The dearth of female leaders in corporate America is well established. For example, at the end of 2020, fewer than eight percent of companies in the S&P 500 were woman-led.
One way to address this gender imbalance would be to increase female representation on corporate boards. Not only are board members corporate leaders in their own right, but they also hire CEOs.
While countries such as Norway have used government mandates to force companies to include women on their boards, few such rules are on the books in the U.S. Nonetheless, American companies recently tripled the rate at which they added female directors.
Were U.S. firms unusually enlightened? Or were they responding to pressure from another source?
Kellogg finance professor David Matsa suspected the latter. In recent research, he and coauthors noticed that the conspicuous uptick in female directorships coincided with a cascade of gender-diversity influence campaigns mounted by a trio of powerful institutional investors: Vanguard, BlackRock, and State Street. Known as “the Big Three,” these firms manage over $15 trillion, accounting for three-quarters of indexed mutual fund assets. That means that these companies hold shares in almost every large firm in the U.S.—in fact, they’re the dominant shareholder in 88 percent of firms on the S&P 500.
Given this outsized influence, Matsa and his collaborators—Todd Gormley of Washington University in St. Louis, and Vishal Gupta, Sandra Mortal, and Lukai Yang of the University of Alabama—wanted to know if the Big Three really were moving the needle on boardroom-diversity efforts. And if they were, how did those efforts compare to government-enforced quotas in other countries?
The researchers found evidence that the Big Three were indeed driving boardroom gender diversity—and that these efforts led to women in more powerful board positions than those spurred by government quotas. Furthermore, by analyzing how firms responded to the Big Three’s demands, the researchers shed light on why companies may be slow to appoint female board members in the first place.
“The Big Three changed the conversation around gender in corporate boardrooms,” Matsa says. “When your largest shareholders create a ruckus, you listen. And in important ways, their advocacy can be more effective than legislative mandates.”
The Big Three’s Campaign
State Street led the Big Three’s charge for gender diversity with its March 2017 “Fearless Girl” campaign, named for an eponymous statue the company placed in front of the “Charging Bull” sculpture on Wall Street. By early 2018, Vanguard and BlackRock had launched similar campaigns.
Each member of the Big Three also backed up its campaign with a threat: it would vote against directors at any firms who failed to appoint more women to their boards. Directors on a corporate board are elected by the firm’s shareholders. And since Big Three investors tend to be a firm’s dominant shareholders, their voting threats are not idle.
“Being a director is a highly sought-after job: it’s prestigious and well compensated. Directors don’t want to lose it,” Matsa explains. “Even though these elections typically aren’t contested, it doesn’t look good to have a lot of votes against you.”
To determine whether companies were responding to the Big Three’s diversity demands in 2017 and 2018, the researchers gathered two types of information about companies in the investors’ portfolios. First, they measured how much of a stake each Big Three investor held in each of the firms, with the idea being that the bigger the stake, the bigger their campaign’s influence would likely be.
Second, the researchers gathered information about the composition of each firm’s board of directors—whether members were male or female, when they’d been hired, whether they’d previously served as board members at this or other firms, and which board committees they served on.
They then analyzed the data across two spans of time: three years before the Big Three’s gender-diversity campaigns (2014–16) and three years after (2017–2019). Together, this provided a before-and-after picture of how firms under the Big Three’s influence behaved.
“The firms with a larger share of their stock held by State Street, BlackRock, and Vanguard—to what extent did they change their boards of directors relative to other firms during this period?” Matsa says. “That’s the variation that we studied.”
More Stake, More Women—with More Power
The results were undeniable: the more of a firm’s stock the Big Three held, the more women directors appeared on that firm’s board after 2017.
Indeed, for every additional 8 percent owned by Vanguard, BlackRock, or State Street, the number of new female board members rose by 76 percent. Before 2017, only one in twelve firms added a woman to its board each year. By 2019, one in four did.
The Big Three’s campaigns each had a slightly different focus. For example, State Street targeted firms without any female directors. BlackRock, meanwhile, said it expected at least two women directors on every board. So the researchers were able to track whether firms responded differently depending on the relative ownership stake of each of the Big Three institutions.
Sure enough, the researchers found that companies with larger State Street ownership exhibited the largest increases in diversity among those firms with all-male boards. Similarly, firms held more by BlackRock—and with fewer than two female directors prior to 2018—made larger board-diversity changes compared with firms where Blackrock was less invested.
“The way a company changed their board corresponds to who holds large ownership stakes in them, and what those specific asset managers were pushing for,” Matsa says. “This finding gives us more confidence that these changes in the board-member composition are indeed a reaction to the pressure from these institutions.”
But to Matsa, the most interesting finding was the quality of the Big Three’s effect on board diversity.
He explains that previous research has shown that government quota systems—like California’s 2019 requirement that every public company have at least one woman on its board—can result in tokenism as boards “check the box” of adding female directors. But, the previous research shows, the companies often fail to put these women on committees where power is actually exercised.
“A lot of a board’s work is done in these committees,” Matsa explains. “For example, the audit committee oversees the company’s financial reporting and disclosure.”
The companies that responded to the Big Three’s diversity demands, however, did appoint more women to influential audit- and nominating-committee positions than firms complying with a mandatory quota did. This implies that institutional investors may be more effective than lawmakers at creating what Matsa calls a “ripple effect” in female corporate leadership.
“When women are involved in the nominating committee, it might begin a cycle of the boards being more open to female membership in the future, even when they aren’t subject to the shareholder campaign,” Matsa says.
Why Aren’t Boards Hiring Women Already?
For Matsa, these results beg a larger question: Why aren’t companies doing this on their own? “This paper is also about understanding what impediments keep firms from appointing more women, outside of these influence campaigns,” he says.
The most commonly cited reason for failing to recruit qualified female board members, Matsa says, is that there simply aren’t enough of them. But that reasoning depends on certain biases.
For one, board nominating committees often use previous CEO experience as a proxy for “qualified”—even though, in practice, boards often include other senior business leaders and nonexecutive experts like lawyers, bankers, scientists, or academics. Since most CEOs are still men, this bias curtails the number of female board candidates. Moreover, nominating committees often rely on personal connections to filter potential candidates—so when those committees are male-dominated, their networks tend to be, too.
To satisfy the Big Three’s diversity demands, Matsa found that firms simply did the obvious: they didn’t prioritize previous CEO experience, and they ventured beyond their personal networks.
But did this result in a flood of unqualified female board members? Hardly. The Big Three believed that there were plenty of qualified women out there ready to serve on boards, if only existing board members broadened their searches. And, indeed, the women who were nominated were “overwhelmingly” voted for by shareholders, Matsa says—and not just by the Big Three, who may have had a motive to see their diversity campaigns succeed.
“That fact is not consistent with there being widespread opposition to adding these women,” he explains. In other words, it’s often the old boys’ network—not a lack of real qualification—that’s keeping women out of boardrooms.
To Matsa, these findings are less about assigning blame than about illuminating what works.
“My sense is that few board members believe that they were selecting a man because he was a man,” Matsa says. “They would think of it as looking for someone experienced, who they can trust. It’s difficult to move outside of that frame. It takes someone influential, like your largest shareholder, to tell you that you should approach this differently.”
Previously published in Kellogg Insight. Reprinted with permission of the Kellogg School of Management.