As well as providing more equitable representation, proposals to increase the number of female directors are premised upon the idea that it’ll be beneficial for governance, and ultimately, firm performance. Together, these views have been at the heart of a number of reforms aimed at increasing female representation on executive boards – ranging from the requirements in the US and in the European Union (EU) for firm disclosure of gender diversity policy in board recruitment, through to enforced gender quotas in Norway.
Despite this new attention to the issues, there’s little evidence regarding the performance-impact of female representation on corporate boards. The evidence that exists for the US and the UK doesn’t back the idea of a positive effect of female board representation. For instance, using a sample of US firms, Adams and Ferreira (2009) find a negative impact of having females on the board on firm performance, despite better attendance records and more effective monitoring in firms with more gender-balanced boards.
One issue is that the focus on representation may miss the actual underlying issue of female integration into firm governance. While regulatory and institutional pressures can lead to appointments of female directors on the board, they don’t necessarily ensure the participation of appointed female directors in the actual governance mechanism. For any director to add value, they need to be appointed to positions in which they can influence governance, and consequently firm performance. The economic implications of board gender diversity may be ambiguous if decisions to increase female representation on boards are, in part, driven by social and political pressures, so just token representation.
In the UK, women now fill a quarter of FTSE 100 director roles, a fact which is highlighted in Lord Davies’ latest report, and which indicates clear progress since that target was set in 2011. The report also makes the new target for a third representation applicable to 150 more companies. This comes at a time when the EU is contemplating mandatory gender quotas for listed firms. Now, meeting an arbitrary headline target on gender diversity is a step in the right direction, but legislation can be too blunt a tool to tackle the genuine issues of gender diversity.
To focus simply on a certain proportion of female directors is to miss the bigger picture. The association between board gender diversity and good governance is more complex than imposed gender quotas. The way in which the economic case for board gender diversity doesn’t hold up well under statistical scrutiny is evidence for how organisations may not reap the benefits of gender-diverse boards automatically.
The point is that although regulatory and institutional pressures can lead to appointments of female directors to the board, they do not necessarily ensure that those women are directly involved in the nuts and bolts of governance. For any director to add value, they need to be appointed to positions in which they can influence governance, and consequently firm performance. In our sample of large European firms, women are more likely to be appointed to monitoring-related committees, like the audit committee. However, they are less likely to be appointed to nomination and remuneration committees, where new CEOs are appointed and where pay and bonuses are set. The fact that fewer female directors make it on to these committees might partially explain the persistence of a gender pay gap at executive level.
In our recent research we examine the mechanisms through which female directors can add value to the firm. In particular, we look at the integration of female directors in the governance mechanism. To a great extent the way a board works is through committees that focus on narrowly defined jobs, such as the nomination committee, remuneration committee, and the audit committee. These groups of executives articulate the goals and strategic plans of the organisation in an area, and serve as a source of specialised expertise. They are fertile ground to closely examine the appointment of female directors, and the performance impact of such appointments.
We found that a one standard deviation increase in the proportion of female directors on key committees enhances firm performance, by increasing firm value by five per cent based on market-to-book value. By comparison, a one standard deviation increase in female board representation overall increases firm performance by a more 0.9 per cent. Simply put, the performance benefit to the firm of appointing female directors to the key committees is three times greater than just appointing them to the board. Appointing women to the board in response to regulatory pressure has, at best, a limited effect on firm performance. Putting women on the key committees may be indicative of a flexible board that simply includes high-ability individuals in the governance mechanism to enhance firm performance.
Quotas don’t necessarily advance the underlying cause of gender equality. Female directors appointed for Norwegian firms to meet the gender quota earned the unfortunate “golden-skirts” epithet. Companies need to be encouraged to embed female directors in the decision-making process. Without that, new female director appointments designed to meet a new target of 33 per cent representation, risk drifting once more into the realm of token symbolism.
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Written by Dr Swarnodeep Homroy of Lancaster University Management School.
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