Can Shareholder Activism Improve Gender Diversity on Corporate Boards?

• Author: Carol Marquardt,Christine Wiedman
• DOI: http://doi.org/10.1111/corg.12170
• Date: 01 July 2016
• Published date: 01 July 2016

Can Shareholder Activism Improve Gender

Diversity on Corporate Boards?

Carol Marquardt and Christine Wiedman*

ABSTRACT

Manuscript type: Empirical

Research question/issue: We empirically examine the antecedents of shareholder activism related to increasing the gender

diversity of corporate boards of directorsand whether such activism is an effectivemechanism for achieving this goal. Because

campaigns for increased gender diversity may be driven by either economic eff‌iciency or sociallegitimacy concerns, we condi-

tion our analysis on activists’motivations for achieving their objectives.

Research f‌indings/insights: Basedon a sample of US S&P 1500 f‌irms over 1997–2011, we f‌ind thatfemale board representation

and board independence are negatively associated with the likelihood of being targeted by a shareholder proposal related to

gender diversity. We further document that f‌inancially motivated activists are more likely to target f‌irms with extremely low

female board representation than are socially motivated activists. Targeted f‌irms signif‌icantly increase their female board rep-

resentationin the two-year period followingproposal initiation, relativeto that of a matched sample of non-targetedf‌irms, with

no signif‌icant differences observed across activist motivations.

Theoretical/academic implications: Our f‌indings provide empirical support for the effectiveness of shareholder activism in

shaping corporate governance.Our work also suggests thatshareholder activists’underlying motivationsare an important con-

ditioning variable in governance research, with both agency theory and institutional theory providing insight into differing

motivations.

Practitioner/policy implications: Our f‌indings suggest that shareholder proposals are an effective mechanism for increasing

board diversity,irrespective of activist motivations. However, we note thatmean female board representation for both targeted

and non-targeted f‌irms remains farbelow the level of representationsought by various activist groups.For policy-makers, this

suggests that legislative action may be necessary to achieve these corporate board diversity goals in the US.

Keywords: Corporate Governance, Shareholder Activism, Gender Diversity, Board Composition

INTRODUCTION

We empirically examine the antecedents of shareholder ac-

tivism related to increasing the gender diversity of cor-

porate boards of directors (BOD) and whether such activism

is an effective mechanism for achieving this goal. These ques-

tions are motivated by recent initiatives by numerous interna-

tional legislative, regulatory, and advocacy organizations

directed toward addressing female underrepresentation on

corporate boards. Norway was the f‌irst country to introduce

a quota of 40 percent for its corporate boards, and as of 2013

at least ten countries have established legal quotas requiring

a minimum percentage of women directors on corporate

boards, ranging from 30 percent (in Germany)

1

to 50 percent

(in Israel).

2

The European Union (EU), Brazil, Canada

(Quebec), India, and the Philippines have similar legislation

proposed or pending.

3

In addition, regulatory bodies in at

least 20 countries have instituted “comply-or-explain”rules

to encourage greater gender diversity on corporate boards.

For example, f‌irms listed on the Australian Stock Exchange

(ASX) are required to establish measurable objectives for

achieving BOD gender diversity and annually assess their

progress in achieving them or explain why they have not

done so, and in the US the Securities and Exchange Com-

mission (SEC) requires publicly traded f‌irms to disclose

whether and how its nominating committee considers di-

versity in identifying nominees for directors. Advocacy

organizations, such as Catalyst and 2020 Women on Boards,

have also pressed for voluntary improvements in board

diversity.

Concurrent with the above broad-based approaches, there

has also been an increase in shareholder activism devoted to

greater board diversity in recent years, particularly in the

US, where shareholders have initiated more than 250 pro-

posals targeting individual f‌irms to increase female represen-

tation on corporate boards since 1997 –over 30 proposals

*Address for correspondence: Christine Wiedman, School of Accounting and Finance,

University of Waterloo, 200 University Avenue West, Waterloo, Ontario, Canada. Tel:

(519) 888-4567x.33732; E-mail: cwiedman@uwaterloo.ca

© 2016 JohnWiley & Sons Ltd

doi:10.1111/corg.12170

443

Corporate Governance: An International Review, 2016, 24(4): 443–461

were f‌iledin 2013 alone. In addition, diversityresolutions f‌iled

in the US in 2013 received the highest average vote (35.8 per-

cent) among environmental and social governance categories,

with shareholder campaigns driven, in part, by the work of

the advocacy group Thirty Percent Coalition.

4

Due to their

non-bindingnature, shareholder proposalsin the US have his-

torically been viewed as a weak mechanism to drive gover-

nance reform (Bebchuk, 2005), and while f‌irms have been

more responsive to shareholder proposals in recent years,

Thomas and Cotter (2007) document that evenin cases where

the proposal receives a majorityvote by shareholders, only 25

percent of proposals in their sample are implemented by the

board. In addition, the effectiveness of shareholder proposals

in improving board gender diversity has not been examined

in the prior literature. It thus becomes an openempirical ques-

tion as to whether shareholder proposals represent an effec-

tive means of achieving desired changes in the gender

diversity of corporate boards.

We address this gap in the literature using a sample of US

shareholder proposals related to board gender diversity

drawn from the RiskMetrics database over the period 1997

to 2011. We examine the effect of shareholder activism on

board gender diversity using a one-to-one matched-sample

design, taking advantage of the natural experiment created

when shareholder activists target a f‌irm for increased female

representation on its corporate board. We focus our analysis

on US f‌irms because proposal submissions are far more fre-

quent in the US than in other countries (Cziraki, Renneboog

& Szilagyi, 2010;Judge, Gaur, & Muller-Kahle, 2010).Further-

more, the US has not yet taken legislative action to address

corporate governance gender imbalances, creating an oppor-

tunity for shareholder activists to intervene.

5

While prior literature examining the effectiveness of share-

holder proposals has generated mixed results (Goranova &

Ryan, 2014), we document that f‌irms targeted by shareholder

proposals calling for increased gender diversity on corporate

boards experience signif‌icantly greater improvements in fe-

male board representation, relative to a matched control sam-

ple of non-targeted f‌irms. The result from this natural

experiment holds in both univariate comparisons, as well as

in a cross-sectional regression analysis that controls for other

potential determinants of shareholder activism and board

gender diversity. Therefore, our f‌indings suggest that share-

holder activism is an effective mechanism for increasing

female representation on boards. We thus contribute to the

corporate governance literatures on both shareholder pro-

posals and board gender diversity by providing, to our

knowledge, the f‌irst systematic evidence on the effectiveness

of shareholder activism in improving female board represen-

tation. Thepaper also speaks to the call for research on alterna-

tive efforts to increase board diversity beyond legislative

quotas, as voiced by Adams, de Haan, Terjesen, & van Ees

(2015). Understanding the potential mechanisms for increas-

ing board diversity is important as signif‌icant changes are

not likely to occur quickly through organic processes.

Wealso examine the antecedentsof shareholder activism re-

lated to board gender diversity, considering the perspectives

offered by both agency and institutional theory in our analy-

sis. We f‌ind that activists targetf‌irms with signif‌icantly lower

female board representation and f‌irms with less independent

boards. We also extend Judge et al. (2010) by conditioning

our analysis on shareholder activists’underlying motivations.

Because campaigns for increased gender diversity may be

driven by either economic eff‌iciency or social legitimacy con-

cerns, we characterize our sample ofproposals as either f‌inan-

cially or sociallymotivated based on activisttype. We f‌ind that

socially motivated shareholder activists target f‌irms with

signif‌icantly higher levels of board female representation

compared to f‌inancially motivated activists, consistent with

institutional theory predictions. These insights underscore

the recommendation of Judge et al.(2010) that activist motiva-

tion should be takeninto account in future research related to

shareholder proposals. In addition, while we observe larger

percentage increases in female board representation for f‌irms

targeted by f‌inancially motivated activists, our statistical tests

reveal that f‌inancially motivated and socially motivated

shareholder proposals are equally effective in increasing

board gender diversity. We thus conclude that shareholder

proposals are an effective mechanism for achieving corporate

governanceobjectives irrespectiveof activists’underlyingmo-

tivations.However, we note that meanfemale board represen-

tation for f‌irms two years after being targeted –6 percent (10

percent)for f‌irms targeted with f‌inanciallymotivated (socially

motivated) proposals –remains far below the level of repre-

sentation sought by various activist groups, suggesting that

legislativeaction may still be necessary to achieve current cor-

porate board diversity goals in the US.

The paper is organizedas follows. In the next section,we re-

view the theoretical perspectivesand prior literaturerelated to

board genderdiversity and shareholder activismand develop

our hypothesesregarding the antecedents of genderdiversity-

related shareholder activism andits effectiveness. Wethen de-

scribe our research methodology and present our empirical

f‌indings. Discussion and conclusionsare provided in the f‌inal

section.

THEORETICAL BACKGROUND AND

HYPOTHESES

Our research question addressing the antecedents and ulti-

mate effectiveness of shareholder activism directed toward

increasing corporate board gender diversity brings together

two disparate streams of the corporate governance literature.

However, both the board diversity literature and the share-

holder activism literature have shared a reliance on two central

theoretical perspectives to structure their investigations –

agency theory and institutional theory. We therefore draw

on both theoretical perspectives in our literature review

and in developing our hypotheses.

BOARD COMPOSITION AND DIVERSITY

Agency theory perspectives

Agency theory (Jensen & Meckling, 1976) is arguably the

dominanttheoretical framework usedwithin corporate gover-

nance research. It stems from the separation between owner-

ship (shareholders) and control (managers). This separation

provides an opportunity for managers (agents) to act in their

own self-interest by maximizing their own utility at the ex-

pense of the owners (principals).

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© 2016 JohnWiley & Sons LtdVolume 24 Number 4 July 2016