Women have Beneficial Impact on Board Governance - Building Gender Balanced Business

• The greater the fraction of women on the board, the better is the attendance behaviour of male directors
• Holding other director characteristics constant, female directors are also more likely to sit on monitoring-related committees
• Diverse boards are more likely to hold CEOs accountable for poor stock price performance
• Directors in gender-diverse boards receive relatively more equity-based compensation
• Taken together, these results suggest that gender-diverse boards are tougher monitors
• It is possible that gender diversity only adds value when additional board monitoring would enhance firm value
• Female directors have a substantial and value-relevant impact on board structure.

BY PROFESSOR RENÉE ADAMS

In our paper “Women in the Boardroom and Their Impact on Governance and Performance”, which is forthcoming in the Journal of Financial Economics, Daniel Ferreira and I investigate the hypothesis that gender diversity in the boardroom affects governance in meaningful ways.

Our sample consists of an unbalanced panel of director-level data for S&P 1500 firms collected by the Investor Responsibility Research Center (IRRC) for the period 1996-2003.

We find that gender diversity has significant effects on board inputs.

• Women are less likely to have attendance problems at board meetings than men.
• Furthermore, the greater the fraction of women on the board is, the better is the attendance behaviour of male directors.
• Holding other director characteristics constant, female directors are also more likely to sit on monitoring-related committees, such as audit, nominating and governance, than male directors.

Women also appear to have a significant impact on board governance.

• We find direct evidence that more diverse boards are more likely to hold CEOs accountable for poor stock price performance: CEO turnover is more sensitive to stock return performance in firms with relatively more women on boards.
• We also find that directors in gender-diverse boards receive relatively more equity-based compensation. Taken together, these results suggest that gender-diverse boards are tougher monitors.

The evidence on the relationship between gender diversity on boards and firm performance is more difficult to interpret. Although the correlation between gender diversity and either firm value or operating performance appears to be positive at first inspection, this result is not robust. Instead, on average, firms perform worse the greater is the gender diversity of the board.

This result is consistent with the argument that too much board monitoring can decrease shareholder value. Thus, it is possible that gender diversity only adds value when additional board monitoring would enhance firm value. Using additional tests, we find evidence consistent with this hypothesis: gender diversity has beneficial effects in companies with weak shareholder rights, where it is plausible that additional board monitoring can enhance firm value, but detrimental effects in companies with strong shareholder rights.

More generally, our results show that, although they may have initially been selected because of tokenism, female directors have a substantial and value-relevant impact on board structure. Thus, director demography appears to be an important element of governance.

Adams, R, & Ferreira, D, (October, 2008) “Women in the Boardroom and Their Impact on Governance and Performance”, SSRN

Renée Adams is a professor on the faculty of the UQ Business School, the University of Queensland.