The Big Three and Board Gender Diversity: The Effectiveness of Shareholder Voice

Todd Gormley is Associate Professor of Finance at Washington University in St. Louis Olin Business School. This post is based on a recent paper authored by Prof. Gormley; Vishal K. Gupta, Associate Professor of Management at University of Alabama Culverhouse College of Business; David A. Matsa, Professor of Finance at Northwestern University Kellogg School of Management; Sandra Mortal, Professor of Finance at University of Alabama Culverhouse College of Business; and Lukai Yang, Ph.D candidate at University of Alabama. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In 2017, “The Big Three” institutional investors (BlackRock, State Street, and Vanguard) launched campaigns to increase gender diversity on corporate boards. BlackRock and State Street’s campaigns included policies of voting against directors’ reelection at firms that made insufficient progress toward a gender-diverse board. In our paper, The Big Three and Board Gender Diversity: The Effectiveness of Shareholder Voice, we exploit cross-sectional variation in The Big Three’s ownership stake to examine the impact of these investor-driven campaigns and shed light on the frictions that slow women’s ascension to corporate leadership positions.

Our analysis shows that The Big Three’s influence campaigns had a large impact on boards’ gender diversity. During the years of the campaign (2017-2019), one standard deviation greater Big Three ownership is associated with an 80% increase in the net flow of new female board members and an 11% increase in the overall proportion of female directors. Both fewer female director departures and more new additions drive this increase. Even our most conservative estimates imply that The Big Three’s campaigns led firms to add 2.5 times as many female directors in 2019 as they had in 2016, accounting for almost half of the total 2016-to-2019 increase in gender diversity and about a third of the decline in all-male boards over that same period. While large, these estimates likely reflect a lower bound. For example, they do not account for the positive spillover effects of The Big Three’s campaigns onto firms in which they own smaller stakes.

The increase in board gender diversity is closely tied to The Big Three’s campaigns. For example, the timing of the increase corresponds to the timing of each asset manager’s campaign: firms in which State Street owned large stakes begin adding female directors starting in 2017 while firms with large stakes owned by Vanguard and Blackrock, which started their campaigns only after most companies had held their 2017 director elections, begin adding more female directors starting in 2018. The increase in female directors is also greater among firms targeted by the individual asset managers’ campaigns. We find no evidence that the differential growth in female directors we document is driven by the California board mandate, which occurs at the end of our sample period, or by larger or B2C companies coming under more intense pressure to add female directors, perhaps in response to the public attention from the “Me Too” movement.

Big Three ownership is also associated with an increase in female directors’ likelihood of holding key positions on the board. For firms with greater Big Three ownership in 2016, a given female director is more likely to chair a board committee after 2016, including the nominating and audit committees, and more likely to serve on the nominating committee. These findings suggest that the growth in female directors resulting from Big Three’s campaigns was not mere tokenism.

The Big Three justified their campaigns by arguing that firms were being too narrow in how they identified candidates, relying excessively on personal connections and candidates’ having executive experience (State Street Global Advisors, 2017). Because men are better networked with other men and have more executive and board experience, both of these criteria have the potential to steer director searches away from women and lead to hysteresis.

Tracing the effects of The Big Three’s gender diversity campaigns, we find that these frictions do slow women’s ascension to corporate boards. Firms expanded diversity during the campaigns by casting a wider net in their director searches: the new female directors hired were less connected to the CEO and existing board members, and they had less executive and board experience than the candidates that would otherwise have been selected. For example, one standard deviation greater Big Three ownership is associated with a 75.5% reduction in the likelihood that a newly added female director is connected to the CEO and a 1.7% decline in the proportion of a firm’s directors with CEO experience.

Our findings illustrate shareholder advocacy’s potential to expand women’s participation in corporate leadership. The success of The Big Three’s campaigns shows that a concerted effort by influential stakeholders can drive change, even in the absence of government mandates. Our results are particularly salient when one considers that governments around the world are enacting quotas requiring companies to appoint females to their board of directors. Our research spotlights a hitherto unrecognized channel for increasing board gender diversity, one that does not involve government fiat. Furthermore, unlike California’s quota, which led to tokenism (Hwang, Shivdasani, and Simintzi, 2020), we find that The Big Three’s campaigns genuinely increased women’s prominence on boards, including serving on and chairing the nominating committee. These findings suggest that investor-driven campaigns may be less likely to result in tokenism than government mandates.

Our results also contribute to the ongoing debate regarding the role of indexed investment strategies in corporate governance. The Big Three now collectively hold about 20% of the outstanding equity in large US public companies, raising questions about their stewardship. Some argue that these institutions lack the incentive or firm-specific information required to monitor firms effectively (e.g., Schmidt and Fahlenbrach, 2017; Bebchuk and Hirst, 2019; Gilje, Gormley, and Levit, 2020). In contrast, others argue that these institutions are motivated monitors who can exert influence on governance issues that are easy to monitor at scale (Appel, Gormley, and Keim, 2016; Appel, Gormley, and Keim, 2019; Fisch, Hamdani, and Solomon, 2019; Kahan and Rock, 2019; Lewellen and Lewellen, 2020). Our findings show that indexed investors can influence firms’ governance structures. The Big Three’s campaigns successfully targeted an outcome that was easy to monitor with little firm-specific information, suggesting that The Big Three can play pivotal roles in shaping other similarly broad governance issues.

The complete paper is available for download here.

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  1. Andrea Carska
    Posted Monday, January 4, 2021 at 8:03 pm | Permalink

    I have been following the HLS Corp Governance forum for many years. I came across it one summer when I was a research assistant for Prof. Weiler (just across from Prof. Bebchuk’s office). Now as GC of global company (the world’s largest integrated company in its field) operating in 200 countries, I find the insight you provide in the forum inspirational and a step ahead. Recently I liked your piece on poison pill – written by the Linklators’ team. As to recent articles including this one on gender diversity on boards – they are excellent source of information but would be interested in reading a practical/inspirational piece and/or advice about how to get on a path to be considered for these boards. The NASDAQ now has new regs on gender diversity but it is unclear who are the
    trustworthy players/sources/recruiters filling these positions for independent directors and how to be considered for these. Thank you.

    Andrea Carska-Sheppard

  2. Vishal
    Posted Tuesday, February 2, 2021 at 6:32 pm | Permalink

    Dear Andrea, thanks for your comment! A number of universities have now started programs that help experienced women get board seats. Yale University has a program in this area that you may find useful ( Other universities like Northwestern and U. Washington also have similar programs. We would be happy to put you in touch with the folks running these programs, if you are interested. Once again, thank you for your comment on our post.