How Do Board Diversity Mandates Affect Firm Value?

In 2018 and 2020, California adopted laws requiring corporations headquartered in the state to diversify their Boards of Directors. Specifically, the laws required that Boards include female representation and a minimum number of people from under-represented racial, ethnic or sexual orientation background.

These laws did not survive long. They were successfully challenged in state and federal court. But the laws may have been on the books long enough to get some sense of their effects on firm value.

A new study by Jonathan Klick, “Market Response to Court Rejection of California’s Board Diversity Laws,” just published in the Journal of Empirical Studies, looks at the effect of the invalidation of the Board diversity laws on firm valuation. Here is the abstract:

California mandated that firms headquartered in the state include women (SB 826) and underrepresented minorities (AB 979) on their corporate boards. These laws, passed in 2018 and 2020 respectively, were held to violate the state’s constitution by judges on the Los Angeles County Superior Court in 2022. This paper examines the market reaction to these surprising court decisions, finding that California firms appreciated significantly on the days of the rulings, and there is evidence that firms that were not in compliance with the laws exhibited larger abnormal returns than firms that were in compliance.

And here is a summary of some of the study’s conclusions:

Those who advocate for more diversity on corporate boards generally claim that more diverse boards improve firm performance, and they claim that identifying, attracting, and retaining female and minority board members will not generate large costs. Supporters of diversity mandates, such as those adopted in California, at least implicitly suggest that firms are unwilling to exploit this diversity premium without legal intervention. The market reaction to the invalidation of California’s board diversity mandates suggests otherwise.

When California judges found AB 979 and SB 826 to be in conflict with the equal protection clause of the state’s constitution, firms headquartered in California appreciated in value, with non-compliant firms gaining more than compliant firms. Because the court decisions arguably had no repercussions for other changes in corporate law and regulation in the state, which cannot be said with as much confidence for the original adoption of these mandates, these results improve confidence in the conclusion that board diversity mandates do not improve firm value and, perhaps, they even lead investors to lower their valuations.

Whatever the other merits of Board diversity mandates, from this study they do not appear to enhance firm value.

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