The impact of board-level female directors on firm performance: evidence from India

• Date: 22 March 2023
• Pages: 945-967
• DOI: https://doi.org/10.1108/EDI-07-2022-0172
• Published date: 22 March 2023
• Author: Rupjyoti Saha

The impact of board-level female

directors on firm performance:

evidence from India

Rupjyoti Saha

School of Commerce, XIM University, Bhubaneswar, India

Abstract

Purpose –This study investigates the impact of female directors on firms’financial performance by

scrutinizing the different roles they are empowered to fulfill.

Design/methodology/approach –This study examines the impact of the roles performed by female

directors on firms’financial performance using a panel dataset of the top 100 listed Indian firms over a period of

5 years. The study uses an appropriate panel data model for empirical analysis. For the robustness evaluation,

a two-stage least square (2SLS) with the instrumental variable model were used.

Findings –The findings reveal a significantly positive impact of the total percentage of female directors on

firms’financial performance. Further, by disentangling the impact of the total percentage of female directors

between independent directors and executive directors, the study shows that independent female directors

make a significant positive contribution to their firms’financial performance. By contrast, the performance

impact of female executive directors was insignificant. In addition, the findings reveal that firms with a higher

proportion of independent female directors outperform firms with a higher percentage of female executive

directors.

Originality/value –This study is the first of its kind to unravel the performance impact of female directors

and distinguish between the roles of independent directors and executive directors in the context of the

emerging market of India, after the imposition of a gender quota for corporate boards.

Keywords Board gender diversity, Directorial roles, Firms’performance, India

Paper type Research paper

1. Introduction

Given the burgeoning importance of having female directors on corporate boards, it is

essential to understand how gender diversity on boards influences those firms’performance

outcomes. Board activities, such as corporate strategy formulation, monitoring, inter alia,

reflect the characteristics of the board of directors that impact firms’performance. Despite

increased attention toward gender diversity on boards in recent years (Adam and Ferreira,

2009;Liu et al., 2014;Nekhili et al., 2020;Maji and Saha, 2021;Chatterjee and Nag, 2022), there

remains much to be explored in this arena to explain when and how it contributes to firms’

performance outcomes.

Diverse theoretical perspectives have been employed to explain the bottom-line effect of

board gender diversity. For instance, the agency perspective emphasizes the presence of

female directors for their superior monitoring skills (Adams and Ferreira, 2009;Rhode and

Packel, 2014;Nekhili et al., 2020), while the resource dependency (Pfeffer and Salancik, 2003)

and human capital perspectives are concerned with their diverse leadership styles and unique

human capital endowments in the form of multi-tasking skills, time management, cognitive

abilities, creativity, innovation and superior problem-solving skills (Kakabadse, 2015;

Elmagrhi et al., 2021). Female directors are also credited with possessing better risk

management skills as they generally exhibit more risk-averse attitude and greater vigilance

than male counterparts (Schubert, 2006;Ghosh, 2018), thereby yielding better performance

outcomes (Liu et al., 2014;Maji and Saha, 2021). Moreover, human capital literature also

asserts that female directors possess relatively higher educational qualifications than men

(Hillman et al., 2007;Saha and Maji, 2022). This is a key directorial requirement for women as

Board-level

female

directors

945

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Received 6 July 2022

Revised 11 November 2022

30 January 2023

Accepted 23 February 2023

Equality, Diversity and Inclusion:

An International Journal

Vol. 42 No. 8, 2023

pp. 945-967

© Emerald Publishing Limited

2040-7149

DOI 10.1108/EDI-07-2022-0172

a minority group on boards, in their attempt to break the “glass ceiling”through investment

in education. This reinforces novelist Fannie Hurst’s famed observation that “a woman has to

be twice as good as a man to go half as far”. In addition, as identified by Schwartz (1992),

certain core characteristics of females like benevolence and universalism steer firms toward

the adoption of ethical and legitimate business practices (Abdullah and Valentine, 2009).

In addition to theoretical advocacy, the exigency for greater board gender diversity is

evident from the slew of regulations on the introduction of mandatory gender quotas in

several European countries (such as Norway, Spain, Finland, France, Iceland and Denmark).

The first regulatory initiative seeking gender balance on companies’boards was instituted in

2003 by Norway. This required minimum representation of 40% for both genders on public

companies’boards by 2008 (Tejedo-Romero et al., 2017). The impact of such initiatives has

increased worldwide. In this regard, India is among the pioneering Asian countries to

mandate the presence of at least one female director on corporate boards under the

Companies Act, 2013. The Global Gender Gap Report (2022) identified India to have highest

gender disparity in terms of all socio-economic parameters. This prompted the Indian

government to review its legislations and introduce this regulation.

Moreover, encouraging women’s participation in strategic leadership has become more

important because of the regime of opening-up of the Indian economy, which began in 1991.

This change was necessitated by the need to meet diverse global business exigencies and

ensure wider diversity in the corporate workforce and leadership positions (Maji and Saha,

2021). The need for having female directors was apparent during the first decade of the 21st

century, but the quota legislation was imposed later in 2013. Prior to 2011, the appointment of

women to boards was voluntary due to which the average level of female representation on

boards was quite poor at merely 5.3% in 2009 for the top Indian companies

(Balasubramanian and Anand, 2013). Accordingly, it became apparent that in the Indian

business environment mandatory gender quota would be more effective in streamlining

gender disparity at the board level. Thus quota-based regime was introduced under the

Companies Act, 2013, as it is the umbrella regulation that overhauled the overall corporate

governance framework. It holds that female director is key to uphold stricter corporate ethical

standards (Sarkar and Selarka, 2021).

Empirical research on board gender diversity has gained momentum by emphasizing its

effect on firms’performance (Rose, 2007;Liu et al., 2014;Duppati et al., 2020). Despite the

growing number of policy initiatives aimed at reducing gender disparity at the board level

and reaping the benefits of human capital diversity by supporting females in board

leadership positions, empirical evidence on the performance impact of female directors is

surprisingly mixed (Carter et al., 2003;Campbell and Minguez-Vera, 2008;Adams and

Ferreira, 2009;Ahern and Dittmar, 2012;Liu et al., 2014;Saha and Maji, 2022). The lack of

unequivocal evidence on the positive performance impact of female directors challenges the

rationale for quota-based regulations aimed at promoting board gender diversity.

A review of current literature reveals that most research has examined the overall impact

of female directors on firms’performance, even though the effectiveness differ according to

their roles; that is as independent directors and executive directors separately. In this regard,

female independent directors indicate the number of independent female directors on the

board, without any other affiliation to the firms apart from their directorship; while executive

female directors indicate the number of executive female directors on the board, representing

the internal management group. The variation in the effectiveness of females in different

directorial roles arises from the fact that independent directors are primarily responsible for

the monitoring and mitigation of the agency problem between shareholders and managers

(Jackling and Johl, 2009), while executive directors are considered to be well versed with the

internal complexities of the business. Thus, executive directors assist firms in taking prudent

strategic decisions like mergers, acquisitions, alliances, hiring/firing executives and capital

EDI

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