Female Directors, Board Committees and Firm Performance

Colin Green is Professor of Economics and Swarnodeep Homroy is Lecturer in Economics at Lancaster University. This post is based on their recent paper.

There is an increasing focus on the gender diversity of executive boards. While the share of female employment in large firms has increased dramatically in the United States and the European Union, this has not been reflected in the gender composition of executive boards (Black and Juhn, 2000; Bertrand and Hallock, 2001). Growing concerns about this lack of gender equality has led to a spate of regulation aimed at increasing female representation on corporate boards. Female representation on corporate boards is likely to remain a central theme of future interventions, yet existing evidence suggests no or even a negative effect of board gender diversity on firm performance (Adams and Ferreira, 2009; Gregory-Smith et al, 2014).

In our paper, we return to this issue and examine the effect of female directors on firm performance within large listed European firms. We focus on one particular channel through which female directors can influence firm performance, their involvement in key board committees (audit, nomination and compensation). This follows from the observation that while the effect on firm performance of board gender diversity has been extensively researched, recent work highlights the importance of these committees in the functioning of the board (Adams, Hermalin and Weisbach, 2010; Guo and Masulis, 2015). Hence, we argue that this focus provides a better test of the effect of gender diversity on firm performance as directors on these committees have a greater ability to directly influence the core corporate governance mechanisms of the firm.

A key challenge to causally identifying the effect of female representation is that there may be omitted unobservable characteristics that simultaneously affect firm performance and the appointment of female directors, to both the board and to committees. To circumvent this problem we rely upon two established results. First, it is well known that CEOs influence the process of director appointments to committees, and to boards in general (Shivdasani and Yermack, 1999; Coles, Daniel, and Naveen, 2014). Second, previous research has demonstrated how child gender affects parental preferences for a range of social and economic outcomes (Washington, 2008; Oswald and Powdthavee, 2010). In particular, parenting a daughter shapes the father’s identity and social views (Akerlof and Kranton, 2000). This, combined with almost all the CEOs in our sample being male, leads us to use information on the gender composition of CEOs’ children as a source of variation in the appointment of female directors on boards, and assignment to committees.

The underlying identifying assumption of this approach is that nature randomly allocates a child’s gender conditional on parental characteristics. In turn, fathers who parent daughters are shown to have increased sympathy towards feminist issues, compared to fathers who parent sons, or have no children. In our case, the assumption is that parenting a female child makes a male CEO more likely to appoint a female director, but the gender of the child does not influence firm performance directly.

Using this approach we demonstrate that whilst female representation on corporate boards has a modest impact on firm performance, involvement on board committees is more economically meaningful. A one standard deviation increase in the proportion of female directors on committees enhances firm performance by 0.56 of a standard deviation. This is roughly three times larger than the firm performance impact of increased female representation on boards alone. This is an important result as while regulatory and institutional pressures may lead to appointments of female directors on the board, they do not ensure the participation of appointed female directors in the governance mechanism. Hence, this suggests that a focus of policy should be to go beyond increased female representation on boards, to a more active involvement of female directors in key governance roles. Moreover, the financial returns we report suggest that this is a source of potential competitive advantage for firms.

In light of our findings, we argue that economically meaningful effects of board gender diversity stems not from female board representation, but assignment to important roles. We recognize that committee membership represents an imperfect proxy for director involvement in governance and decision making, and stress the potential for further research which can find more specific measures to find larger, positive, financial benefits for firms from gender diversity. A further issue is that the appointment of female directors, and assignment to committees are likely constrained by a range of demand and supply side frictions. A challenge for future research is to credibly identify these constraints to more gender equal boards.

Our results are timely considering the recent regulatory requirements for mandatory female representation on the boards of European firms. These range from the advisory requirements in Netherlands, Spain, for firm disclosure of their gender diversity policy in board recruitment in the US, through to enforced gender quotas in Germany, France, and Norway (Higgs, 2003; Davies, 2015). In particular, our results are supports the economic premise for gender diverse corporate boards.

The full paper is available for download here.


Adams, R.B. and Ferreira, D. (2009) Women in the boardroom and their impact on governance and performance, Journal of Financial Economics, vol. 94(2), pp. 291-309

Adams, R.B., Hermalin, B.E., and Weisbach, M.S. (2010) The role of board of directors in corporate governance, Journal of Economic Literature, vol. 48(1), pp. 58-107.

Akerlof, G.A., and Kranton, R.E. (2000) Economics and identity, Quarterly Journal of Economics, vol. 115 (3), pp. 715-753.

Bertrand, M., and Hallock, K. (2001) The Gender Gap in Top Corporate Jobs, Industrial and Labor Relations Review, vol. 55(1), pp. 03-21.

Black, S. and Juhn, C. (2000) The Rise of Female Professionals: Are Women Responding to Skill Demand? American Economic Review, 90(2), pp. 450-455.

Coles, J.L., Daniel, N.D., and Naveen, L. (2014) Co-opted boards, Review of Financial Studies, vol. 27(6), pp. 1751-1796.

Cronqvist, H., and Yu, F. (2016) Shaped by Their Daughters: Executives, Female Socialization, and Corporate Social Responsibility, Available at: http://ssrn.com/abstract=2618358 or http://dx.doi.org/10.2139/ssrn.2618358.

Davies, M. (2011) Women on Boards, The Davies Report.

Gregory-Smith, I., Main, B.G.M., and O.Reilly, C.A. (2014). Appointments, pay and performance in UK boardrooms by gender, The Economic Journal, vol. 124, pp. F109-F128.

Guo, L., and Masulis, R.W. (2015) Board Structure and Monitoring: New evidence from CEO turnovers, Review of Financial Studies, vol. 28(10), pp. 2770-2811.

Higgs, D., 2003. Review of the role and effectiveness of nonexecutive directors. http://www.ecgi.org/codes/documents/higgsreport.pdf.

Oswald, A.J., and Powdthavee, N. (2010) Daughters and Left Wing Voting, Review of Economics and Statistics, vol. 92(2), pp. 213-227.

Shivdasani, A., and Yermack, D. (1999) CEO involvement in the selection of new board members: An empirical analysis, The Journal of Finance, vol. 104 (5), pp. 1829-1853

Washington, E.L. (2008) Female Socialization: How daughters affect their legislator fathers’ voting on women’s issues, American Economic Review, vol. 98(1), pp. 311-332

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