Board diversity: female director participation and corporate innovation
| Date | 21 December 2020 |
| Pages | 247-279 |
| DOI | https://doi.org/10.1108/IJAIM-06-2020-0080 |
| Published date | 21 December 2020 |
| Subject Matter | Accounting & finance,Accounting/accountancy,Accounting methods/systems |
| Author | Alireza Vafaei,Darren Henry,Kamran Ahmed,Mohammad Alipour |
Board diversity: female director
participation and
corporate innovation
Alireza Vafaei
Department of Accounting and Data Analytics, La Trobe Business School,
La Trobe University, Bundoora, Australia
Darren Henry
Department of Economics and Finance, La Trobe University,
Bundoora, Australia
Kamran Ahmed
Department of Accounting and Data Analytics, La Trobe University,
Bundoora, Australia, and
Mohammad Alipour
Faculty of Accounting and Finance, Islamic Azad University Khalkhal Branch,
Khalkhal, Iran
Abstract
Purpose –This study aims to examine the impact of board female participation on Austral ian firms’innovation.
Design/methodology/approach –Data are from the 500 largest AustralianSecurities Exchange (ASX)-
listed companies for 2004–2015. Measures of innovation concern input (research and development
expenditureand intangible assets) and output (patents registered)indicators.
Findings –A positive and significant association exists between female director participation and firm
innovation activity. This association exists across industry classifications independent of technological
importance and is particularlydriven by materials and health-care sectors. Findings support calls for more
board diversity in line with board female membership positively influencing innovative investment and
developmentactivities.
Practical implications –The economic efficacyof the latest revisions to the ASX Corporate Governance
Council principles and recommendations (“ASX CGC revisions”) is supported. Diverse boards are a strong
source of innovation. Regulators and corporations can use the findings to establish principles and practices
that promotefemale board diversity.
Originality/value –This study is the first to examine the link between board diversity and corporate
innovation in Australia where there is under-representation of women on corporate boards and in key
management positions. Also lackingare formal legislative or governance policy mandates on board gender
diversity. Beyond confirming a positive association between board diversity and levels of corporate
innovation,this paper provides new findings that this relationship is driven by womenwho are non-executive
JEL classification –G14, G38, M48, M41, M14
Corrigendum: It has come to the attention of the publisher that the article Vafaei, A., Henry, D. and
Ahmed, K. (2020), “Board diversity: female director participation and corporate innovation”,
published in International Journal of Accounting & Information Management, Vol. ahead-of-print No.
ahead-of-print, had omitted an author. The author Mohammad Alipour, along with their affiliation
details, has now been added to the online article. The authors sincerely apologise for this.
Female
director
participation
247
Received3 June 2020
Revised10 October 2020
Accepted19 October 2020
InternationalJournal of
Accounting& Information
Management
Vol.29 No. 2, 2021
pp. 247-279
© Emerald Publishing Limited
1834-7649
DOI 10.1108/IJAIM-06-2020-0080
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1834-7649.htm
(independent) directors, independent of the underlying technology intensity of firms and moderated by the
nature of firm-levelprofitability and growth opportunities.
Keywords Innovation, Corporate governance, Board diversity, Board female participation
Paper type Research paper
1. Introduction
Global evidence suggests that female directors and executives are underrepresented on the
boards and in the C-suites of public companies (Fenwickand West LLP, 2013;Deloitte, 2018;
Feintzeig, 2019). Binder et al. (2019) indicate that although several global initiatives have
narrowed the gender gap, progresshas been slow. The motivation for this study is driven by
two streams of literature. One stream concentrates on many benefits of board diversity
including providing equality and inclusion, which better reflects a firm’s customer and
employee base, higher quality financial reports, better use of skills of a broader talent pool
and enhancing financial performance(Simpson et al.,2010;Rhode and Packel, 2014;Rezaee,
2019). Another stream suggests that corporate innovation is a key determinant of firm-level
new investment and growth opportunities (Miller and del Carmen Triana, 2009) and help
new competitive approaches resulting in better profitability (Teece et al.,1997). The policy
motivation for this study arises from the latest revisions to the Australian Securities
Exchange Corporate Governance Council(ASX CGC) principles and recommendations. The
updated ASX CGC revisions become applicable from January 1, 2020, and require the top
300 ASX-listed firmsto have at least 30% of directors from each gender on their boards. The
late adoption of board gender targets in this policy framework indicates that, compared to
other developedcountries, Australia still lags behind on board diversity.
Unlike Chen et al. (2018), who investigates the link between female participation on
boards of directors and corporate innovation using a sample of US-based firms between
1998 and 2006, this study is conducted in Australia. Although Australia and the US share
the similarity that women are becoming more educated than men (Carrington and Pratt,
2003;Semuels, 2017), the gender pay gap ranges between 10% and 26% in Australia
(Workplace Gender Equality Agency, 2018),whereas in the US it is around 19% (PayScale,
2020). Apparently, despitebeing highly educated, Australian women earn farless than men.
Australia is subsequently still quite behind regarding board gender diversity (hereafter
“diversity”) compared to other developed countries (Smale and Miller, 2015;Rezaee, 2019).
Consequently, Australia provides an interesting setting to examine issues about diversity
and corporate innovation.
Our study distils relevant theoretical propositions and contributes to empirical evidence
on corporate governance measures pertainingto diversity and firm innovation activity. The
study responds to a recent trend in the corporate governance literature (Davidson and
Burke, 2000;Dwyer et al.,2003;Nielsen and Huse, 2010;Hillman, 2015) highlighting that
women’s contribution to the boardroom is important and the role they play in corporate
decision-making. The upshot is a call for more research into the relationship between the
presence/role of female directors and various board and firm outcomes including decision-
making, growth and innovation (Davidsonand Burke, 2000;Hillman, 2015). Whether public
companies should voluntarily or mandatorily increase the percentage of female directors is
open to question. While a specific diversity requirement suchas that proposed by the ASX
Corporate Governance Council represents a potential exogenous change to board diversity
levels, firms may also voluntarily elect to do this if female directors encourage corporate
innovation and generate business and performancebenefits. These possibilities lead to our
IJAIM
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research question: is there an association between female director participation and
corporate innovation?
To answer the above question, we use a sample from the Top 500 ASX-listed firms for
2004–2015. We use several measures of firm innovation and board female demographics.
Like Chen et al. (2018), we capture “realised”innovation output via patent issues and inputs
as represented by Research and Developmentexpenditure (R&D) and intangible asset data.
Using innovation measures based on different dimensions such as patent issues, R&D
expenditure intensity and intangibles can capture innovation in potentially different forms
from various industries. To reflect women’s board participation, we adopt indicators of the
existence and strength of female membership on company boards. We also statistically
accommodate the potential endogeneity of board female membership as it relates to
corporate innovation, given that directors may self-select onto board positions, based on
underlying personal characteristics and attributes (Terjesen et al., 2009;Huang and Kisgen,
2013). We find a significant positive relationshipbetween both the presence and proportion
of female board members and various measures of firm innovation activity, suggesting the
importance of board diversityin firms’decisions and success. This relationship is confirmed
after controlling for a range of firm-specific, ownershipand governance characteristics and
for observed endogeneityof board female demographics.
Our study contributesto the business literature in several ways. Firstly, it alignswith the
rise of female company directors and executives worldwide. Secondly, our findings are
timely and relevant considering the global move towards board diversity and recent
regulatory initiatives introduced in Australia aimed at strengthening board diversity.
Thirdly, this study has implications for practice and regulation. Female representation on
boards is associated with enhanced firm innovation and supports the economic efficacy of
the ASX CGC revisions and the notion that gender-diversified boards are strong sources of
innovation. From a corporate governance perspective, the findings suggest that greater
diversity should benefit businesses in terms of creativity and investment opportunities and
correlate with valuationoutcomes. Fourthly, this study contributes to the diversityliterature
by furthering our understanding of the important role that female directors and executives
play in improving strategic decisions, performance and corporate innovation. Fifthly, this
study contributes to the literatureby further analysing the association between measures of
innovation and diversity acrossdifferent industries. Patent and R&D expenditure emerge as
important attributesof innovation within the Materials and Health-care sectors. Intangibles,
conversely, are an important driver of innovation within the Materials, Industrials and the
Consumer Discretionary sectors.Sixthly, this study investigates the mediation effect of firm
performance and growth opportunitieson the association between diversity and innovation
measures. Diverse boards encourageinnovation less if the firm is relatively more profitable
or has greater underlying growth opportunities. Finally, we address the controversy in the
corporate governanceliterature regarding gender tokenism (Farrell and Hersch, 2005;Ahern
and Dittmar, 2012) in the context of firm-levelinnovation and decision-making. We contrast
gender tokenism based on boardswith the presence of at least one female director relative to
more gender-balanced boards and consider if corporate innovation is related to whether
women represent executives or independent directors. Therefore, our paper extends the
literature on corporate governancein Australia by implicitly evaluating behavioural factors
and clarifying prior findings that female directors, on average, either facilitate or inhibit
corporate innovation.
This paper is structured as follows. Section 2 presents the stylised facts on board
diversity and innovation in Australian listed firms. Section 3 reviews the literature and
outlines the hypotheses. The research methodology, variable construction and regression
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director
participation
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