August 14, 2008
Board Diversity Norwegian Style
Posted by Lisa Fairfax

I have finally gotten around to reviewing a report on the impact of Norway's law requiring gender diversity on corporate boards, which law Daniel Sokol posted several months ago.  The report indicates that despite significant criticism of the law, it may be having a positive impact on boards. 

Interestingly, even though people characterize the law as requiring a 40% “quota” of women on public company boards, the law itself is actually gender neutral. 

Hence, the pertinent part of the law states:

  • If the board of directors has two or three members, both genders shall be represented.
  • If the board of directors has four or five members, each gender shall be represented with at least two members.
  • If the board of directors has six to eight members, each gender shall be represented with at least three members.
  • If the board of directors has nine members, each gender shall be represented with at least four members, and if the board of directors has more than nine members, each gender shall be represented with at least 40 per cent of the board of directors.

To be sure, because Norway's public boards were dominated by men when the law was enacted, the real impact of the law was to require such companies to recruit significant numbers of women to their board.  And the notion of a 40% quota stems from the final aspect of the rule, requiring at least 40% representation of both genders.  A company that breaches the rule faces sanctions, including potential dissolution—though there is considerable about the propriety of a dissolution sanction in this context. 

Apparently, however, the issue of sanctions is not a tremendous worry at this time since apparently all public companies have now complied with the gender equity rule.  Such compliance is an achievement in and of itself.  Indeed, when the law was first enacted in 2003, only about 7% of Norway's boards were women.  Now that number has jumped to 36%, which is remarkable given the relatively slow rate of increase in prior years.

While clearly acknowledging that it is too early to really ascertain the impact of the rule, the report nevertheless suggested that the rule had proved beneficial.  The report noted that the rule not only has caused companies to broaden their search for directors to include women “instead of restricting the search to only half of the population,” but also has led to more women having top management positions because the rule has increased the number of visible “competent businesswomen.”  The report states that anecdotally, even those initially critical of the rule observe that its effect has been to “bring the best women in, forcing some of the less competent men out, and thereby giving companies better boards. . .” 

To be sure, some have expressed concern that the rule will dissuade foreigners from investing in Norway companies while discouraging companies from going public in Norway.  The report does not reference any studies of this issue.

Again, it is certainly too early to tell what kind of impact such a law will have.  Interestingly, the report does not mention how or whether companies had to overcome the “pool” problem.  Indeed in the US, putting aside the merits of board diversity, many people argue that, to the extent there is a lack of board diversity, it is primarily due to the lack of significant numbers of qualified diverse people in the pool of potential director candidates.   So one wonders how Norway managed to overcome this problem.  Of course the short answer could be in the numbers.  According to the report, at the end of 2007, Norway had 483 registered public companies, so perhaps locating qualified directors did not pose significant problems.  However, the Economist suggest that Norway has overcome this problem by relying on the same few women.  Hence, it notes that some women hold 25-35 directorships each.  In light of the view that holding multiple directorships undermines the ability to be effectiveness, this figure is problematic.  In fact, it may undermine the ability to truly assess the rule’s impact as well as the ability for women directors to perform effectively.  The Economist notes that the rule required Norwegian boards to recruit some 1,000 women in four years, apparently displacing male directors.  One also has to wonder whether and to what extent there will be any backlash/resentment as a result of the rule’s implementation, and if so, how it will impact board conduct going forward. 

And this conduct question is really pivotal.  Indeed, the report points out that the purpose of the rule was not simply (or even as a first matter) to ensure better board representation of both genders, but to improve the performance and competitiveness of the corporation and its board.  Of course, there is considerable debate about the extent to which board diversity can achieve these goals.  But analysis of the rule’s impact could have important repercussions for this debate.  Indeed, the rule not only ensures wide-spread diversity, but also ensures a critical mass of board diversity, which many claims is important to harnessing the benefits of diversity.  As a result, even though it is in a very different context than the US, the rule may provide some rich data from which we will be able to assess the merits of board diversity claims.

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