When do women on board of directors reduce bank risk?

• Date: 02 October 2020
• DOI: https://doi.org/10.1108/CG-03-2020-0089
• Published date: 02 October 2020
• Pages: 1307-1327
• Author: Giuliana Birindelli,Helen Chiappini,Marco Savioli
• Subject Matter: Strategy,Corporate governance

When do women on board of directors

reduce bank risk?

Giuliana Birindelli, Helen Chiappini and Marco Savioli

Abstract

Purpose –This study aims to examine the relationship between female directors and bank risk. In

particular, whether such a relationship varies across sound or unsound banks and with or without a

criticalmass of female directors is tested.

Design/methodology/approach –Using a sampleof 215 listed banks from 40 countries over the period

2008–2016, this study carries out panel data analyses and tests all the model specifications on four

differentmeasures of risk (common equity ratio, leverage,NPLs ratio and price volatility).

Findings –The findings show thatincreasing the number of female directors doesnot reduce bank risk

when banks areunsound. When banks are sound, female directorshave a significant and positiverole in

reducingrisk, only until reaching a critical mass of women.

Practical implications –This study providesuseful corporate governance indications forpolicymakers

and practitioners.Advantages of gender diversity on boards are recognizedespecially in sound banks,

but increasingthe number of women directors beyond the criticalmass may not lead to lower risk. In fact,

ethicalor legal pressures aimed at increasing genderdiversity on boards (i.e. soft or hard genderquotas)

may cause undesired effects on bank risk, especially if female directors are not chosen on merit and

skills. Moreover, gender-balanced boards, namely, with a ‘‘dual critical mass,’’ seem to assure more

effectivedecision-making processes.

Originality/value –This study provides empirical evidence on female board members and risk

minimization,differentiating between sound or unsoundbanks. Furthermore, this study contributesto the

literature on the critical mass of women on the board of directors by testing this theory for these two

categoriesof banks.

Keywords Bank risk, Corporate governance, Female directors, Critical mass of women

Paper type Research paper

1. Introduction

In recent years, two main factors have pushed for greater gender balance on bank boards

of directors: the global financial crisis (Garcı

´a-Meca et al., 2015) and a growing ethical

pressure (Mateos de Cabo et al., 2012). The global financial crisis underscored the failure

of corporate governance mechanisms (The High-Level Group on Financial Supervision in

the European Union, 2009) and has consequently created a driver to strengthen such

mechanisms through more diversified boards, at least in terms of age, professional

experience and gender (Basel Committee on Banking Supervision, 2015). Gender balance

may foster sound decision-making processes by expanding the views and experiences of

management bodies and reducing the risk of male “group-think,” which was an important

factor behind the crisis (see, among others, the Directive 2013/36/EU). In addition, growing

ethical pressure makes the claim that gender diversity is a desirable factor itself (Mateos de

Cabo et al., 2012), and that women should not be excluded from a firm’s top positions. In

response to this, many governments have issued laws establishing gender quotas (e.g.

France, Italy, Norway and Spain) or have supportedgreater representation through national

corporate governance codes(e.g. Austria, Germany and Ireland).

Giuliana Birindelli is based

at the Department of

Management and Business

Administration, Gabriele

d’Annunzio University of

Chieti and Pescara,

Pescara, Italy.

Helen Chiappini is based at

the Department of

Management and Business

Administration, Gabriele

d’Annunzio University of

Chieti and Pescara,

Pescara, Italy.

Marco Savioli is based at

Department of Economics,

University of Salento,

Lecce, Italy and Rimini

Centre for Economic

Analysis, Milano, Italy.

Received 5 March 2020

Revised 28 July 2020

31 August 2020

Accepted 7 September 2020

Marco Savioli gratefully

acknowledges financial

support from the intervention

co-funded by the 2007–2013

Development and Cohesion

Fund –APQ Research Puglia

Region “Programma regionale

a sostegno della

specializzazione intelligente e

della sostenibilita

`sociale ed

ambientale

–FutureInResearch”.

DOI 10.1108/CG-03-2020-0089 VOL. 20 NO. 7 2020, pp. 1307-1327, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1307

A relevant academic debate also emerged around the topic of women and firm

performance (Darmadi, 2013;Pathan and Faff, 2013;Faccio et al.,2016;Sila et al., 2016;

Terjesen et al.,2016;Bhat et al.,2019;Yang et al.,2019;Ye et al.,2019;Fern

andez-

Temprano and Tejerina-Gaite, 2020;Greene et al.,2020;Hurley and Choudhary, 2020).

Few studies analyze the relationship between female directors and bank risk (Berger et al.,

2014;Palvia et al., 2015;Farag and Mallin, 2016;Owen and Temesvary, 2018) though there

is growing attention to improved monitoring of decisions by management bodies by means

of adequate representation of women (Basel Committee on Banking Supervision, 2015;

EBA-European Banking Authority and ESMA-European Securities and Markets Authority,

2018).

Based on a sample of 215 listed banks from 40 countries over the period 2008–2016, we

examine whether the relationship between female directors and risk is different in either

sound or unsound banks and whether a critical mass of female board members influence

bank risk. We assume that the impact of gender diversity is context-dependent, as it

depends on bank and board characteristics (Owen and Temesvary, 2018;Groening,2019).

In particular, drawing inspiration from the recent study by Owen and Temesvary (2018) on

US banks, we believe that female board members are mostly able to play a pivotal role in

sound banks. Furthermore, we assume that their role changes when there is a critical mass

of women on the board of directors (Kanter, 1977a,1977b). In fact, when there is more than

a certain number of women sitting on a board a threshold or critical mass is reached

(Joecks et al.,2013) and they no longer hold a “symbolic status” and can influence the

dynamics and the decisions withinthe board.

We use four measures of risk (common equity ratio, leverage,NPLs ratio and price volatility)

to differentiate our banks with respect to bank soundness. These measures are linked to

corporate governance mechanisms. A high level of risk –especially when not accompanied

by high returns –is strictly connected with management and corporate governance failure.

To validate our choices, we investigated whether our categorization of sound/unsound

banks is consistent with other variables that emerge in the literature (DeYoung, 1998)as

related to corporate governance mechanisms: return on assets (ROA) and deposits on

loans ratio, respectively indicators of profitability and liquidity/funding. The results on tests

of differences between means (available upon request) show that the banks we identified

as sound significantly outperformthe unsound, both in terms of ROA and deposits on loans

ratio.

Our findings show that, when the critical mass of women has not been reached, the

sign of the relationship between female directors and risk is negative for sound banks

and not significant (or slightly positive) for unsound banks. Once there i s a critical

mass of women on the board, the relationship with risk is not significant. In addi tion to

the heterogeneity between sound and unsound banks, our results confirm a non-linear

effect of female directors on bank risk. The results are robust across the m any

specifications considered: sample splits relating to different meaningful geograp hical

areas and allowing for endogeneity of sound/unsound bank categorization and of

female directors.

This study contributes to the ongoing debate over the link between gender balance on the

board of directors and bank risk in several ways. First, to the best of our knowledge, there

are no studies on the relationship between gender diversity and risk analyzed in sound/

unsound banks. Second, we consider a panel of listed banks from 40 countries, while

previous studies on female directors and risk concentrate on specific geographical areas,

with a majority of studies focused on US banks (Muller-Kahle and Lewellyn, 2011;Palvia

et al.,2015

;Owen and Temesvary, 2018) or on specific countries (Berger et al., 2014;Skała

and Weill, 2018). Finally, we contribute to the literature on critical mass theory (Kanter,

1977a, 1977b) by testingthis theory for sound and unsound banks.

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