Dive Brief:

• Firms that have gender-diverse boards experience market penalties, according to an October study published in Organization Science. Firms that showed a preference for diversity experienced this effect most strongly.
• Specifically, firms that boosted the amount of female executives on their boards suffered a decrease in market value, said the study, which was based on board composition and financial data from 1,644 public companies in the U.S. between 1998 and 2011. Companies that had been vocal about their commitment to diversity and inclusion experienced an even greater value decline when they upped the board representation of women.
• "Our findings reveal that the level of female representation on a firm's board may send a negative signal to the market regarding a firm's commitment to shareholder value maximization if it is perceived as being motivated by a desire for diversity," the study said.

Dive Insight:

One explanation behind this finding is rooted in the possibility that investors believe women lack the competence to make good business decisions, but the authors of the study called this explanation "unlikely" in a Harvard Business Review article. A far more probable explanation was investors' negative reaction "to what they perceive to be a change in firm preferences," the authors wrote. An increase in board diversity may be perceived by investors as a firm's motivation to pursue "diversity for diversity's sake," as the authors put it in their study, at the expense of other goals.

This doesn't mean companies should stop attempting to bring more women to the top of their organizations, the authors pointed out. The results may prompt organizations to examine how they define and pursue diversity: "our research suggests that shifting the diversity discourse away from gender to other dimensions of expertise and experience might, in fact, help women and other underrepresented groups," the authors said in their HBR article. When a board appoints a woman, for example, it may elect to broadcast why she was the best candidate, rather than the fact that it chose a woman.

The survey's findings are particularly interesting in light of recent legislation in California. The state passed a law last year requiring all publicly held companies operating in the state to have at least one women director on their board by the end of the year. The mandate was met with warnings from researchers, including one woman.

The law has met some criticism since its passage; a lawsuit filed earlier this month alleged that the law is "deeply patronizing to women" in addition to being "plainly unconstitutional." The man who filed the lawsuit — a shareholder of a publicly traded Delaware company with California headquarters — said that "[t]he Woman Quota injures Plaintiff's right to vote for the candidate of his choice, free from the threat that the corporation will be fined if he votes without regard to sex."

Regardless of this criticism, the law seeks to speed up the diversification of boards, which have been overwhelmingly male and white, historically. "Given all the special privileges that corporations have enjoyed for so long, it's high time corporate boards include the people who constitute more than half the 'persons' in America," former California Governor Jerry Brown wrote in a letter when he signed the law last summer.