Summary

This paper investigates the impact of California’s gender quota law on corporate strategy and the representation of women in managerial positions. Our findings suggest that affected firms adopt a long-term strategic orientation, demonstrated by increased investments in research and development, organizational capital, and intangible assets, as well as improvements in corporate environmental performance and culture. These investments are financed through internal resources, avoiding an increase in corporate indebtedness. Beyond the direct effect on board representation, the law also enhances female representation in other managerial positions and produces spillover effects, increasing female leadership in establishments across other states through firms’ internal networks. Our findings highlight both the social and economic benefits of this law, which have been underexplored in previous literature.

Introduction

Significant progress has been made toward gender equality across developed economies, yet women remain underrepresented in upper management roles. In the United States, although women account for 51% of the population and 47% of the labor force as of 2021, they occupy only around 29% of C-suite positions in public corporations. It is estimated that achieving full gender parity across corporate leadership in the U.S. could take nearly 50 years (McKinsey & Company and LeanIn, 2024). This gender disparity has led policymakers around the world to adopt measures aimed at increasing female representation in corporate leadership.

In September 2018, California became the first U.S. state to introduce a binding gender quota for corporate boards, intending to dismantle systemic barriers, including discrimination and gender stereotypes, that prevent women from ascending to top managerial positions (Compton et al., 2019). Research indicates that women may contribute unique functional and ethical skills often lacking in male-dominated boards (McCabe et al., 2006; Kim and Starks, 2016; Adams and Funk, 2012; Ho et al., 2015), and their presence could support other women in attaining higher leadership roles (Wang and Kelan, 2013). Thus, mandating female board representation has the potential to enhance both gender equality and corporate performance.

Despite the growing body of evidence linking board gender diversity to improved corporate outcomes, critics argue that gender quotas may lead to the promotion of less-qualified individuals, potentially harming firm performance. Empirical research on the effects of gender quotas in other countries has produced mixed results (e.g., Bertrand et al., 2019; Ahern and Dittmar, 2012; Matsa and Miller, 2013; Ferrari et al., 2021).

This paper examines the effects of California Senate Bill No. 826 on the representation of women in corporate leadership and its broader impact on corporate strategy. While most studies to date have focused on Norway’s 2003 gender quota, the U.S. offers a novel and diverse setting for examining these policies. Despite being the world’s largest economy, the U.S. lags behind countries like Norway in terms of gender equality in corporate leadership (Schwab et al., 2017). Most prior research on California’s law has centered on short-term financial impacts, often overlooking its long-term implications on corporate strategy and broader societal effects. This study seeks to address these gaps by exploring the law’s longer-term effects on firm strategy, corporate culture, and social outcomes.

Effects on Female Representation and Board Characteristics

To evaluate the impact of California Senate Bill No. 826, we analyzed the proportion of women on boards of firms headquartered in California, compared with those based in other states. The data reveal a significant increase in female representation after 2017, with women holding over 30% of board positions by 2021, up from 15% in 2017. This substantial rise indicates that the law successfully increased female representation without being driven by unrelated state trends.

In addition, our dynamic model estimates confirm this effect, showing a yearly increase of 0.5 percentage points in the share of women on boards following the law’s implementation. We also find that the gender quota was fulfilled through both hiring more women and slightly increasing board size, while the number of male board members decreased, suggesting a partial substitution effect. Importantly, there was no significant impact on the overall qualifications of board members, as female managers exhibited similar educational levels to their male counterparts. These findings reinforce the view that gender quotas can enhance diversity without compromising corporate governance quality.

Corporate Investments and Gender Quotas

The gender quota law significantly affected corporate investment decisions, which are key determinants of long-term corporate success (Pakes, 1985; Kogan et al., 2017). Prior research highlights that an excessive focus on short-term profits can limit firms’ willingness to undertake long-term projects (Graham et al., 2005). However, female managers are generally more oriented toward long-term strategies, and diverse teams are associated with greater creativity and innovation (Østergaard et al., 2011; Griffin et al., 2021).

Our analysis examines four key investment variables: research and development (R&D), capital expenditures (CapEx), investment in intangible assets, and organizational capital (SG&A). The results show that adding one additional female board member increases R&D by 13.07%, CapEx by 2.38%, intangible asset investments by 2.84%, and SG&A by 5.85%. These increases underscore the economic significance of gender diversity in fostering growth-oriented, long-term investment strategies.

Environmental Performance

The presence of female directors is also linked to improvements in corporate environmental performance. Previous studies suggest that female board members tend to hold more benevolent and universalist values, which positively influence corporate social responsibility and environmental transparency (Adams and Funk, 2012; Marquis and Lee, 2013). Consistent with this, we find that adding one female board member increases a firm’s environmental performance by 4.74% and reduces environmental damage by 7.41%. These findings indicate that gender diversity on boards not only enhances firm performance but also contributes to broader societal benefits by improving environmental practices.

Corporate Risk and Short-Term Performance

Consistent with the literature that shows female managers tend to be more risk-averse (Barber and Odean, 2001; Croson and Gneezy, 2009), we find that an additional female board member reduces cash holdings by 2.16%, though we observe no significant effect on corporate leverage. This suggests that firms finance long-term investments through internal resources without increasing financial risk.

In terms of short-term performance, gender quotas appear to have a negative effect on return on assets (RoA), which decreases by 9.49%. This aligns with existing studies showing that firms pursuing long-term strategies often experience a temporary decline in profitability (Hwang et al., 2018). However, these short-term losses are likely offset by the long-term benefits of sustainable strategies.

Long-Term and Short-Term Orientation

To explore shifts in corporate strategy, we analyzed the frequency of long-term and short-term keywords in MD&A sections of firms’ 10-K filings. Our results indicate that gender quotas lead to a reduction in short-term orientation by 1.2 basis points and an increase in the difference between long-term and short-term orientation by 1 basis point. These changes suggest that firms with more female board members are increasingly adopting long-term strategies, prioritizing sustainable growth over short-term financial gains.

Corporate Culture and Leadership

Gender quotas have a substantial positive effect on corporate culture, an important driver of firm performance (Graham et al., 2022). Our findings reveal that adding one female board member improves teamwork, innovation, and quality by 6.5, 7, and 7 basis points, respectively. Notably, the probability of a firm ranking in the top quartile for strong corporate culture increases with the presence of female board members, highlighting the broader cultural benefits of gender diversity.

Spillover Effects on Broader Corporate Governance

A key contribution of this study is the identification of a spillover effect of the gender quota law on broader managerial structures beyond the boardroom. Using establishment-level data, we find that the presence of women on corporate boards is associated with an increased number of female officers within firms. Specifically, we observe a 2.7 basis point increase in female officers, compared with a 1.5 basis point increase in male officers, suggesting that gender diversity at the board level fosters greater representation of women across senior management roles.

Additionally, this effect extends beyond California. Our analysis shows that firms headquartered in other states but with exposure to California-headquartered establishments also experience an increase in female officers. This suggests that the internal networks of California-based firms influence gender diversity in establishments across state lines, promoting female representation in managerial roles at a national level.

Conclusion

The implementation of California Senate Bill No. 826 offers critical insights into the potential benefits and challenges of gender quotas. While previous research on gender quotas has yielded mixed results, our analysis provides a more comprehensive understanding of the law’s broader implications. We contribute to the literature by demonstrating that gender quotas not only enhance female representation in corporate leadership but also foster long-term corporate strategies, improve environmental performance, and strengthen corporate culture.

Our findings indicate that while short-term declines in corporate performance may occur following the introduction of gender quotas, these losses can be attributed to a shift toward sustainable, long-term strategies. Moreover, we provide new evidence of the spillover effects of gender quotas, as firms with exposure to California-headquartered establishments see increased female representation in senior management roles across various states.

Overall, this paper advances the understanding of gender quotas by moving beyond a focus on short-term financial performance and highlighting the long-term corporate strategies and broader societal benefits of gender-diverse leadership. These insights are essential for shaping future policy decisions and promoting more equitable and effective corporate governance.