An increase from one to two female members on a board reduces that firm's profits by 12.3 per cent, a study has claimed.

Researchers from Norway, Germany and the US examined the impact of the increased number of female executives on company performance in Norway.

A law was brought in for publicly listed companies to have 40 per cent women on boards in 2003.

Using post 2003 data, they found that increasing the number of women meant that they took 'fewer risks', which they say could attribute to the fall in profits.

Norwegian firms after this point scored lower in terms of accounting-based performance and were characterised by fewer risks.

But, they said, the lower risk might positively affect firms' long-term success and survival.

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An increase from one to two female members on a board reduces that firm's profits by 12.3 per cent, a study has claimed. Researchers from Norway, Germany and the US examined the impact of the increased number of female executives on company performance in Norway

WHAT WERE THE MAIN FINDINGS OF THE RESEARCH? The findings revealed that the use of a quota in the law brought in in Norway was successful in significantly increasing female representation on executive boards. Increasing the number of women company directors leads to an average 12.3 per cent drop in profits. They found that increasing the number of women meant that they took 'fewer risks', which they say could attribute to the fall in profits. But, they said, the lower risk might positively affect firms' long-term success and survival. After implementation of the quota which was passed in 2003, the directors’ average education level rose. Advertisement

The research, published in the Leadership Quarterly, analysed information from databases on company leaders and financial statements.

The findings revealed that the use of a quota is successful in significantly increasing female representation on executive boards.

After implementation of the quota, directors’ average education level rose.

'We observe a negative association between female board representation and board directors' age and experience, but a positive association with directors' education,' they wrote.

They used a 'difference-in-differences' approach to study the effects of women directors on firm performance in Norway.

They used firms from Finland, Sweden, and Denmark as control groups, which have no laws requiring female directors.

They used publicly available data such as average tenure, average age, nationality mix, and average amount of educational above-bachelor degrees.

Difference-in-differences estimates apply in natural experimental settings in which one policy reform, such as the board quota, affects a treated group but not a comparable control group.

They analysed the differences between the treatment and control groups before the quota was introduced and after.

Their result suggested that the cause of effect of the quota had an affect on firm performance.

A law was brought in for publicly listed companies to have 40 per cent women on boards in 2003. Using post 2003 data, they found that increasing the number of women meant that they took 'fewer risks', which they say could attribute to the fall in profits

They suggest that this is because the increase in female director and their aversion to risk could be a factor in profit loss.

'The coefficients are also significant in economic terms. An increase from one to two female board members on a board with four directors reduces that firm's operating income to assets by 12 per cent,' the authors, led by Philip Yang, wrote.

'Our results imply a negative effect of the reform on firm risk.

'Further, we find the quota significantly adversely affects the performance of treated firms and firm risk is significantly reduced.

With regard to firm performance they found 'clear evidence' that firm performance was affected.

Post 2003, they found a 'significant' negative effect on profits, as measured by both return on assets and operating income divided by assets.