Board composition and company performance

In 2012, the NZX required listed firms to disclose the gender composition of their boards. No gender quotas were introduced, but the disclosure rule was expected to encourage changes in board composition.

Glenn Boyle takes up the topic with Michael Foley and Sanghyun Hong.

The Impact of the 2012 NZX Listing Rule Change on Board Composition and Company Performance

We examine the impact of the December 2012 NZX listing rule change that introduced compulsory disclosure about gender diversity on NZ boards. Most notably, the rate of growth in female-held directorships increased significantly after the introduction of the new rule, resulting in, by 2016, average female board representation being approximately double what it had been in 2012. However, we find no relationship between this response and company performance. Across six measures of operating and financial performance, firms that responded most strongly to the listing rule change fared, on average, no better or worse than those that stuck closer to the status quo.

That doesn't mean that tighter rules requiring specific board gender balance targets would be costless; it is always risky to extrapolate from changes like this voluntarily undertaken by firms that were able to do so to changes that would obtain under compulsion.

They conclude:

We have obtained two principal results in this paper. First, NZ companies significantly increased their rate of female director appointments following the 31 December 2012 listing rule change that required all NZX-listed firms to disclose more information about the level of gender diversity on their boards. Although we cannot totally rule out the possibility that this relationship is merely coincidental, it seems more likely to have been at least partly causal. Thus, despite its “gentle-nudge” nature, the new listing rule appears to have had a positive impact on the gender diversity of NZ boards.

Second, however, this positive impact did not translate into better firm performance. Although post-2012 NZ company performance was generally strong, inter-firm variation appears to have been independent of changes in gender diversity: on average, firms that responded most strongly to the listing rule change subsequently performed no better on average than firms that failed to respond at all. Perhaps even more strikingly, there is also no relationship between listing rule responsiveness and performance improvement following the listing rule change. Such a finding is consistent with the bulk of the literature on the relationship between company performance and female board  representation: as Klein (2017) has noted, meta-studies of this relationship conclude that there is essentially zero relationship between these two variables. Our work provides further support for this view, in a NZ context.

Our results are consistent with an efficient director appointment process in NZ. If, following the 2012 listing rule change, NZ firms had over-reacted by appointing unqualified female directors, then we would expect to see a relative deterioration in performance among the firms that responded most strongly to the rule change. Similarly, if prior to 2012 NZ firms had been under-utilising available female talent, then we would expect to see a relative improvement in performance among the firms that responded most strongly to the rule change. However, we observe neither such effect, suggesting that NZ firms applied, at least on average, meritocratic principles in appointing directors prior to 2012 and have continued to do so since.

This leads to one final implication of our results. Despite the meta-study evidence, NZ commentators (e.g., Meier, 2014; Parker, 2018) and politicians (Lambert, 2018) periodically call for the imposition of female quotas on boards. Our study suggests such claims should be treated with caution: if a voluntary increase in female directors (which is likely to consist of mainly well-qualified appointees) has no impact on firm performance, then a further enforced increase (regardless of ability and qualifications) could well have a negative impact.

Previously: Wishful Treasury Thinking

Relatedly: Reddell on that full-page ad in the Dom.