. It's good. There's a lot of good restaurants around here, nice scenery, nice walking places. So it's been good so far. Fantastic. And I know in some of our discussions, too, you're a basketball fan like myself. My Philadelphia 76ers are not doing so well. They just choked big time last night. So, yeah, not doing so well in basketball. I sympathize. My Lakers had a choke job themselves yesterday, losing a 20-point lead. Yeah. No, I know. Not good outcomes for our two teams there. All right. So the power of diversity in the boardroom, I know that's something that's really close to your research. How did that get started? I know you actually, your Ph.D. at Columbia, and you studied at Berkeley. How did that come about? What was maybe the genesis or the impetus for you to get involved into this space here? Yeah. So around the second year of my Ph.D., I was struggling for research ideas, and I was initially working on a project that was trying to analyze the effect of non-compete agreements. And non-compete agreements are provisions within employment contracts that prevent workers from moving to competing firms. So I was playing around with different data sets, and I was trying to figure, I was trying to identify a data set that could track labor mobility. And that is a data set that could track workers over time in different jobs. And I came across a data set called BoardX, which tracked the employment histories of corporate board members, also known as directors. Initially, I thought this would be a great project to tie into my existing work on non-compete agreements. But I later learned that there was legislation in 2018 passed by the state of California that mandated gender diversity in corporate boards. And this data set, BoardX, also contained gender identifiers. So I thought this would be a great project. This is a feasible project to do for my Ph.D. studies, and it's something that I'm interested in, given that I grew up in California. And on a more personal note, my mom is sort of a – she's sort of a middle manager in the corporate ranks. And she has sort of gone up through the ranks, and I've sort of seen some of the challenges associated with women rising up through the ranks. And so this topic was a bit close to my heart. Yeah, absolutely. And I think in your research, too, it showed that at least a third of the U.S. publicly listed companies had a just straight-up all-male corporate board, right? So then in 2018, as you're mentioning, in California, they implemented that quota to have at least one woman on all of the different boards that were Canadian headquarters. So – California headquarters. California headquarters, exactly, yeah. So what did you find that some of the impacts were with regards to that initial quota that they put in? I know that the organizations had to have at least one woman on that board by the end of that year. What were some of the findings that you had? Yeah, I think the most striking findings are a couple things. So one is the dramatic compliance of the quota. So there's legislation, and firms are – firms actually respond to the legislation by adding female directors. How do they comply? They're more likely to comply by expanding the size of their board as opposed to replacing existing male board members. So that's one set of results. Another set of results is, in terms of how it affected firms, is it really introduced first-time directors onto corporate leadership. So the directors that firms were adding, they were less likely to possess top-level experience such as prior C-suite experience, that's experience as a senior leadership in that company, and they're less likely to possess pre-existing board experience. So companies respond to this quota by, one, adding female board members, two, expanding the size of their board, and three, introducing first-time directors. And, you know, and many times with, let's say, quotas, there's sometimes tokenism, and I think you went into that a little bit as well. Kind of that tokenism theory where they're pulling from maybe outside that network, right, and they're just kind of having to just put a woman on the board. How did that really maybe change the dynamic? Yeah, that's a really great question, and it's a bit difficult to actually answer, to give a definitive answer about whether tokenism is going on or not. But I do sort of lean on the stance that there's not tokenism going on. And I provide a couple pieces of evidence. So one is, so there's a concern that tokenism might be going on because the quota just made it one female director. Right. So it's, in theory, it's possible that firms were responding to this quota by adding one female director who plays minimal influence on the board. But if you think tokenism is going on, you may not expect these women to be assigned important responsibilities on the corporate board. So when I look at the actual committees that people are joining, in particular the quota, when I look at the committees quota appointed directors are joining, I find that they generally have similar responsibilities as their peers. The one exception is the audit committee. So quota appointed directors are less likely to join the audit committee, which is often regarded as one of the most important committees on boards. But otherwise, they have similar responsibilities as their peers. Right. And honestly, it's a great starting point. And some of the numbers, I believe it went down from, let's say, 204 California headquartered organizations to about 59 at the end of a couple of years after 2019, which is a pretty astounding change and a lot of great opportunities. And, you know, if you look at, too, that the number of women that are in MBA programs, I believe you said it was about 50 percent or so. I think it's even increased now at this point in time. So the qualifications are there. There are plenty of women that have all of those different credentials, all the experience, you know, the letters after their name even as well. What are your thoughts of maybe why that didn't happen even earlier? And it took maybe a quota to actually have to make that shift. Yeah, I think it's partly the way firms recruit candidates for board positions. So when I look at the characteristics of board members, I see that connections and top level experience matter a lot. So if you work with an existing board member, that really helps you get a job as a board member. If you have CEO experience, that really helps you get a board position. And it turns out women are less likely to have these types of characteristics, which is why I think we have a dramatic representation of women in higher education, but not necessarily at the very top, which is a phenomenon known as the glass ceiling. So we have women generally, you know, there's parity in education, maybe even at the middle management level, but not so at the very top. Mm-hmm. No, that makes a lot of sense. And, you know, there's a lot of fear, obviously, in change, especially when it's maybe traditionally all male. And kind of like we were saying, a lot of the boards maybe consisted of these directors that had ties to the organization. I think it was the males, about 83 percent were, like some of the females that were on there, 95 percent were kind of this external or out-of-network. And kind of to what you're saying, they're really, they have the credentials, they have things, but they didn't have that same kind of tie or that network or that direct kind of access to those organizations because of that. What have you seen or maybe what do you think about that in particular, with this out-of-network scenario? What else maybe some of your research did you find into that? Yeah, yeah, that's really a good point. I think it's partly, you know, the fact that women are less likely to have these networks is probably influenced by how these networks are determined, right? So, you have these connections with the existing directors if you're in top-level positions, right? So, if you're a CEO of a company, you may be, you're more likely to have these social connections with board members which helps to attain future board positions. But if women are systematically not in the top echelons of companies, then these networks are never formed in the first place, which is one of the reasons why a quota can be beneficial in placing women into leadership positions, both in the short run but also in the long run. So, this paper is looking at the short run, the sort of relatively short-run impacts of this quota which made it just, which mandated that one woman be on corporate boards. But it would be interesting to follow up to sort of see whether the woman appointed due to the quota earned further work positions down the line. So, one of the things I'm documenting is that top-level experience is more, that's more experience and connections matter. The quota sort of brings forth these qualifications amongst quota appointed directors. So, it'd be interesting to see if these quota appointed directors sort of remain the system down the road. Right. Absolutely. And then something else too to understand, even the financial performance or well-being of the organization, you know, before, after, even during, some of the different women have been now on the board and after. What were you maybe finding on that part of it too with regards to the performance of it in a sense? Yeah. So, going into the project, I wasn't sure how the quota would affect financial performance. So, there's quite a prominent paper in the Norwegian context that documented that firms experienced negative financial impacts due to this Norwegian quota which made it 40% of the board be women. Ultimately, there are some other research that suggested that increased gender diversity increases financial performance. In fact, the California legislature cited some of this type of research as a sort of justification for passing the legislation. So, going into the project, I was sort of unsure how the quota would affect financial performance. And there's theoretical reasons to expect various different results. So, if boards are kind of optimal as it is, then the constraint imposed by the quota may deteriorate financial performance because it's moving firms away from its optimal board structure. Alternatively, the quota may improve financial performance as stated by the proponents of the legislation. If the quota encourages firms to bring in qualified directors who would otherwise not be considered. Alternatively, we talked about tokenism. If firms play, if quota appointed directors play token roles in the company, then we may expect really no effect of the quota at all on financial performance. What do I actually find? I find either null effects or positive effects depending on the specification of the quota on financial performance. So, you know, that's the main takeaway I take from the research is there's no negative impact of the quota on financial performance, which suggests that it's an effective tool of creating a pathway for women to join corporate leadership. Now, it makes a lot of sense there. And in that research as well, was there anything that you may have uncovered with regards to even possibly the size of the organization or the kind of current status, whether it's a growth company or maybe more mature, something in that realm? Any other facts that you may be uncovered? I think one, I find one descriptive fact interesting, which is that mature firms are much more likely to have women on their boards than younger firms. So, growing, younger and growing firms, these are the companies that tend to have all male boards. And mature companies are the ones that tend to have more gender diverse boards. So, if you have a quota that mandates female, that mandates female representation on boards, it's more likely to affect younger firms. Okay. Makes sense. Makes sense. What about, let's just say some organizations that are maybe in a male-dominated or considered what would be a male-dominated type of industry? Oh, yeah, yeah. For sure. So, one may think that, I think this is a great point, which is one may think that firms in male-dominated industries, that is with, let's just, you can define male-dominated industries in various ways. In the paper, I define male-dominated industries to be those industries with below-median female representation. One may think that compliance with the quota would be especially burdensome amongst firms in male-dominated industries. That's because there's not many women already sort of in the pool of applicants. And so, it may be harder for firms to recruit qualified female candidates in male-dominated industries. But in the data, I don't find, I find that there's good, there's compliance in male-dominated industries, as much compliance in male-dominated industries as elsewhere. And I also find that there's no negative impact on financial performance in male-dominated industries. So, it brings that different perspective. And it actually, in a way, like you said, continues to potentially offer more help. And some of the findings, too, are showing that diversity can be actually a very good positive for the business performance and business outcomes. That's right. That's right. So, regarding perspective, there's this paper by Kim and Starks. And they find that women directors may improve performance by bringing new skills into the boardroom. And new skills into the boardroom may help because one of the jobs of boards is to advise corporate leadership. So, boards tend to play two roles. They tend, they're responsible for monitoring corporate leadership, for example, firing the CEO who did bad performance, but also advising the CEO on the best strategy to take. So, women directors possess different skill sets, and that can improve the board's advisory role. So, that's the argument for how increased diversity and perspectives could improve financial performance. And with some of the changes that took place, in some cases, a wholesale change with going from an all-male board into then a lot more of a diverse group, like you said, it does help and bring so much more perspective to the challenges that are being faced. In that research and things that you might have heard from the California organizations, were there any major roadblocks or challenges that these organizations faced in making that happen, into bringing some of the different women into the boardroom? Yes. So, in this context, it seems that compliance is relatively straightforward because it was just one female director. Right. Though, there's evidence to suggest that a quota that mandated, that mandates even more female directors would impose some financial costs. So, there's some research that looks into how the share prices of California-based companies responded to the gender quota, which is a two-stage quota. It mandated one female director by the end of 2019 and approximately three female directors by the end of 2021. So, there are some researchers that examine how the share prices of California-based companies responded on the day of the legislation. And presumably, under the efficient markets hypothesis, the changes in share prices reflect all available news. And they document that there's a negative share price reaction on the day of the quota, which suggests that investors may be worried that a quota that sort of mandates 40% female directors or 50% female directors would hurt financial performance. Like you said before, in the very beginning, at times, some of the different boards, they would increase the number of board seats just to have that one. So then, in this situation as well, if they had, let's say, six board seats, they might need to get three women now instead of just that one to make it at 50% or even closer to 40% if there's more seats. So, it can truly change the dynamic of the overall board, the structure, the insights that are going to be going into it as well. Well, definitely. Yeah, yeah. I think the fact that companies chose to expand the size of the board is interesting in and of itself. So, and there's some trade-offs that go into the decision, which I think makes sense. So, the average, the companies tend to respond to the quote about hiring non-executive directors and their annual salary is about $100,000. The addition of one female director is less than the cost of non-compliance. So, the cost of non-compliance is $100,000 to $300,000. So, it's less costly to hire a female director than to not comply. Okay. Yeah, because I was going to hit on the accountability side of things because obviously, a law goes into place. How do they uphold that? So, they did see the numbers change quite dramatically, but those, let's say, 59 after that two-year period that did not have that kind of gender diversity then had to pay a price, which was $100,000 and some other potential fines and penalties. And some other potential fines. Okay. Though I should note, if you go the next year, that 59 number goes down even further. So, it's even less than 59 companies. It's about 20 companies that end up having all-male boards by the end of, let's say, 2020. 2020, 21. Nice. Well, and that's fantastic. And that's California. How has the rest of the United States, let's say, even learned from this specific law and the details in your research, too? Yeah. So, one thing that's sort of interesting is this whole period is associated with the gradual increases in board gender diversity. So, at the same time, in the rest of the United States, board gender diversity is also going up, partly due to the fact that it's a more salient issue. So, there's a paper by Gormley et al., and they document that pressures by large institutional investors to increase board gender diversity succeeded. And this is for all companies, not just California-based companies. So, over the same time, there's sort of more female representation in corporate boards. But the increase in female representation is faster and much more pronounced in California than elsewhere. And I think in your paper as well, you talk a little bit about actually the political sphere and how that can also really influence certain parts, whether it's, let's say, in the U.S., the Democrat versus Republican side of things. And some of the states that had leadership on the Democratic side were more likely to kind of leverage that rather than just sometimes the Republicans. But the effects were similar in that, you know, the financial performance was always the same or better, but now the adoption has kind of changed. So, politics do play a role. Politics play a role, yeah, yeah. Exactly. So, you might expect that, you know, California has similar political leadings to, let's say, Massachusetts. So, you might expect that states like Massachusetts would follow in California's lead. And so, there's a paper that actually documents that California companies experienced negative share price reactions on the day of the quota. But not only that, they document that companies in states with similar political leadings to California also experienced negative share price reactions on the day the legislation was passed because the investors expected states like Massachusetts to also pass similar legislation. That's interesting. And similarly, let's say Canada and some others, you talked about Norway. I think also Italy had a similar scenario where, like, 2011, I think it was, that they started to implement some of that change. And even in a company like Ferrari, which similarly male-dominated type of mindset, has seen a lot of that success from this gender diversity. What kind of, almost for, let's say, Canada, other places too, how can, let's say, organizations and governments start to help shape a path beyond even just a quota for women to get onto the board? Yeah, that's a big picture question. I think this research implies that moderate gender quotas, so quotas that mandate one, maybe two female directors, they can successfully increase female representation without harming financial outcomes. And this is, you had mentioned the Italian context. The Italian context mandated about 20 percent, 20 to 35 percent female board representation. They find similar results over there, that companies increased female representation and didn't hurt financial outcomes. So if governments are thinking about ways to increase representation of women on boards, then moderate gender quotas may be one way of going about it. I say moderate because there's evidence to suggest that governments go too far. So the Norwegian context, where there was 40 percent female representation that was required, there's some research that suggests that this had a negative impact on financial outcomes. But beyond just quotas, there are other tools that governments can use and which governments are currently experimenting with to increase female representation and leadership. So one example is mandatory disclosure of how many female directors a company has. So this legislation requiring companies to disclose whether they have one, two, three female directors and explaining, you know, if they don't have a certain number of female directors, explaining why not. I think this is a promising path to increase female board gender diversity, but there's limited research on its effectiveness. So this is actually one thing I'm working on right now, is to examine the impacts of mandatory disclosure on female board representation. Yeah, well, that's great. And like you said, kind of that first starting point, the moderate growth and the change starts with having one, maybe two, that type of thing. Going too fast can have some repercussions, let's say, like evidence in Norway. But I'd love to hear, yeah, and dive into more. I'm looking forward to hearing more of your research at a later time, too, on what you find with the mandatory disclosures, because too often things get buried, let's say, in a prospectus or the, you know, here's the report, and here's the board. People aren't even looking at or don't understand it fully, so they're not even really knowing who is representing that specific company. Usually when things go sour, that's when all of a sudden the board names kind of come out. But having that kind of disclosure, that mandatory part that's made public and is known would be another great way to put it into the limelight and show those companies that are actually adhering to that, that are thriving, and are the, let's say, the change makers in that space. Because, again, having too myopic of a viewpoint does not lead to accelerated growth, especially in today's type of ever-changing world. You need a lot of different perspectives, whether that's gender or even other types of differences as well. So you can come at some of the different problems that are incredibly unique now from a lot of different ways. So I think it's definitely a great step from that quota to the mandatory disclosure to potentially, as you mentioned earlier, continuing to get a lot of women into that C-suite, making connections, leveraging that up, and maybe remedying what your mother maybe had to consistently fight for and now many women are now coming out of MBAs and law schools and others and having opportunities that maybe many in the past did not. Absolutely, absolutely. Yeah. So what maybe, in some of the research that you have, what were some of the maybe surprises that you found? Surprising research. Oh, yeah, yeah. I think one thing that was surprising is just how contested this literature remains on the effects of quotas and also women on boards on financial performance. We have different results across different contexts. And so that's one of the things that was a bit surprising when I first encountered it, which is how different these results are in various countries and contexts. Yeah. No, interesting, interesting. And from there, any other insights or pathways you're going down the road with regards to the mandatory disclosures? But has that spawned any kind of new ideas for further research? I know you talked about non-disclosures and some other things has been your early stage investigations and research. Anything else that maybe has piqued your interest in this? Yeah. So there's a couple of follow-up projects I have in mind. So one, one is assessing whether the board members who are appointed because of the quota earned additional board positions down the line. That's one. Two is to sort of further deep dive into whether referral-based hiring is going on. So sort of just to back up a little bit, quotas are sort of very coercive means of encouraging firms to hire female directors. You're forced to have female directors or there's a fine. But one of the things I'm currently interested in is what are the effects of less coercive means of increasing diversity in corporate leadership? And less coercive means can fall into two buckets, or there's two buckets that I'm currently considering. One is mandatory disclosure, which we briefly talked about, and the second is referral-based hiring. So if women are more likely to have employment connections with women, then a quota may have broader effects of more gender diversity if the quota appointed director brings in her workplace connections. So that's one of the things I'm currently investigating is what are the effects of mandatory disclosure and referral-based hiring? Now that's very insightful. Very interesting because, yeah, as more of the women too engage into those executive level positions, have the networks more tightly connected so that, like I said, some of the quota appointed directors now have their network that can then bring into more, and then that whole, let's say, domino effect can start to happen and eventually get to a point where it's not even solely focused on trying to get a certain percentage or leverage. It's getting that right perspective, and it just works out to that kind of balance and continuing to grow the different types of perspectives, eyes, and skills in that. Absolutely. It would certainly be interesting if a quota that made it in just one female director had led to broader increases in more gender diversity. There's some evidence that suggests this occurs in the governmental context. There's a paper by Conrad Miller that documents the persistent effects of a temporary affirmative action policy. That is, an affirmative action policy mandated x percent of diverse candidates, and it continued to increase diversity even after the requirements passed. It would really be interesting to see if that sort of phenomenon is occurring in the more gender diversity context. Yeah, because I was going to say, too, that affirmative action, obviously, in the U.S., things have changed slightly in the past recent years with some of the legislation. But yeah, I'm very curious to see the impact of that in a very particular state with women on board seats. Yeah, that's an interesting dynamic there, too. Any other, let's say, insights as far as breaking the glass ceiling? You mentioned the glass ceiling, and that phrase is quite common, but anything else that you would say would be kind of true, let's say, catalysts for really beginning to shatter that? Yeah, so I don't have any huge, huge comments except one sort of interesting result from the paper, which is that I find that the women who did break the glass ceiling came from the same sector as firms that were required to add more gender diversity. So the idea is firms are required to add female directors. They're searching for candidates with new experiences, not necessarily those with prior CEO experience, prior board experience, but they are looking for candidates that are in the same sector as their firm. So sectoral experience seems to matter, which suggests that it sort of provides some insight into how firms are complying with the gender quotas. They're looking for female candidates with relevant sectoral experience, if not CEO or board experience. Yeah, no, that's very poignant, because then also that would, I would imagine, probably spur a lot of different types of very, very industry-segmented type of networking groups and other things that are empowering women that can then help to then place them onto these specific director roles and in the executive position at organizations that could then hopefully bring them up and help them climb that ladder into those next seats as well. So I'm sure that's probably like an entire ecosystem type of engine that could actually help to then change the entire game as well. Definitely, yeah, yeah, yeah. These industry network professions could definitely have an impact. Great, great. And so any other, as we kind of like finish up here, any other major insights or things that people can take away from your research, from the overall scenario, and even for tips for other C-level executives that are looking for board seats currently? Yeah, I mean, I think one of the takeaways is that hiring candidates outside of typical hiring pools, the addition of candidates outside of typical hiring pools doesn't necessarily result in worse financial performance and can increase the diversity amongst the board composition. So at least at moderate levels, at least at moderate levels. Fantastic. All right, Bhargav. Well, it's been an amazing time. I love to learn more about your research and how can people find you as well on LinkedIn or any other places they can read some of your content? Yeah, you can find me on LinkedIn. You can look at my website, BhargavGopal.com, or shoot me an email. Sounds good. And for all those, we're going to be posting this video in the portal for all the certificate students. And we're also going to be sharing some of Bhargav's insights on social media and other channels as well. Thank you, everyone. Thank you, Bhargav. It's been a true pleasure and look forward to continuing our chat again soon. Absolutely. Thanks, Matt, for having me. Thanks so much.