Gender diversity increases corporate board effectiveness

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 is mixed. This study isolates the ways in which gender diversity might improve firm value 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

Building on research that links better advice from a firm’s board with increased firm value, this paper asks: Do women increase a board’s effectiveness, and thus its value, 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 the 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, as well as more 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. 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.

The study 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) were 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. Thus increasing the effectiveness of the board and, in turn, increase firm value.

Implications

• Expand recruitment – 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.
• Transparent policies – Policies that require or encourage public disclosure of board composition or set quotas may help increase the diversity on boards.
• Shift what “good” 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.