In a new paper posted to SSRN, David A. Matsa and Amalia R. Miller examine the impact of the Norwegian quota (roughly 40% of board seats must be held by women, see here and here for prior posts) on the management style of affected firms by comparing them to other Scandinavian companies, public and private, that were unaffected by the rule. Matsa and Miller, consistent with prior research, find that the quota is associated with a relative decline in corporate profitability. (HT: Holger Spamann)
(We review the empirical literature in our most recent paper, for those wanting more information on these various studies.)
What is new about the Matsa and Miller study, however, is that they decompose the change in profits to determine why quota firms lost value. They conclude:
The results suggest that the decrease in profits can be explained entirely by increased labor costs. On average, labor costs increased by 21 percent, relative to firms that were unaffected by the quota. . . . Among affected firms, average employment increased even more than labor costs. This pattern is consistent with women on corporate boards directing their firms to hire or retain additional rank and file workers. Because low-wage workers are particularly vulnerable to unemployment risk, this pattern may reflect a greater concern on the part of female board members for the well-being of workers at the lower end of the wage distribution.
In a forthcoming paper, Lissa Broome, John Conley, and I discuss the results of a series of interviews with corporate directors about the value, if any, of corporate board diversity. As I’ve discussed in several prior posts (here, here, and here), the interviews reveal a tension: while “diversity” evokes universal acclaim in the abstract, our respondents’ narratives demonstrate that it is an elusive and even dangerous subject to talk about concretely.
Importantly for purposes of the Matsa & Miller paper, however, many of our respondents generalized about women and the ethic of care in ways that were strongly reminiscent of Carol Gilligan’s feminist classic, In A Different Voice. Nearly all of these examples, which we excerpt in detail in the article, relate directly or indirectly to employee, community, or customer relations. Perhaps most meaningfully, female and minority board members were credited with positive contributions in improving employee relations, and in causing the corporation to focus more deliberately on the diversity of its workforce as it considered hiring, retention, promotion, and succession issues.
For example, a white female director stated that women “tend to be more sensitive to the people issues within the company” and “tend to deal with the softer side and understand the workers more” than their male counterparts. Her specific examples included thinking through communicating “various things within the organization when you’re dealing with something like selling the company.” The company wasn’t “putting enough emphasis on that piece of it [the people issues]. And so I think I was able to make an impact from that standpoint.”
A Hispanic female board member also mentioned being sensitive to employee concerns because as a woman:
You feel it. You’ve seen it. You’ve experienced it. You’re sensitive to it. You understand it and when you make a decision whatever that decision is whether it’s about an acquisition, whether it’s about anything it just makes you more sensitive to everyone that’s involved, everyone that’s involved; their health care, their retirement, all their benefits. If one of our employees becomes very ill, making sure that their family is going to be taken care of; that you have an appreciation for the contribution that they’ve made to the company.
This same board member talked about recognizing that she has a great appreciation “for the worker bees in a company”: “I feel like part of my role is to represent the worker bees, not to lose sight of those people and to make sure that they’re remembered and not forgotten because that’s where the rubber meets the road” and a business cannot succeed without them.
For reasons we elaborate in the paper, an attention to employee relations (particularly attention to equal opportunity practices in hiring, retention, and promotion) could suffice as a business justification for the pursuit of board diversity, either from a risk management or from a profitability standpoint. But, of course, as Matsa and Miller find, too much “empathy” with employees could also reduce shareholder value; to the extent it results in inefficient labor policies.
In the end, like so much of the dialogue associated with board diversity, women’s purported greater ethic of care appears to be a double-edged sword. As we note in the paper, difference arguments of this sort can be dangerous enough, by opening the door to both stereotyping and invidious comparison.
Now, Matsa and Miller point to another potential drawback. Our respondents raised the “ethic of care” trait as an argument in favor of the business case for board diversity – positive relations with employees will provide bottom-line improvements. And, of course, they may. But as Matsa and Miller find, too much “empathy” could also decrease firm value, especially in tough economic times.
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