Legitimacy at a Premium: When Do Firms Hire Comparatively Better (Lesser) Qualified Female Directors?

ABSTRACT Research Question This study explores the role of (mis)alignment between institutional and behavioral forces in determining compliance (or deviance) with changing institutional norms on inclusion on corporate boards. Specifically, we examine the effect of (1) the type of quota design, (2) the distance to the quota target, and (3) the attainment discrepancy on a firm's compliance behavior regarding director appointments. Research Insights Using a sample of 33,036 observations for 6022 firms from 25 countries for the period of 2006–2019 with dynamic panel regression methodology, we find that firms operating under mandatory quotas and firms at a longer distance to the quota target generally hire lesser qualified female directors, whereas those with positive attainment discrepancy (i.e., firms with actual performance above their aspirations) hire more qualified female directors in certain institutional contexts. More importantly, we find robust evidence for joint effects among these factors. Our post hoc analysis also indicates a strong direct and indirect effect of female CEOs. Overall, these findings indicate that firms actively navigate the intersection of institutional mandates and internal performance dynamics when determining how to respond to gender diversity initiatives. Theoretical/Academic Implications Our results show that firms use complex decision heuristics in deciding how to comply with institutional demands encompassing factors such as the severity of institutional compulsions, risk tolerance, firm performance, and self‐interest. In unraveling when institutional norms may be perceived as opportunities, or, conversely, threats, we unpack when firms are likely to comply with both the letter and the spirit of regulatory initiatives. These results reveal important boundary conditions for institutional theory predictions. Practitioner/Policy Implications As we find no overall difference in the qualifications of existing male directors and newly appointed female directors, our results challenge the persistent conversations regarding the supply‐side constraints for qualified female directors, that is, the perception that there is a limited pool of females who are board‐ready. However, we do observe the need for policymakers and practitioners to take a more holistic view in instituting and monitoring new norms, including by paying attention to director qualifications rather than just the number of seats allocated to meet quota targets. This is important given firms' proclivity to respond to new institutional norms by exhibiting symbolic compliance, which can weaken overall long‐term support for such normative changes.