University of Copenhagen: Companies recruit more female board members through family ties

Back in 2012, Denmark introduced a new legislation pushing larger Danish firms to aim at a 40 percent target for the ‘underrepresented gender’ on their boards of directors (see box below). The law created a sudden demand for more female board directors, and the recruitment of women to boards almost doubled after the reform.

But did the legislation also improve the diversity of boards and, ultimately, their decision making as intended by legislators?

If you look at potential female candidates that are all highly qualified, the women with family connections have become much more likely to make it to the boardroom.

Esther Chevrot-Bianco, PhD
of Economics at UCPH mapping female board directors and their family connections in the corporate business sector.

The study questions the real effects by concluding that the law – rather than supporting broader diversity based on merit and smoothing the access to the boardroom for all qualified women – has paved the way for family-related appointments.

“The recruitment of women through family networks increased significantly after the implementation of the quota,” says PhD Esther Chevrot-Bianco, who has conducted the study.

“Moreover, if you look at potential female candidates that are all highly qualified, the women with family connections have become much more likely to make it to the boardroom, while the situation has not changed for the others.”

In the study, she finds that the share of female board members with family connections to incumbent directors and CEOs of larger companies increased right after 2011 ending years with a declining trend (figure 1).

Figure 1: Share of connected women among female board appointments

Andel kvinder med familieforbindelser udnævnt til bestyrelser i årene omkring introduktionen af de ’bløde’ kønskvoter i 2012-2013.
The figure shows the share of women with family connections appointed to boardroom in the years surrounding the introduction of a soft gender quota in 2012-2013.
Ultimately, family connected women have become more than double so likely to make it to a boardroom compared to highly qualified women without family ties (se figure 2).

Figure 2: Probability of board appointment (connected and unconnected women)

Større chance for kvinder med familienetværk
The probability of board appointments among all potential female candidates (13,828 women in the sample). For the individual, the annual probability is small, but still significantly higher among connected women.
The differences between connected and unconnected women are also reflected in the overall-composition of the boards. Already before the reform, a third of the female board directors had family connections to board directors or CEOs prior to their appointment. In comparison, this was only the case among 10 percent of male board directors. The reform has reinforced this difference.

The legal requirements in Denmark
Since 1 April 2013, the largest Danish companies in terms of turnover, balance sheet and/or employees have been subject to a number of legal requirements (in Danish) to ensure a more equal gender-balance in boards. An equal gender-balance is defined as 40/60.

However, Danish legislation only requires companies to set a target figure and draw up a policy for the gender composition of management that may take into account the specific conditions in the individual company and industry. In addition, companies must report annually on their target figures, policies, and achievements.

Failure to set a target figure or reporting can be sanctioned with a fine, while failure to meet the set target will not be sanctioned. Thus, companies in Denmark are not forced to comply with a centrally set gender quota, which has been introduced in e.g. Norway. In this sense, Denmark has applied a ‘soft’ gender quota.

Factors behind the trend
It is still uncertain whether women’s increased dependence on family connections is a short-lived trend or of more permanent nature. The data only covers the years around the legislation came in place, and further data – when available – will have to identify the development since 2017.

However, Chevrot-Bianco argues that recruitment of women through family connections is not a transient phenomenon.

“The big differences between women and men strongly indicate that women generally are much more dependent on family networks. This was the case before the introduction of the quota, and the new quota reinforced the pattern. The differences also point in the direction of many women lacking access to traditional business networks and relying on family networks to compensate.”

Esther Chevrot-Bianco is still looking into the specific dynamics steering the current recruitment processes of companies, and an on-going survey involving CEOs and other company managers will shed further light on the barriers as seen from the companies’ perspective.

“The case could be that it is costly for companies to recruit women, so in the short term, firms have used their immediate networks to minimise the costs by appointing whomever they can. In the long run, some firms could decide to make more costly investments and use a broader range of ways to employ qualified women,” she says.

Need for broader recruitment
Here and now, Esther Chevrot-Bianco argues that her results are calling for a discussion on how to ensure broader recruitment among women. Recruitment through family ties and other close social networks not only ignores female candidates who are better qualified to gain access to the board level, the overall competence of the boards may also be negatively affected.

About the study
The study titled ‘It only takes a strong tie: Board gender quotas and network-based hiring’ is conducted by Esther Chevrot-Bianco in connection to her PhD thesis at the Department of Economics, UCPH.

The study combines matched firm-management datasets and administrative registers in order to retrieve family ties of directors at sample firms between 2007 and 2017.

The sample of firms threated in the study includes 1,006 Danish firms with at least 100 employees.
The sample of potential female candidates for board positions includes 13,828 women.
The study observes 240 appointments at the firms covered by the law, representing 60% of all female appointments in these firms during the sample period.

The study was carried out under the auspices of the research group FAMBUSS (The Impact of Family Assets on Corporate Structures and Outcomes) supported by the Danish National Research Foundation.

”This is a risk, the study shows. If we compare the qualifications of connected and non-connected female directors, the connected female directors tend to be less qualified in terms of educational credentials and top executive experience,” she says.

As possible countermeasures, she suggests more focus on transparency in appointment processes as one way to go. Regulation could make sure that companies publish vacant board positions including qualification criteria before appointing new directors. Furthermore, the use of databases with qualified candidates and assistance from executive recruitment firms using new search technologies may help firms subject to quotas to find relevant candidates in a cost-efficient way.

“What we shouldn’t do, based on these results, is to conclude that quotas as such are bad. The law has increased the share of women on boards, which is a clear improvement. But in the short run quotas have unintended consequences we must handle.”