Does making a business case for voluntary quota-induced board gender diversity pay off?

Women in top management have attracted global interest, and many governments have implemented the policy of female director quotas on corporate boards. In the context of self-regulatory quotas, policy- makers justify their intervention to improve board gender balance by appealing to the business case rather than gender equity concerns, that gender diversity improves firm performance. Critical mass theory provides theoretical support to such a position; according to this theory, a positive influence on the corporate financial behavior may exist when the number of female directors increases to critical mass level. Using FTSE 350 companies from 2006 to 2016 as the sample, the current paper evaluates female directors’ influence on corporate financial outcomes against the background of imposing UK self- regulatory quotas. Our results show a significant positive correlation after the imposition of the quota. Moreover, based on all firm-year observations, we find that the effect of three and more female directors is more pronounced than that of two women, or just one, confirming the predictions of critical mass theory. Finally, we show that female directors serve as a supplementary mechanism for companies with weak governance but can lead to over-monitoring for organizations with strong governance. These findings demonstrate that the introduction of a gender quota not only dramatically increases the number of female directors of FTSE 350 companies but also significantly changes firm outcomes.