When do investors value board gender diversity?

• DOI: https://doi.org/10.1108/CG-01-2018-0012
• Pages: 60-79
• Published date: 17 September 2018
• Date: 17 September 2018
• Author: Christopher Groening
• Subject Matter: Corporate governance,Strategy

When do investors value board

gender diversity?

Christopher Groening

Abstract

Purpose –This paper aims to use the passage of the Italian Gender Diversity Law to help isolate the

effects of board gender diversity on firm value by investigating conditions under which such diversity

providesgreater role-enhancing resourcesto the board.

Design/methodology/approach –This paper used a one-day event study to measure when gender

diversity matters to investors. Abnormal returns from Italian firms were used to study investors’

anticipatedoutcomes of the effect of gender diversityon firm value.

Findings –Board genderdiversity is financiallybeneficial especiallyfor firms with a male dual CEO and

board chair and with few or no women on board committees and firms that operate in industries with

greater levels of competition. Addition of these moderators more than doubles the variance explained.

Moreover,the effect of genderis isolated in this study,which examinedinvestor reactionto the expectation

of increasesin the numberof female boardmembers, ratherthan to specificfemale appointees.

Social implications –Determining the conditions when a gender diverse matters to firm value is

important for shareholders, policymakers and advocates for gender equality. The findings illustrate

precise conditions for stakeholders to make the case for board gender diversity as achieving financial

reward,in addition to societal benefit.

Originality/value –The value of a gender diverseboard is contingent on the company’s need for diverse

resources (e.g. more competition, lack of gender diversity on committees or CEO duality). This paper

provides insight as to why prior research linking board gender diversity to firm value finds seemingly

contradictory results. Thus, this paper provides useful insights for researchers, boards and legislative

bodies.

Keywords Gender, Board of directors, Event study

Paper type Research paper

Introduction

The persistent challenge of achieving gender diversity in business is of greatconcern when

examining corporate boards. Growth in the percentage of women on corporate boards has

been slow. Female representation on corporate boards in countries such as Norway and

France averages near 40 per cent; in others, such as the USA and Canada, it averages

close to 20 per cent, whereas in Brazil, India and Portugal, the average is around 10 per

cent (Eastman et al.,2016). Yet, even if boards achieve gender diversity, there is a lack of

consensus as to whether investors believe gender diversity will create a board that is more

able to execute its duties and increasefirm value (Post and Byron, 2015;Kang et al.,2010).

Several papers have discussed the multi-faceted role of women on boards: monitoring and

directing managers, monitoring regulatory compliance, providing insight, advice and

counsel to managers and creating legitimacy for firms (van der Walt and Ingley, 2003;

Adams et al.,2010;Adams and Ferreira, 2009;Kim and Starks, 2016). Some findings

suggest that the presence of female board members has a positive impact on firm value

(Joy et al.,2007;Carter et al.,2003), whereas other studies are less sanguine about their

impact (Miller and Triana, 2009;Matsaand Miller, 2013).

Christopher Groening is

based at the Department of

Marketing and

Entrepreneurship, Kent

State University College of

Business Administration,

Kent, Ohio, USA.

Received 28 August 2017

Revised 8 January 2018

6 May 2018

Accepted 28 June 2018

PAGE 60 jCORPORATE GOVERNANCE jVOL. 19 NO. 1 2019, pp. 60-79, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2018-0012

My paper advances this literature stream by suggesting that the capability of gender

diversity to affect firm value varies depending on the firm’s need for diverse resources; in

other words, is the relationship between board diversity and firm value contingent on

characteristics of the firm and its environment? To look for an answer to this question, an

examination of theoretical explanations for the link between boardgender diversity and firm

value is necessary. Academics posit that no single theory can explain the link between

board diversity and firm value (Dalton et al., 1999;Carter et al.,2010;Hillman and Dalziel,

2003). Therefore, this paper uses a multi-theoretical framework to examine the relationship

between board diversity and firm value: agency theory addresses monitoring of managers

and regulatory compliance (Bathala and Rao, 1995); resource dependence focuses on

advice and counsel to managers (Hillmanet al.,2000); and institutional theory applies to the

legitimacy of the board (Hillman et al.,2007). The potential moderators for the gender

diversity–firm value relationship are derived from whether the agency-reducing, resource-

and legitimacy-improving functions of diversity are valuable in all scenarios (Terjesen et al.,

2008).

First, the need for a diverse board may be contingent on the level of competition. That is,

more competitors may require more resources from the board to provide insight, advice

and counsel to managers regarding the threats that competitors present. Second, board

committees monitor managers and regulatory compliance. A board with the resources of

diverse committees will reap more financial benefits due to its improved monitoring

capability. In addition, diverse board committees can create greater levels of legitimacy

with stakeholders. Third, a concentration of power is created when the same individual

occupies the positions of CEO and Chairman of the Board. This situation, known as CEO

duality, creates an agency issue that may require greater level of monitoring by the board,

and thus, greater levels of diversity.Finally, other forces may ameliorate the need for a high

level of monitoring by the board. For example, regulated industries have a high level of

governmental regulation, reducing agency issues, and thus may make the presence of a

diverse board less necessary and therefore less valuable to a firm.

The nature of the data used to examine the role of gender diversity in creating firm value is

another possible challenge when trying to reconcile divergent research findings. Prior

studies examineboards where the identities, and thus qualifications and characteristics (e.g.

name, gender, age and credentials) of each board member are known to investors. In other

words, previous studies may not have been accuratelymeasuring the impact of the concept

of board gender diversity, but rather the reaction to the appointment or presenceof specific

women. This paper attempts to address this question by investigating a scenario where the

specific characteristics of the womenon the board are not available to investors.

This paper examines the effect of reducing gender inequality on firm value by examining

investors’ immediate reaction when presented with news that a firm’s board of director’s

gender make-up will have to change. Specifically, this paper uses a one-day stock market

reaction to the passage of a law mandating that all Italian publicly traded companies’

boards comprise a minimum of 20 per cent female members to investigate whether the

effect of women’s board appointmentson firm value is contingent on firm characteristics.

Financial outcomes regarding diversity

There is a lack of consensusregarding the effect of mandated gender diversity on firm value

(van der Walt and Ingley, 2003;Terjesen et al.,2009). Evidence suggests that managers

perceive a positive correlation between diversity and firm performance (Allen et al.,2008).

Several studies also found evidence of a positive financial effect from a diverse board. For

instance, gender diversity in boards of directors has a positive effect on Tobin’s q, the ratio

of the market value of a company’s assets to the replacement cost of its assets, in both

Spanish (Campbell and Mı

´nguez-Vera, 2007) and US firms (Erhardt et al.,2003). In fact,

many US firms deliberately have sought to increase the ratio of female to male board

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