Women in the Boardroom and Their Impact on Governance and Performance

In our paper “Women in the Boardroom and Their Impact on Governance and Performance”, which is forthcoming in the Journal of Financial Economics, we investigate the hypothesis that gender diversity in the boardroom affects governance in meaningful ways. Our initial sample consists of an unbalanced panel of director-level data for S&P 500, S&P MidCaps, and S&P SmallCap firms collected by the Investor Responsibility Research Center (IRRC) for the period 1996-2003. Once we supplement this data with other director and financial information, we have a final sample of 86,714 directorships (director firm-years) in 8,253 firm-years of data on 1,939 firms.

We find that gender diversity has significant effects on board inputs. Women are less likely to have attendance problems than men. Furthermore, the greater the fraction of women on the board is, the better is the attendance behavior of male directors. Holding other director characteristics constant, female directors are also more likely to sit on monitoring-related committees than male directors. In particular, women are more likely to be assigned to audit, nominating, and corporate governance committees, although they are less likely to sit on compensation committees. Women also appear to have a significant impact on board governance. We find direct evidence that more diverse boards are more likely to hold CEOs accountable for poor stock price performance: CEO turnover is more sensitive to stock return performance in firms with relatively more women on boards. We also find that directors in gender-diverse boards receive relatively more equity-based compensation. We do not find a statistically reliable relationship between gender diversity and the level and composition of CEO pay, which is consistent with our findings that female board members are underrepresented on compensation committees and thus have less involvement in setting CEO pay.

The evidence on the relationship between gender diversity on boards and firm performance is more difficult to interpret. Although the correlation between gender diversity and either firm value or operating performance appears to be positive at first inspection, this correlation disappears once we apply reasonable procedures to tackle omitted variables and reverse causality problems. Our results suggest that, on average, firms perform worse the greater is the gender diversity of the board. This result is consistent with the argument that too much board monitoring can decrease shareholder value. Thus, it is possible that gender diversity only adds value when additional board monitoring would enhance firm value. Using additional tests, we find that gender diversity has beneficial effects in companies with weak shareholder rights, where it is plausible that additional board monitoring can enhance firm value, but detrimental effects in companies with strong shareholder rights.

The full paper is available for download here.