The value of strong female presence on corporate boards

Citation

Thorburn, K. (2013), "The value of strong female presence on corporate boards", Strategic HR Review, Vol. 13 No. 1. https://doi.org/10.1108/SHR-08-2013-0085

The value of strong female presence on corporate boards

Article Type: Strategic commentary From: Strategic HR Review, Volume 13, Issue 1

Thought leaders share their views on the HR profession and its direction for the future

The representation of women on corporate boards in the western world remains low. Less than one out of six directors of large company boards across Europe and the USA are female (European Union, 2012). Most of the increase in female board representation in Europe over the past decade has come from countries that have adopted legal board gender quotas.

Several studies document a positive relationship between the fraction of female board members and various measures for firm performance and corporate social responsibility. However, it is impossible to make inferences about causality. It could be that profitable firms are more likely to appoint women, and women more prone to accept directorships in profitable firms. Thus, despite the positive association between female directors and firm performance, one cannot conclude that adding women to the board automatically will improve profitability.

Evidence shows benefits of gender-balanced boards

Yet, a growing body of scientific evidence points to the benefits of gender-balanced boards. Evidence from the USA suggests that gender-diverse boards are more efficient monitors than all-male boards (Adams and Ferreira, 2009). Female directors have better attendance records than male directors. Male board members have fewer attendance problems the more gender-diverse the board. The stricter monitoring by gender-diverse boards manifests itself in a higher likelihood of CEO turnover when the firm performs poorly.

A recent study of Israeli government-owned firms finds that boards with a critical mass of women are more active in their monitoring role, and are associated with superior firm performance (Schwartz-Ziv, 2013). The study relies on detailed minutes from board and board-committee meetings, documenting statements made by every participant. Boards with at least three women present in the meeting are twice as likely to request further information from management and to take an initiative. Interestingly, both men and women are more active in these meetings. The firms with at least three female directors are more profitable and have higher performance-sensitivity of CEO turnover.

One potentially important effect of female representation on corporate boards is a spillover on the gender composition of top management. US evidence shows that firms with more female directors also have more female top executives (Matsa and Miller, 2011). Importantly, the previous year’s share of female directors predicts the fraction of females in top management, but not the reverse. In other words, changes in board composition precede changes in executive membership. This could reflect different hiring policies of gender-balanced boards, or a corporate culture that easier attracts female top executives.

A 2005 survey of directors of publicly listed firms in Sweden suggests that female directors are more stakeholder-oriented than male directors (Adams and Funk, 2011). The survey uses an established questionnaire (the Schwartz PVQ), which has been shown to successfully predict economic behaviour in an experimental setting. Female directors report significantly different core values than their male colleagues. They care less for power and achievement, and are more benevolent and universally concerned. Women value independence, stimulation and change more, while men put a higher value on tradition, conformity and security.

The need to raise awareness

One argument used to defend the low fraction of female directors is that women typically lack CEO experience. Evidence from the USA shows that the stock market reacts positively when a board appoints its first outside CEO (Fahlenbrach et al., 2010). However, there is no comparable reaction when the second or third outside CEO is appointed to the board. Moreover, the appointment of a CEO to the board does not lead to higher profitability, nor to an improved stock-market reaction to merger announcements made by the firm. Thus, it is difficult to argue that the board should be stacked with CEOs.

The Norwegian government mandated a quota in 2006, requiring boards of publicly listed firms to be gender-balanced. In work in progress, I show with two coauthors that investors were neutral to the adoption of the board gender quota in Norway. If investors expected the quota to reduce firm value, the enactment of the quota would have triggered a price drop at the Oslo Stock Exchange. We fail, however, to find any significant stock-price reaction to announcements of the legislative decisions that led up to the quota. In other words, investors did not really care.

It appears that gender-balanced boards take their monitoring role more seriously than boards with few or no women. The board is a team, where the members contribute with different experiences and skills. It is probably not the gender itself that makes a difference, but the resulting diversity of backgrounds and perspectives. The important question now is how we can make shareholders and nomination committees understand the benefits of gender diversity and a critical mass of women on corporate boards.

Karin Thorburn

References

Adams, R.B. and Ferreira, D. (2009), “Women in the boardroom and their impact on governance and performance”, Journal of Financial Economics, Vol. 94 No. 2, pp. 291–309

Adams, R.B. and Funk, P. (2011), “Beyond the glass ceiling: does gender matter?”, Management Science, Vol. 58 No. 2, pp. 219–235

European Union – Directorate-General for Justice (2012), “Women in economic decision-making in the EU: progress report”, available at: http://ec.europa.eu/justice/gender-equality/files/women-on-boardsen.pdf

Fahlenbrach, R., Low, A. and Stulz, R.M. (2010), “Why do firms appoint CEOs as outside directors?”, Journal of Financial Economics, Vol. 97 No. 1, pp. 12–32

Matsa, D.A. and Miller, A.R. (2011), “Chipping away at the glass ceiling: gender spillovers in corporate leadership”, American Economic Review: Papers and Proceedings, Vol. 101 No. 3, pp. 635–639

Schwartz-Ziv, M. (2013), “Does the gender of directors matter?”, Northeastern University, Boston, MA, mimeo

About the author

Professor Karin Thorburn is the research chair professor of Finance at the Norwegian School of Economics. She was previously a faculty member at the Tuck School of Business at Dartmouth College, USA. Her research, which focuses on corporate governance, takeovers, and bankruptcy, has been published in the top academic journals. She is affiliated with several international academic think tanks, including the Centre for Economic Policy Research (CEPR) and the European Corporate Governance Institute (ECGI). She is also a director of the board of Nordea Bank Norge ASA. Professor Karin Thorburn can be contacted at: mailto:karin.thorburn@nhh.no