Gender quotas will give C-suites the motivation to change

My ears perked up this past week at the news that Jerry Brown, the Democratic governor of California, had signed a bill into law requiring publicly traded companies headquartered in the state to have at least one woman on their boards of directors.

As a professor of strategic management at Rice University, I have studied gender diversity on corporate boards closely, in the U.S. and China.

{mosads}At first glance, it may seem strange that the home of some of the world’s most valuable companies — including Apple, Alphabet and Facebook — would start to police the gender composition of its corporate residents’ boardrooms.

But the current American corporate board landscape is begging for change. This is the right regulatory move at the right time. 

Research confirms that people prefer socializing and working with others like themselves — the so-called “similarity attraction” effect. As a result, corporate board diversity — in gender and in other dimensions — tends to progress slowly without external pushes, since the majority of sitting corporate directors in the U.S. are white men.  

Data from BoardEx shows that large companies (those in the S&P 500) have made steady progress in this realm. The average percentage of female directors increased from 15 percent in 2007 to 23 percent in 2017, while the number of companies without female directors declined from 13 percent to 2 percent. 

Meanwhile, mid-sized companies (S&P MidCap 400) saw a rise in the percentage of female directors, from 12 to 18 percent, while the number of companies without female directors declined from 26 to 10 percent.

For smaller companies (S&P SmallCap 600), the average percentage of female directors increased from 9 to 16 percent, and the number without female directors declined from 44 to 20 percent. The slower progress in small- and medium-sized companies is likely because they are “under the radar” and less subject to public scrutiny.

California’s regulatory requirement can help close the gender gap across the whole spectrum of public companies, large and small. 

Having more women in corporate boardrooms does more than address a critical social equality issue. It helps companies better connect with their employees and customers, considering that women consist of nearly half the work force and make more than 70 percent of purchasing decisions in the U.S. 

Moreover, it helps solve another pressing problem in corporate America: the dearth of women in C-suites. After some prominent female CEOs left office recently, such as Ursula Burns at Xerox and Indra Nooyi at PepsiCo, gender parity in C-suites seems to have made an abrupt U-turn. As of May 2018, there were only 24 female CEOs in Fortune 500 companies, a 25-percent decrease since June 2017.

My research on publicly traded companies in China demonstrates that female representation in a company’s board of directors not only increases the chance of appointing a female CEO, but also makes a female CEO more likely to succeed.

Boards of directors have the dual responsibilities of working with and monitoring their CEO. Incumbent corporate directors are also potential candidates for the CEO position. Therefore, having women on boards can provide female candidates or attract other females for the CEO position.

Having other women on a board also helps female CEOs feel like they belong: CEOs who are the only woman on their board have lower firm performance and are more likely to leave office prematurely (i.e., within 18 months) than those with at least one other woman in the boardroom. 

Breaking into male-dominated boardrooms is not easy for women. Different women address the challenge in different ways. One female CEO, who succeeded the male founder in a well-known Chinese company said that she embraces her feminine leadership style.

While her male predecessor’s authoritative leadership style pushed away talents with strong egos, many of whom are men, her feminine style allows both men and women to prosper. In comparison, a female executive director of another Chinese company said, “I simply ignore my gender. Just roll up sleeves and do my job!”  

Gender parity in business will not happen without a conscious effort and some outside nudging. California’s regulatory requirement presents a much-needed external push. 

To be sure, mandatory quotas of women on corporate boards will only work if qualified female candidates are available. Otherwise, women would be appointed to corporate boards as tokens for the sake of compliance, which could reinforce stereotypes and make it even harder for intelligent and hardworking women to break the glass ceiling.

California has a large and well-educated workforce, however, and the supply of qualified female candidates should not be a concern. It is a good place to start with such a requirement, and other states can learn a great deal from its experiment. 

Yan Zhang, Ph.D., is the chaired professor of strategy at Jones Graduate School of Business at Rice University.