A number of people have sent me the link to a piece that appeared this week in the University of Michigan News Service entitled Does Forced Diversity Hurt Board Performance? Another reader sent me another headline, also about the same report, this one even more misleadingly entitled: Adding Female Directors Hurts Norwegian Firms.
Since many busy people only register headlines and never quite get to the body of a piece, I wanted to set the record straight by introducing you to Professors Amy Dittmar and Kenneth Ahern of the University of Michigan, authors of the research study. The bottom line: the researchers did find evidence that abrupt change unnerves a market for a short time, and that investors want experience on their boards.
What they did not find, despite the headlines, is evidence that women hurt board performance, or that adding female directors per se hurts Norwegian firms.
Based on my reading of the UMIch News Service article, I asked Professor Dittmar the following questions, and here are her replies:
Question 1: According to your research as reported, all of the Norwegian companies experienced a drop in stock price when it was announced that women would be added to some boards (some boards already had them). Am I correct in reading that boards that had women experienced a smaller drop (- 2 ½ percent) than boards that would need to add women (-5 percent)? Why then does the article conclude that the market is "punishing" companies for adding women – experienced or not? How did you sort out what drove the difference in the stock price drops? One could argue that companies with women on their boards already were being rewarded.
Professor Dittmar: Actually, this is not exactly correct. We show an average drop of -2 ½ for all firms. We then break this up by those that have women on the board before the change and those that do not. We find that the group with no women has a drop of -5% where as those with women on the board have no significant drop. We do not conclude that the market is punishing companies for adding women – experienced or not. It is important to look at all of the evidence in our study. We explain in our study that the value drop at the announcement of the law is concentrated in those with no women on the board. We also go on to examine the value change when firms comply with the law made this change. We show a value drop over the year that this change occurred and tie this change to the experience of the board member.
Question 2. Why is the stock market’s reaction in the first couple days of women joining Norwegian boards considered to be so significant to the valuation of the company? When Bob Nardelli was appointed CEO of Home Depot here in the US, the stock price immediately jumped because he was a former GE executive – and look what happened there. He was the wrong CEO for Home Depot and destroyed a lot of value. In other words, the initial stock blip was not meaningful in terms of the actual value he brought. Do you plan to look at stock price impact of women on boards over the longer term?
Professor Dittmar: Our study uses two measures of value. One is the market reaction to the law. At this time, which women the firm chose to meet this quota was not known. So, this reaction is more of a perception of the impact. In addition, looking at the average market reaction over many firms provides assurance that the effects we see are not anecdotal (like the Nardelli example). We also look at the value change in the year of the change to the board to meet the benchmark defined by the law. Here we find similar evidence of a drop in value over this year. It is this longer term change in value that we then are able to tie to characteristics and experience.
Question 3. What percentage of male board members in Norway are former CEOs? I have heard on good authority that not all have been CEOs. Is the market holding women to a different standard? Is the market aware of how few male board members are former CEO’s, or does it simply assume greater knowledge, experience and proficiency on the part of the males?
Professor Dittmar: Our evidence shows that as of 2007, 73.5% of the men on the (shareholder elected) boards have work experience as a CEO or owner. In this same year, 45.1% of the women had this same experience. Interestingly, in 2001, 66.7% of the women on the board had this experience. This suggests that the women chosen to meet the quota had less CEO experience. This information is clearly explained in the bios of each board member that is available in the annual report. So, I don’t believe it is simply a market perception of women chosen after the quota having different (and less CEO) experience but rather they do.
Question 4. Are you happy with the title of the article reporting on your research? It seemed a bit provocative, and did not necessarily represent your findings accurately. For example, it could have said: "Norwegian stock market indifferent to gender of board members but does reward experience" or something like that. What would you have named that article, given the chance?
Professor Dittmar: The title of our paper is The Changing of the Boards: The Value Effect of a Massive Exogenous Shock. You are correct that our paper does show that experience is rewarded or that lack of experience is discounted. Thus, the role of gender is relevant only if the experience of the pool of women is different from that of men. Our paper shows that the experience of the women added to the board after the law differed from the men on the board and from the women on the board before the law was changed. It is this experience difference of the women chosen that is key driver.
Thank you, Professor Dittmar. Now can any readers connect me into a media specialist who can explain why these headlines are so misleading?
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