Are Board Gender Quotas a Good Idea?

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In April 2024, the head of the Buenos Aires Office of Corporations, newly appointed by President Milei, revoked a resolution imposing gender quotas on selected corporations. The resolution had been issued in August 2020, when a severe lockdown was being imposed on Argentina’s already disastrous economy. It had been received with bewilderment from the private sector, and with jubilation from feminist activists. 

In the following years, the resolution had been deemed unconstitutional by Argentina’s commercial courts and struck down, a promising development in a country where courts have hitherto been happy to affirm the government’s tendency to over-regulate. On this occasion, however, the court held that the imposition of affirmative-action measures by the Office of Corporations trespassed on matters reserved for Congress. But what if Congress—which is itself subject to gender quotas—decided to take this matter into its own hands? Would that be a good idea?

Norway was the first country to introduce gender quotas for public-company boards in 2004, which encouraged other European countries to follow suit, including France (forty percent), Germany (thirty percent), Italy and Belgium (both 33 percent). In November 2022, the European Union approved the so-called “Women on Boards” Directive, pursuant to which, by July 2026, all large publicly listed companies in the EU will have to comply with a target of forty percent of non-executive director posts, or 33 percent of all director posts. If companies are unable to satisfy these quotas in time, they will have to report the reasons and disclose the measures they are taking to address the shortfall. Fines and other penalties (including the annulment of a contested director’s appointment) will be imposed on companies that are not in compliance with selection and reporting requirements.

In December 2023, because the process was “going too slowly,” Norway decided to extend gender quotas to private limited-liability companies with boards of three or more members that have either annual operating and financial revenues of at least NOK50 million (approximately US$4.5 million) or more than thirty employees. Companies that do not comply with this rule can be compulsorily dissolved. Oddly, the law’s neutral language means that a company with a majority of female shareholders and a three-member board, will be obliged to appoint a male director or risk dissolution.

As usual, the US approach to this matter has been less intrusive. A similar quota law passed by California’s legislature in 2018 was struck down in 2022 because it violated the Equal Protection Clause of the state’s constitution. The most relevant measures used to promote female directors in the US are not quotas, but soft regulations approved by non-governmental entities like NASDAQ and the New York Stock Exchange. NASDAQ approached the issue by adopting a “comply or explain” measure: listed companies must annually report that they satisfy diversity objectives or explain why they have failed to do so. In 2019, the NYSE established a Board Advisory Council, which increases the opportunity of female candidates by offering training programs and recommending diverse hires to listed companies, taking advantage of the personal networks of its now 25 CEO members.

Last September, the IZA Institute of Labor Economics published a meta-analysis of 51 studies examining the effects of board gender quotas implemented in eleven countries. It concluded that mandatory quota policies do increase board diversity (which was hardly a surprise) and benefit board quality, but that they do not necessarily help reduce gender disparities more broadly (the share of female CEOs, women in high-earnings positions, the share of female part-time workers, wage gaps, and so on). The meta-analysis also found that quotas have a negative effect on stock-market responses and a positive effect on firm performance measures.

This last finding was odd, given that positive firm performance tends to produce favourable responses from the stock market. But this might be explained by the inclusion of social-responsibility scores in the definition of “firm performance,” which are likely to be positively affected by the increase of board gender diversity. In addition, the authors note that most of the studies reviewed by the meta-analysis were authored or co-authored by women, and that “studies authored exclusively by males produce more negative results” (which may cast doubt on the whole idea of unbiased scientific gender quota studies).

Gender quotas on boards of directors present an additional problem to that of quotas in general. When a university establishes a system of quotas in its admissions policies, the aggrieved parties are those candidates disadvantaged by affirmative discrimination. Mandatory gender quotas imposed upon boards of directors, on the other hand, do not simply disadvantage qualified male candidates, they are also imposed on owners of private enterprises by the government, thereby impairing their freedom to contract and conduct business as they see fit. 

The constitutional issues involved in this debate vary from country to country, but impairing business freedom causes direct and indirect undesirable effects everywhere. Direct effects may result if suboptimal candidates are elected, thereby driving down the corporation’s value. Indirect effects may be caused by the expectation of suboptimal candidates, thereby driving down stock prices (because investors take their money elsewhere) or driving corporations away from capital markets or countries where gender quotas are imposed. In Norway, after it was announced that gender quotas would be imposed upon public companies, firms reorganised themselves as private companies or incorporated abroad.

Directors are shareholders’ agents. In the interests of fairness and efficiency, shareholders should therefore be free to elect directors based on competence and trust without government interference. A distinction can be made, however, between private and public corporations. In public corporations, it may be in the best interests of shareholders that the government impose certain requirements on the election of directors to prevent fraud. That is what happened in the US following the Enron and WorldCom corporate and accounting scandals, when the Sarbanes-Oxley Act of 2002 required that all US public companies elect an audit committee of independent directors, including a financial expert. This limitation on the rights of shareholders to elect their corporation’s directors, however, was not proposed for the sake of equality, a “general” public good, but to enhance market transparency and specifically protect shareholders, who face a collective-action problem when monitoring managers.

Advocates of mandatory gender quotas contend that there are plenty of women qualified for top jobs who are thwarted by an invisible barrier of entrenched selection patterns favouring male candidates. Material change, they argue, has only materialised in countries that establish quotas. In addition, advocates maintain that gender quotas help ensure a diversity of perspectives that is beneficial to board performance (and, consequently, to firm performance).

Critics, on the other hand, argue that mandatory quotas produce only cosmetic changes and do not meaningfully advance participation in executive and senior management roles (a criticism consistent with the results obtained by the IZA meta-analysis). Furthermore, quotas increase the risk of electing suboptimal candidates, especially in industries where a small pool of experienced female senior managers reduces the number of optimal candidates. This may, in turn, harm the reputation of female directors in general and provoke an unintended backlash. Alternatively, a limited number of well-connected women may end up sitting on multiple boards. This is what happened in Norway, where a female lawyer ended up sitting on ninety boards at once. 

The European Commission has said that the percentage of women on the boards of the largest listed companies in European countries has increased on average from 11.8 percent in 2010 to an all-time high of 32.2 percent in 2022 (38.3 percent in countries with national binding quotas, 31.4 percent in those with soft measures, and just 17.5 percent in those that have taken no action at all). But the EC insists that such an increase is not sufficient when “60% of [European] university graduates are female.” In order to accelerate progress, the Commission argues that new mandatory rules are necessary.

Is this fixation on the “correct proportion” of female board-members—and the urgency required to achieve it—justified by the benefits of quotas? Or is this just evidence of a relentless and ever-expanding bureaucracy dedicated to finding fault with everything in order to regulate it, instead of contributing to the creation of value through innovation? If diversity is indeed beneficial to a firm’s performance, why can’t we wait for the market to acknowledge and reap those rewards, as it has been doing in recent years?

Some commentators have argued that the beneficial effects of mandatory quotas on firm performance cannot be proven yet because they are long-term. But what can better assess long-term benefits than the market? Certainly not politicians. At least one politician seems to have realised that there is such a thing as “too much regulation.” On 2 October, President Macron warned the audience during a panel discussion at the Berlin Global Dialogue: “The EU could die, we are on the verge of a very important moment. … Our former model is over. We are over-regulating and underinvesting. In the next two or three years, if we follow our classical agenda, we will be out of the market.”

Over the past century, the position of women has significantly improved in the West, a development that resulted from an emphasis on freedom and the principle of universality. In authoritarian countries, the excess of government power seldom benefits women. Female advancement in the West has occurred organically, through sheer will and hard work, the use of persuasion to effect cultural change, mentoring, cooperation, and the enactment of laws against arbitrary discrimination, sexual harassment, and sexual abuse. There is still a lot to be done, especially when it comes to the most visible barrier of all, which prevents many young women from climbing the corporate ladder and increasing the number of experienced managers from which good female board candidates can be elected: a lack of accommodation for working mothers. 

As I browsed the exhausting number of pieces advocating board gender quotas, I found myself puzzled by the internal inconsistencies. The whole idea of overthrowing the “invisible barrier” is based on our belief that women can be as competent, rational, and risk-ready as men. But the literature is full of references to specifically “female contributions,” such as creativity, emotional intelligence, empathy, good listening, and compassion. Women are also apparently better at understanding consumer preferences, collaborating with others, fostering cohesiveness, and corporate social responsibility, and they are more sensitive to different perspectives. One study even found that “in the presence of women directors in meetings, men become more civilized, change their language, and even moderate their masculinity,” as if boards needed women to play the role of a 1950s housewife...

Quota advocates express a desire for women to be accepted as part of the “old boys club,” but also maintain that women are tougher in monitoring management, probably because they are outsiders. Additionally, female members allegedly improve board governance because they need superior leadership skills, social intelligence, and technical intelligence to crack the glass ceiling. But won’t this virtuous circle be destroyed by the artificial imposition of gender quotas? And how will young women feel empowered—and their male counterparts respectful of their achievements—in an environment in which no matter how much they succeed, they will be occupying seats reserved for them by the government on account of their gender?

As usual, there are no simple solutions to complex problems. The more we try to limit freedom in the interests of desirable social change, the less effective we will be in the long run, and the greater the number of additional problems we create. Once we agree to quotas in principle, how can we resist similar demands that further impair the free market from other groups under-represented on boards because of class, race, disabilities, and so on? If the goal is to help women advance in the business world, government measures should be directed towards trying to understand and remove the concrete obstacles we face at the beginning of our careers—the lack of adequate maternity accommodations, sexual harassment, arbitrary discrimination—so that we can succeed on our own merits, whether we are climbing the corporate ladder or building our own companies. We are more than capable of doing so.