Gotta love the British press. According to the FT, this Daily Mail headline from August, “Why ‘meddling’ women in the boardroom can wreck a company’s performance,” is understandably causing some consternation. The Daily Mail coverage was prompted by the Renee B. Adams and Daniel Ferreira paper, Women in the Boardroom and Their Impact on Governance and Performance, which I’ve discussed before in other Lounge posts. From the paper:
Our results highlight the importance of trying to address the endogeneity
of gender diversity in performance regressions. Although a positive relation between
gender diversity in the boardroom and firm performance is often cited in the popular
press, it is not robust to any of our methods of addressing the endogeneity of gender
diversity. The true relation between gender diversity and firm performance appears
to be more complex. We find that diversity has a positive impact on performance
in firms that otherwise have weak governance, as measured by their abilities to
resist takeovers. In firms with strong governance, however, enforcing gender quotas
in the boardroom could ultimately decrease shareholder value. One possible explanation
is that greater gender diversity could lead to overmonitoring in those firms.
As I’ve noted in several prior posts (here and here), board diversity’s
role in firm performance may be more complicated than is often recognized in the
popular press and, sometimes, by academics. Researchers currently disagree on whether board diversity has
been shown to improve firm performance. Whereas some studies find
evidence that the authors conclude is consistent with the theory that board
diversity positively affects firm performance, others find no support or even
contradictory evidence. (We review the literature here)
Despite the press characterization of the
Adams and Ferreira paper, the research is notable for its findings that female
directors have a quantifiable impact on firm performance (in both directions,
depending on the underlying governance characteristics of the firm at issue). As I understand their conclusions, the
point is not that board diversity is either meaningless or (necessarily) negative, but merely
that quotas, such as those implemented in Norway and some other countries,
cannot be justified on business improvement rationales, as they should not be
expected to improve performance on average. From the paper’s conclusion:
More generally, our results show that female directors have a
substantial and value-relevant impact on board structure. But this evidence
does not provide support for quota-based policy initiatives. No evidence
suggests that such policies would improve firm performance on average. Proposals
for regulations enforcing quotas for women on boards must then be motivated by reasons
other than improvements in governance and firm performance.
Given the potentially complicated role of
board diversity in firm performance, the difficulty in studying its effects,
and the disagreement among researchers about its impact, perhaps it is not
surprising that corporate insiders themselves appear to have no concrete master
narrative to explain the pursuit of diversity on boards of directors. For more on this, see our preliminary
findings in Narratives of Diversity in the
Corporate Boardroom: What Corporate Insiders Say About Why Diversity Matters.
In the meantime, Naissance Capital’s
newly-formed Women’s Leadership Fund believes that
“we can earn higher returns, and fulfill an important social objective, by
investing in companies demonstrating ‘best practices’ with regard to Gender
Diversity,” and plans to invest accordingly.
(HT: Lissa Broome)
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