Can a Gender-Diverse Board Improve Corporate Performance?

Gender diversity on boards is one of the main criteria that investment managers use to evaluate companies' corporate social responsibility. There are, of course, many reasons why people think gender diversity is important. One of the arguments for board diversity is that having diverse viewpoints expressed within the leadership team can improve the overall performance of the organization. However, despite its popular appeal, the research on outcomes relating to the measurable impact of board diversity on corporate performance is mixed.

Banks, asset managers, and lawmakers are currently setting or considering establishing mandatory requirements for increased diversity on boards. Beginning July 1, 2020, Goldman Sachs said it will not take a company public unless the company has at least one "diverse" board member. (1) In addition, Nasdaq recently filed a proposal with the Securities and Exchange Commission that "would require listed companies to have at least one woman on their boards and a director who is a racial minority or one who self identifies as lesbian, gay, bisexual, transgender or queer". (2) In addition, some asset managers have promoted claims that a higher percentage of women on boards yields increased profitability as measured by a "return on equity" factor. (3)

While it is natural to assume that individuals from different demographic backgrounds will bring new ideas and perspectives to a boardroom, the measures of economic impact resulting from greater gender diversity on boards is still inconclusive. Research results suggest that boards with higher percentages of female directors also demonstrate improved governance through greater board participation in decision making and tougher CEO monitoring. However, gender diverse boards do not appear to improve economic performance on average. Gender diverse boards may enhance value in organizations with weak governing structures, but enforcing gender quotas in the boardroom may ultimately damage shareholder value due to over-monitoring by the board. (4) These results are consistent with a study by McKinsey, which concluded that the correlation between board gender diversity and financial performance is positive, though not statistically significant in the US and UK. (5) A 2014 meta-analysis of 140 research studies also supports the mixed impact of board diversity on a firm's performance. (6)

One possible explanation is that there are just not enough potential directors in certain industries to support real gender diversification. In such cases, setting mandatory diversity quotas for boards could result in the burden of having to compete for a limited number of suitable candidates or, even worse, appointing unsuitable candidates whose directorships present a liability for the organization. Perhaps the most important philosophical point to note is that the potential positive impacts of gender diversity on a board only become manifest when the corps of leadership accepts the individual opinions of its "diverse" members. These directors can lose their power to influence peers if it is widely believed that their presence is merely the product of tokenism, as opposed to true expertise and earned respect.

One reason that we value diversity is because it has the potential to deploy fresh ideas and new skill sets in service of an organization. However, having a small number of representative members from another gender on a board likely won't have much impact on an organization's culture or performance if there is no real diversity in a workforce that boasts tens of thousands of employees. We might also reasonably wonder whether gender diversity creates as much value for a board as would the inclusion of directors with different professional backgrounds and experiences essential to a company's strategic and operating goals.

Gender diversity may be a hot topic and one that boards can no longer avoid addressing but asset managers should be mindful of adopting a tick-the-box mentality while evaluating companies based on this metric. By focusing on only the dimension of board diversity, companies run the risk of missing out on opportunities to recruit directors who could bring true intellectual and practical diversity to the organization's leadership. The greater risk of tokenism, however, is that diversity becomes little more than an empty gesture of corporate compliance to some social ideal as opposed to the source of real inspiration and creativity that it could be under the right circumstances.

References

(1) Solomon, David. "Goldman Sachs' Commitment to Board Diversity". Goldman Sachs, 04 February 2020. Retrieved from: https://www.goldmansachs.com/our-commitments/diversity-and-inclusion/launch-with-gs/pages/commitment-to-diversity.html

(2) Osipovich, Alexander and Akane Otani. "Nasdaq Seeks Board-Diversity Rule That Most Listed Firms Don't Meet". The Wall Street Journal, 01 December 2020. Retrieved from: https://www.wsj.com/articles/nasdaq-proposes-board-diversity-rule-for-listed-companies-11606829244

(3) Swaminathan, Aarthi. "S&P 500 companies with more gender diversity on boards see 15% higher ROE: BofA". Yahoo Finance, 03 March 2021. Retrieved from: https://finance.yahoo.com/news/sp-500-companies-with-more-gender-diversity-see-15-higher-roe-bof-a-194303756.html?guccounter=1

(4) Renee B. Adams, Daniel Ferreira (2009), "Women in the boardroom and their impact on governance and performance". Journal of Financial Economics 94 (2009) 291–309.

(5) Hunt Vivian, et al. "Delivering through diversity". McKinsey & Company, January 2018.

(6) Post, Corinne and Byron, Kris (2014), "Women on Boards and Firm Financial Performance". Academy of Management Journal, Vol. 58, No. 5.

About the Author

Yi Han, Portfolio Manager at Humankind Investments, is an experienced portfolio manager and quantitative research analyst. She most recently spearheaded research and supported product development at Redwood Investment Management. Prior to this, she served as Head of Research at TrimTabs Investment Research and as a Quantitative Research Analyst at Avatar Investment Management. She holds a Master's Degree in Financial Engineering from New York University's Tandon School of Engineering. Yi is a CFA charterholder.