Democrats in California work hard to punish businesses and sometimes they succeed without trying. Consider a 2018 law that imposes gender quotas for boards of public companies based in the state, which a new study finds effectively destroyed $60 billion in wealth over night.
Last September the state enacted a law requiring all public companies headquartered in California to have at least one female director by the end of 2019 and two by the end of 2021. Democrats claimed that increasing board diversity would benefit corporations. Investors supposedly needed politicians to tell them what was in their best financial interest.
Economists at Clemson University tested this hypothesis by examining the effects of the law on public companies in California and how their shareholders reacted vis-a-vis those of companies in other states. About 28% of the 602 public firms headquartered in California needed to add a woman by the end of this year and 88% over the next two years. In total, the law required more than 1,000 additional female directors by 2021.
Firms could comply with the mandate by replacing a male director with a woman, though doing so could erode board expertise and experience. Hence, the researchers found, most firms have instead expanded their boards by adding a woman. They estimate that the median firm needing to add two female directors by 2021 will have to spend an additional $345,636 on salaries and travel.
This cost is trivial for large corporations, but the cost makes up 0.76% of the market capitalization and 13.2% of sales for the smallest 10% of firms. Younger companies are also disproportionately affected by the mandate, as are those in industries with fewer potential female candidates like engineering. For many firms, the financial penalties for noncompliance could outweigh the costs of compliance.
The economists say this explains why they found that stock market returns of affected firms declined on average 1.2% relative to other companies the day after
former Gov. Jerry Brown
signed the law, resulting in a wealth loss of over $60 billion. The strong negative market reaction to the law does “not imply that the presence of female directors destroys firm value,” the economists note. But it does show that politicians mandating board diversity has economic costs.
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