Investors’ Response to the #MeToo Movement: Does Corporate Culture Matter?

Good corporate governance is a bedrock of corporate America, with a central tenet being the board of directors’ role in effectively overseeing and monitoring the firm. Recently, institutional investors have focused on changing board composition. Beginning in 2017, two of the “Big 3” institutional investors, State Street and BlackRock, began an ESG activist campaign for their portfolio firms to include women on their board of directors, voting consistently against directors on the nominating committee if the firm presented a ballot of directors with zero women. Prominent proxy advisors, including ISS and Glass Lewis, also have advanced voting policy guidelines that reflect commitments to board gender diversity. In 2020, Goldman Sachs joined this campaign by announcing it would not underwrite IPOs in the U.S for firms with all-male boards of directors.

Given the voting and financial clout of these institutions, it is not surprising that their activism wielded significant influence in this governance area. Between 2017 and 2020, the number of S&P 1500 firms having all-male boards dropped from 179 to 30, with no S&P 500 board retaining a board without at least one woman director. In 2020, of the top 25 U.S. IPOs, just one company, Dun & Bradstreet, went public with an all-male board, compared to 12 IPOs in 2018. Government and regulators also have responded. In 2018, California passed legislation mandating most publicly traded companies based there to have at least three women on their boards by the end of 2021 (California Senate Bill No. 826), and in 2020, the NASDAQ proposed a change to its corporate governance listing requirements by requiring the inclusion (or explanation of non-inclusion) of at least one woman board member.

Our new research paper joins the conversation surrounding board gender diversity from a novel perspective. We use gender to measure culture—as opposed to using gender to identify specific skills brought to the table, which has been the focus of prior studies. In so doing, we take board composition as a given and, instead, focus on changes in investors’ beliefs about gender-related firm risk—as signaled by the existing composition of the board. This contrasts with prior work, which largely focuses on the addition of women to boards.

Our paper exploits a shock in investor attention to the issue of sexual misconduct in the workplace to provide evidence that the #MeToo movement revised investors’ beliefs about the cost of fostering a culture that excludes women. In particular, we propose that the #MeToo movement shifted investors’ views of the economic risks associated with sexual misconduct in the workplace.

Following “critical mass” theory of group dynamics (and consistent with the new California law), we identify firms with inclusive cultures as those firms that enter the #MeToo time frame with three or more women in the board room over 2012-2016, the five-year period immediately preceding the first #MeToo tweet. We compare these 481 “inclusive” firms to 122 “exclusive” firms that had historically kept women completely out of the board room prior to the advent of the #MeToo movement, as evidenced by having all-male boards over the same time period. If firms with all-male boards are associated with an internal culture that is “exclusive” to women and more vulnerable to allegations of sexual misconduct, then these firms should earn significantly negative abnormal returns as the revelations of this movement became more apparent. On the other hand, if firms with gender-diverse boards are indicative of an internal culture that is “inclusive” of women, then these firms should be less affected by the shock, thus producing less negative or even positive abnormal stock returns.

Using various approaches to cumulating abnormal returns, we assess the overall market reaction to 37 event dates occurring during the first 9 months of the #MeToo movement. Our findings consistently support the view that exclusive firms experienced negative abnormal market returns as momentum for the cause increased, while inclusive firms enjoyed positive abnormal returns as #MeToo events unfolded. The discrepancy in cumulative returns between groups grew over time, reflecting the increased momentum of the #MeToo movement as more allegations of sexual harassment surfaced. These findings hold regardless of our approach to benchmarking abnormal performance and after taking various approaches to controlling for covariates between firm types.

In contrast, placebo tests conducted over the same time period (replacing #MeToo dates with randomly generated “pseudo” dates) produce insignificant differences in market price movements between the two groups, suggesting that the return patterns we document stem from the #MeToo movement itself and not to other firm characteristics.

We also document systematic differences in culture between the exclusive and inclusive firms. Focusing on executive characteristics, we find that firms that leave women out of the board room also neglect to hire (or promote) female executives. Moreover, examining external evaluations of firm culture (as maintained by Glassdoor, Fortune and two proprietary databases), we document that differences in gender diversity and inclusion span broadly throughout all levels of the workforce, with exclusive (inclusive) boards being both a reflection of and shaping their respective firms’ cultures.

Collectively, our evidence is consistent with the #MeToo movement revising investors’ beliefs about the costs of fostering a culture that excludes women, as reflected by the tone at the top set by the absence or presence of women in the board room. Overall, investors appear to have changed their beliefs about the risks associated with future revelations of misconduct and also about the value of having women in the board room shaping the culture of the firm.

In the context of increased regulatory attention to board gender diversity, as well as the ESG activist campaigns by large institutional investors, our study documents a shift in investors’ beliefs about the risks associated with future revelations of misconduct and also about the value of having women in the board room shaping the culture of the firm. In so doing, our findings inform advisors, regulators and other stakeholders as they consider approaches to fostering diversity and inclusion in ways that have a meaningful impact on firm value.

The complete paper is available for download here.