Women in the Boardroom and Their Impact on Governance and Performance

TLDR: This article found that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees.

Abstract: We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that CEO turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.

Figures

Table 8: Performance: ROA and gender diversity

Table 2: Relationship between attendance problems of directors and gender diversity in director level data

Table 9: Performance and interaction of gender diversity with the IRRC shareholder rights index

Table 10: Difference in characteristics between female and male directors at the directorship level

Table 5: Summary statistics for variables related to the fraction of male directors with board connections to female directors

Table 4: OLS, firm fixed effect and Poisson regressions of board meetings on gender diversity

Full text

Center for Economic Institutions
Working Paper Series
Center for Economic
Institutions
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Institute of Economic Research
Hitotsubashi University
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CEI Working Paper Series, No. 2008-7
“Women in the Boardroom and Their
Impact on Governance and
Performance ”
April 2008
Renée B. Adams and Daniel Ferreira

Wom en in the Boardroom and Their Impact on
G o v ernance and P erform ance
∗
Renée B. Adams
†
Universit y of Queensland and ECGI
Daniel Ferreira
‡
London School of Economics, CEPR and ECGI
This v ersion: Septem ber 2007
Abstract
Although some argue that tokenism drives the selection of female directors, we show
that they have a significant impact on measures of board effectiveness. In a large panel
of data on publicly-traded firms from 1996-2003, we find that (1) the likelihood that
a female director has attendance problems is 0.29 lower than for a male director, (2)
male directors have fewer attendance problems the greater the fraction of female directors
on the board, (3) firms with more divers e boards provide their directors with more pay-
performance incentives, and (4) firms with more diverse boards have more board meetings.
We also sho w that the positive relationship between corporate performance measures and
gender diversity documented by previous studies is not robust to attempts to address the
endogeneity of diversity. Instead, the average effect of gender diversity on both market
valuation and operating performance appears to be negative. This negative effect is driven
by companies with greater shareholder rights. In firms with w eaker shareholder rights,
gender diversity has positive effects. Our results suggest that diverse boards are tougher
monitors. Nevertheless, mandating gender quotas in the boardroom may not increase
board effectiveness on average, but may reduce it for well-governed firms where additional
monitoring is counterproductive.
JEL classification: G30; G34; J16
Keywords: Board of Directors; Board Effectiv eness; Gender; Diversity.
∗
We thank Francesca Cornelli, Paola Sapienza, Annette Vissing-Jorgensen and seminar participants at Edith
Cowan University, the University of Cologne, Univ ersity of Exeter, University of Illinois at Urbana Champaign,
University of Frankfurt, University of Mannheim, University of Melbourne, University of New South Wales,
Northwestern University, the Norwegian School of Management, the Norwegian School of Economics and Busi-
ness, SOAS-University of London, University of Technology, Sydney, University of Western Australia, the Zurich
Workshop and Lecture Series in Law and Economics and conference participants at the 2006 European Winter
Finance Conference for helpful comments on a previous version of this paper.
†
Corresponding author. UQ Business School, University of Queensland, Brisbane, Qld, 4072, Australia.
E-mail: r.adams@business.uq.edu.au. Phone: +61-7-3365 7285.
‡
E-mail: d.ferreira@lse.ac.uk.

1. Introduction
It is widely argued that women face a glass ceiling when it comes to holding top corporate
officer posit ion s.
1
Partly because they hold so few officer positions, w omen also hold few board
seats. In the US, w omen held 13.6% of Fortune 500 board seats in 2003 (Catalyst, 2003). The
percentage of female directors in Australia, Canada, Japan and Europe is estimated to be 8.7%,
10.6% , 0.4% and 8%, respectively (see Equal Opportunity for Women in the Workplace Agency
(EO WA), 2006, and European Professional Women’s Net work (EPWN), 2004). Furthermore,
man y firm s ha ve only one female director whic h is often regarded as evidence of tok en ism (see
the discussion in Branson, 2006; Bourez, 2005, and Corporate Women Directors In ternational
(CW D I), 2007).
2
This situation is likely to ch ange because boards around the world are under increasing
pressure to c hoose female directors. Man y recen t proposals for governance reform explicitly
stress the importance of gender div ersity in the boardroom. In the UK, the Higgs Report
“Review of the Role a n d Effectiv en ess of Non-Execu tive Directors” (H igg s, 2003), comm issioned
b y the British Department of Trade and Industry, argued that diversity could enhance board
effectiveness (see also “The Tyson Report” (T yso n, 2003) on the recruitmen t and dev elopm e nt
of non-ex ecu tive directors). If compan ies don’t voluntarily see to it that 25% of their directors
are female, Sw eden has threatened to make div ersity a legal requirement (see the discussion
in Medland, 2004). The most extreme promotion of gender div ersity occurs in Norway, where
since 2006 all listed compa nie s must abide b y a 40% gender quota for female directors or face
delisting.
One argument for suc h measures is that boards could enhance their effectiv en ess by tapping
broader talent pools for their directors. The Higgs Review, for example, points out that although
approximately 30% of managers in the UK corporate sector are female, wo m en hold only 6%
1
For example, Bertrand and Hallock (2001) found that women comprised only 2.5% of the 5 highest paid exec-
utives in the S&P 1500 from 1992-1997 and earned 45% less than men. While they argue that job characteristics
explain part of this gap, others interpret their findings to be evidence of the glass ceiling.
2
For example, in the top 200 companies in Europe, 62% of companies have at least one female director, but
only 28% have more than one in 2004 (EWPN, 2004). In Australia, 50% of ASX200 companies have at least
one female director, but only 13.5% have more than one in 2006 (EOWA, 2006).
1

of non-executive director positions. Precisely because they do not belong to the “old bo ys
club,” female directors may mo re closely correspond to the concept of the independent director
emph asized in theory. Nevertheless, for several reasons it is not clear that adding female
directors will enhance board effectiv en ess. For example, if female directors are chosen merely
because of tokenism, their impact is likely to be min im a l. Kanter (1977) argues that th e con tra st
bet ween tokens and the num e ric majority may lead to both social and professional isolation
of tok en s. Sub sequ ent tokenism researc h found evidence consistent with this h ypothesis (e.g.
Yoder, 1991). This suggests that tok e n female directors are unlikely to be able to influence
board effectiv en ess. Even if they can, if the effect of increasing gender div ersity is to increase
board independence, gender diversit y should enhance board effectiv eness only where greater
independence is valuab le .
3
The purpose of this paper is to examine the relationship bet ween board effectiveness and
gender diversity, whic h we measure using the fraction of female directors on the board. In
particular, we ask the follo w ing questions. F irst, do boards with greater gender d iversit y
look different? If so, does diversity lead them to perform differently in terms of go vernance?
Finally, does the effect of gender diversity on governance matter sufficiently to affect corporate
performance?
The answers to these questions are in terestin g for severa l reasons. Most directly, they can
shed ligh t on whether tokenism pr events female directors from ha ving an impact. They can also
further our understanding of the effect group composition has on board effectiveness and the
likely success or failure of recen t governance proposals advocating greater diversit y. Despite the
importance of gender diversity in the policy debate, there is still relativ ely little researc h linking
div ersity and corporate governance (for a survey of this literature, see Fields and Keys, 2003).
Carter, Sim kins and Simpson (2003) document a positiv e relationship between gender and
3
Other benefits and costs of gender diversity can be found in the finance and management literatures.
For example, Ellis and Keys (2003) describe the idea that more diverse boards may have better relations with
customers, suppliers and employees. On the other hand, management scholars have also pointed out that diverse
top management teams may disagree more (e.g. Eisenhardt, Kahwajy and Bourgeois, 1997) or underperform
(see the survey by Milliken and Martins, 1996).
2

ethnic diversit y of the board and corporate performance, as pro xied by Tobin’s Q.
4
Farrell and
Hersc h (2005) find that gender systematically impacts the selection of directors to the board.
Ho wever, when they examine the market’s reaction to the announcement of the addition of
female directors, the abnormal returns are insignificant. Rather than being performance based,
they argue that their evidence is consisten t with the idea that female directors are added to
the board following interna l or extern al calls for diversity. These papers do not fully address
the endogeneity problems that arise because of differences in corporate culture across firm s or
reverse causality. Thus, their findings cannot alw ays be given causal in terpretations. Our paper
comp lem ents these by prov iding a more comprehensive analysis of the effect of gender diversit y
in boards with an emphasis on the identification of causal effects.
5
More generally, our paper contributes to the literature on the demography of organizations,
which has been studied primarily by researchers in managem e nt and organization theory, but
also increasing ly in economics and corporate finance. Pfeffer’s (1983) concept of organiza tional
demography deals with the description of organizations “in terms of their sex composition,
their racial composition, their age or length of service distributions, the educational level of
their w o rk forces, the socioeconomic origins of their members, and so forth” (p. 303). Em pir-
ical papers in this tradition have looked both at the effects of demography on outcomes and
at the determinants of demography in organizations (Ha veman, 1995; O’Reilly, Caldwell, and
Barnett, 1989; Pelled, Eisenhardt, and Xin, 1999; Wagner, Pfeffer, and O’Reilly, 1984). In
the economics and finance literature, Hermalin and Weisbach (1988) and Agra wal and Knoe-
ber (2001) document that firms appear to optimally c hoose directors for their c har acteristics.
Bertrand and Schoar (2003), Malmendier and Tate (2005) and Bennedsen, Péréz-G onzalez and
Wolfenzon (2007) pro vide evidence that personal c hara cteristics of CEO s affect corporate poli-
cies. Bertrand and Scho ar find that older CEOs pursue more conservative corporate strategies,
4
Similar results have been documented by Adler (2001), although the focus of this study is more broadly on
the gender diversity of senior management.
5
Our paper also contributes to a large, mainly experimental, literature exploring whether women behave
differently than men in different situations (see the survey by Croson and Gneezy, 2004). In the context of
financial decision-making, Charness and Gneezy (2004) argue that women commonly invest less than men in
experimental settings. Using data from an account brokerage, Barber and Odean (2001) find that women trade
less, which leads them to outperform men.
3

Frequently asked questions

Q1. What are the contributions in "Women in the boardroom and their impact on governance and performance∗" ?

Although some argue that tokenism drives the selection of female directors, the authors show that they have a significant impact on measures of board effectiveness. In a large panel of data on publicly-traded firms from 1996-2003, the authors find that ( 1 ) the likelihood that a female director has attendance problems is 0. 29 lower than for a male director, ( 2 ) male directors have fewer attendance problems the greater the fraction of female directors on the board, ( 3 ) firms with more diverse boards provide their directors with more payperformance incentives, and ( 4 ) firms with more diverse boards have more board meetings. The authors also show that the positive relationship between corporate performance measures and gender diversity documented by previous studies is not robust to attempts to address the endogeneity of diversity. Their results suggest that diverse boards are tougher monitors. 

Q2. Why do the authors expect that directors should improve with greater board independence?

Because independent directors are supposed to improve governance, the authors expect that director attendance behavior should improve with greater board independence. 

Q3. What is the reason why diversity may be endogenous in board and director behavior regressions?

18While the authors believe that omitted variables are an important reason why diversity may be endogenous in board and director behavior regressions, reverse causality may also be a concern. 

Q4. Why are the authors careful in their analysis to control for board size and independence?

the authors are careful in their analysis to control for board size and independence to ensure that the effects the authors document are due to gender diversity and not those variables. 

Q5. Why is attendance important from a governance perspective?

Attendance behavior is also important from a governance perspective because the primary way in which directors obtain necessary information to carry out their duties is by attending board meetings. 

Q6. Why do the authors not present instrumental variable estimates for board meetings?

25Because the authors believe that reverse causality is less of a concern for board meetings, the authors do not present instrumental variable estimates for board meetings. 

Q7. Why is the literature arguing that stronger governance should increase shareholder value?

Because boards are seen as essential to overcoming the agency problem between managers and shareholders, the literature generally argues that stronger governance should increase shareholder value (see the survey by Hermalin and Weisbach, 2003). 

Q8. Why do the authors examine the fraction of equity-based pay?

The authors examine the fraction of equity-based pay because it is reasonable to assume that shares and options provide more performance-based incentives than salaries. 

Q9. Why do the authors examine the relationship between diversity and equity-based compensation for directors?

The authors examine the relation between diversity and equity-based compensation for directors because the governance literature suggests that performance pay is an important mechanism10to ensure that directors act in the interests of shareholders (e.g. Shleifer and Vishny, 1988). 

Q10. What are the factors that are correlated with the endogenous variable?

In the context of governance regressions it is usually difficult to come up with valid instruments, because the factors that are arguably most correlated with the endogenous variable are other governance characteristics that are already included in governance regressions, such as board size, independence, etc. 

Q11. What does the authors argue about the evidence of the inclusion of female directors?

Rather than being performance based, they argue that their evidence is consistent with the idea that female directors are added to the board following internal or external calls for diversity. 

Q12. What can be done to further their understanding of the effect of group composition on board effectiveness?

They can also further their understanding of the effect group composition has on board effectiveness and the likely success or failure of recent governance proposals advocating greater diversity.