What do we know about Board Diversity?

Prof Sally Wheeler, ANU.

The last twenty years or so have seen an explosion of research studies, policy interest at the national and supra-national level and investment industry pressure around the question of boardroom diversity – or more accurately – the number of women amongst executive and non-executive directors of corporate boards around the world. There has been comparatively little interest in the ethnic make up of boards or the inclusion of those with visible or invisible disabilities. Two broad narratives are generally relied upon to explain the push for female participation in the boardroom. One is expressed in social justice terms around gender equality and political and economic participation and the other focuses on ‘business’ related reasons. The first narrative draws on theoretical literature from political and social theory. The second narrative demands an illustrative empirical research base. This research base is contestable and, as the following brief and issue selective summary shows, often confusingly points in diametrically opposite directions.

The question of female membership of corporate boards is situated in a hinterland of research about gender difference that portrays women in management as less aggressive and more relationship orientated, rather than task focused like their male counterparts. This then translates into fewer women self selecting for boardroom roles. There is research that suggests that investors, despite well-documented instances of the investor community criticizing corporates that lack female board membership, devalue corporations with female board members against those with all male board membership.

The suggestion is that diversity in the boardroom is seen by investors as a corporate preference for diversity over the pursuit of shareholder value. However alongside this there are seemingly contrary research findings that profit margins increase substantially when there are female executive directors. In the US at least the narrative around board diversity has been dominated by assertions that profit improves when diversity is present. In the wake of the GFC there were a number of calls for increased female membership of boards as women were thought to be more risk averse than men and less prone to over confidence.

There is academic research that supports this viewpoint. These character traits may have resulted in decisions that were less financially disastrous for corporations in the run of events that brought about the 2007-2009 crisis. However just as there are competing and contradictory findings for female board membership and investor preference and profitability so there are for female board membership and risk appetite. Both of these pieces of research suggest that there is no evidence that the presence of women directors affect a board’s appetite for risk or that they themselves are risk averse.

The reason that research findings conflict on even very basic propositions around female board membership is that often the studies are not comparing like with like. They are often based in different countries (the US and the UK being the most popular followed by various European States where there is a quota of female directors required by hard or soft law) or using different market indices. If they are drawing data from the same index they might be using different time periods, different performance measures for firms or different calculations of value. What they are identifying in the main is either the presence or absence of a statistically significant correlation for the effect of female board membership.

A recent report from the Bankwest Curtin Economics Centre is significant in two respects. First it looks at the ASX so moves the debate away from its usual geographical settings and second it asserts that it can support the ‘business case’ for female board membership improving firm performance with a causal relationship rather than just correlation. It does this by adding firm performance data to longitudinal data collected by the Workplace Gender Equality Agency from the annual reports firms make to comply with the Workplace Gender Equality Act of 2012. This legislation requires employers outside the public sector with more than 100 employees to report on six gender equality indicators including the representation of women in leadership.

The key findings of the Curtin Study make for interesting reading. A firm that increased female representation on its board by 10% or more saw a 4.9% increase in its market value. The appointment of a female CEO (around 1 in 8 corporations on the ASX50 have a female CEO) resulted in a 5% increase for ASX listed corporations. Corporations that increased the number of women holding leadership positions were likely to outperform others in their industry sector on dividend yield, return on equity and assets, sales per worker, EBIT and Tobin’s Q. In a more fine-grained analysis the appointment of a female CEO created a 12% increase in the likelihood of a corporation outperforming its sector on three or more of these metrics. Increasing female board membership by 10% or more resulted in a 6% increase in the likelihood of a corporation outperforming its sector.

Women are still under-represented in corporate boardrooms across the world particularly in executive and c-suite positions. In Australia nearly 30% of the ASX200 have no female representation at board level. The Curtin Study rises above the ‘for and against’, ‘yes and no’ extant research and presents a convincing case for the rapid promotion of suitably qualified women to Australia’s boardrooms.  

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