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Abstract

Since 2008, nine countries have enacted laws that require publicly traded firms to meet certain levels of gender balance in their boardrooms by requiring a minimum number of female directors (“female director quotas”). In September 2018, California became the first U.S. state to do the same. Interestingly, the stated purpose of any female director quota is neither a social case nor a moral case, but a business case: to increase shareholder value by increasing boardroom heterogeneity. Accordingly, it is of increasing importance that we generally understand the relationship between boardroom heterogeneity and firm performance, and, particularly, whether gender is an appropriate proxy for the type of heterogeneity that benefits firm performance.

This Article reviews evidence from behavioral sciences on the relative performances of homogeneous and heterogeneous work groups in tasks analogous to the two main board functions—monitoring and managing—and contends heterogeneous boards make better decisions than homogeneous boards, due to “diversity of perspectives,” which increases the knowledge and skills that a board needs to effectively monitor and manage.

This Article then applies that framework to determine if a female director quota increases a board’s diversity of perspectives. Unfortunately, the findings show that a board’s compliance with a female director quota does not always increase its diversity of perspectives—meaning that, all things considered, a company’s cost of compliance may outweigh the quota’s benefit.

This Article concludes by proposing an alternative for regulating boardroom heterogeneity: a “diversity index.” The diversity index is comprised of six areas of heterogeneity that positively impact board decision-making, including gender, and sets a minimum aggregate heterogeneity score that a board must meet across those categories. This Article explains why each category is an appropriate proxy for diversity of perspectives, why this specific combination of categories produces an optimal level of diversity of perspectives on a board (unlike a solely gender-based quota), and the potential costs of instituting such a measure (such as whether it is administrable, given that directors are elected by shareholders).