Gender diversity increases corporate board effectiveness

//Gender diversity increases corporate board effectiveness

Gender diversity increases corporate board effectiveness

2017-11-08T15:27:05+00:00 Categories: Research Briefs|Tags: , |

Summary

While the number of women on S&P 1500 boards continues to increase steadily, women remain significantly underrepresented and, as of 2013, not represented at all on 25% of the boards. Many countries outside the US have addressed this inequality by implementing regulations (e.g. quotas, public disclosure), citing evidence that more diverse boards increase firm value. However, the research on this link has yielded mixed support. This study isolates the ways in which gender diversity might improve firm value, namely through additional expertise in a particular field or function. The findings show that boards are more effective when they are made up of people with diverse contributions and that women are more likely than men to bring new and unique skills to the board.

Research

This paper focuses on how women on corporate boards might increase firm value, building on research that already clearly links better advice from a firm’s board with increased firm value. The question here then, is do women increase the board’s effectiveness and what is it about their contributions that cause this? Research supports that variation in functional experience contributes to a board’s diversity and produces better quality decisions and more creative, innovative insights. This paper set out to determine whether women are more likely to contribute to functional diversity on a board, thereby enhancing board effectiveness and increasing firm value.

Variation in functional experience contributes to a board’s diversity and produces better quality decisions and more creative, innovative insights

Given that women are more significantly underrepresented on smaller boards, this study focused on firms in the S&P SmallCap 60 Index and their disclosure of the functional types represented on their board. The researchers first looked at the newly appointed female board directors and found that women were more likely than men to contribute additional, new, and more distinct types of expertise to their boards. Thus, when women join boards, they contribute more than men to the diversity of functional experience present on the board

Women were more likely than men to contribute additional, new, and more distinct types of expertise to their boards

The study then examined whether this increased functional diversity was contributed by women, due to differences between men and women, or both. They found that not only do women, on average, possess more types of functional expertise, they are also more likely to bring expertise in the areas of risk management, human resources, sustainability, corporate governance, regulatory/legal/compliance, and political/government. They also noted that of the most underrepresented board skills overall, four of the five (human resources, risk management, sustainability, political/government, and R&D) where more likely to be possessed by women than men.

These findings demonstrate that increasing female representation on boards will increase board diversity given their new and unique skill contribution. This diversity then, will increase the effectiveness of the board and, in turn, increase firm value.

Implications

  • Women are more likely to bring important and underrepresented skills to corporate boards and steps should be taken to increase their presence. When boards expand their search to increase gender diversity, they will acquire greater functional diversity in key areas which will, in turn, increase the effectiveness of the board.
  • Policies that require or encourage public disclosure of board composition or set quotas may help increase the diversity on boards.
  • One of the reasons women bring more functional experience is that the bar is higher for women – it’s not enough for a woman to be as competent as a man, in order for her to be considered for board membership she must also possess a wider range of experience in underrepresented areas.
  • We need to shift what we think a good corporate board member looks like. Men disproportionately bring experience in finance and operations (“line jobs” that men historically hold) but not human resources, governance, risk management, etc. (“staff jobs” that women have historically taken). Because we have prioritized certain (predominantly male) functions on boards, women who have historically been relegated to certain undervalued functions continue to be underrepresented.

More Research Briefs

Title

Gender diversity increases corporate board effectiveness

Authors

Daehyun Kim, Laura T. Starks

Institutions

University of Toronto,
University of Texas at Austin

Source

American Economic Review

Published

May 2016

Link

https://www.aeaweb.org/
articles?id=10.1257/
aer.p20161032

Research brief prepared by

Celeste Jalbert

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