Controversies over the right way to handle shareholder and stakeholder relations have never been deeper despite decades of debate. In recent work, Nobel laureate Oliver Hart discusses whether, and should, “the board of directors of a public company [has] a legal duty to maximize shareholder value?” In mid-2016, The Wall Street Journal ran a story on a growing trend among leading U.S. chief executive officers (CEOs) to flex their corporate muscles for social causes such as gay and transgender rights. Only a year earlier, however, the Chief Justice of the Delaware Supreme Court, Leo Strine, Jr., sternly warned against “the dangers of denial”:

Despite attempts to muddy the doctrinal waters, a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.

With four out of the six major companies mentioned in the Journal being Delaware corporations, one may wonder what their top managers were thinking when they decided to take such bold moves, arguably in breach of applicable law. In this study, we set out to examine the hotly-debated issue of the relative importance of formal (legal) versus informal (cultural) institutions and of personal values for strategy formation and corporate governance. We hypothesize and show that values and culture play an important role in corporate leader’s decision-making and that the law does not trump them.

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Boards of directors are multi-dimensional and the optimal board combines monitoring and advisory roles to varying degrees. We examine how individual director skills map into these roles. Do directors specialize as “advisors” or “monitors,” or, like boards, do they combine roles? And how do directors’ skills aggregate to the board level—are individual skills independent of each other or do they complement/substitute each other? The answers to these questions are important for understanding what boards do, why they are structured the way they are, and how they can be improved.

In our paper, we answer these questions by exploiting an amendment to Regulation S-K in 2009, which requires public U.S. firms to describe their reasons for nominating directors. According to this rule, firms have to disclose the skills they believe each director brings to the table. A particular strength of these data is that the descriptions represent the firm’s perspective rather than a perspective chosen by researchers. The data allow us to document the skills that directors have and allow us to test how these skills cluster at the board level. We then examine whether some boards have skill sets that lead them to systematically outperform other boards.

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Our forthcoming article in the American Economic Review (May Issue), Women on boards in Finance and STEM industries, is the first in a series of papers in which we connect two policy debates that are usually conducted separately: the debate about women’s underrepresentation in STEM fields and the debate about women’s underrepresentation on corporate boards (see also Adams and Kirchmaier, 2016). Using a comprehensive sample of board data for listed firms in 20 countries from 2001 to 2010, we show that the fraction of women on the board (Board Diversity) is lower for firms in the STEM and Finance sectors (STEM&F) than in non-STEM sectors. This finding is robust to controlling for firm and country characteristics and country and year fixed effects. On average STEM&F firms have 1.8% fewer women on boards than non-STEM firms. Relative to the sample mean of 7.56%, this represents an economically significant leadership gap in STEM&F fields.

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In our paper, Does Gender Matter in the Boardroom? Evidence from the Market Reaction to Mandatory New Director Announcements, we examine how the market perceives the appointment of female directors on average as well as how the market perceives their appointment relative to men. Many countries are introducing initiatives to promote boardroom gender diversity. Since the benefits and costs of boardroom diversity quotas in publicly-traded companies are ultimately borne by shareholders, it is important to examine how they react to increases in gender diversity. If the market reacts systematically differently to female appointments, this suggests that gender may matter above and beyond other director characteristics.

To date there is almost no evidence that the market reacts to female director appointments. One problem with conducting an event study of director appointments is that formal elections take place at the annual meeting and the announcement of the new director appointment often appears in the proxy statement or annual report. Because of the amount of information released around the annual meeting, it is difficult to attribute the stock price reaction around proxy or annual meeting dates to new director appointments. On the other hand, results based on director appointment announcements that appear in press releases or newspaper articles prior to proxy dates may be biased due to sample selection and strategic timing of press releases, as Rosenstein and Wyatt (1990) suggest. If companies time announcements depending on their expectation of the market’s reaction, abnormal returns around event dates may be systematically biased. This may be a particularly serious problem for event studies trying to identify gender effects since female directors are generally in the minority and their appointments may attract more attention than the appointment of male directors. Another problem is that if the appointment of female directors is anticipated, it will be difficult to detect the market reaction on the event date.

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Banks clearly appear to have different governance structures than non-financial firms. The question is whether these governance structures are ineffective and whether implementing independence standards imposed by Dodd-Frank, SOX and the major stock exchanges will improve bank governance. In our paper, Bank Board Structure and Performance: Evidence for Large Bank Holding Companies, which was recently made publicly available on SSRN, we try to provide an answer to this question by examining the relationship between board composition and size and bank performance. We focus on large, publicly traded bank holding companies (BHCs) in the U.S., which are the banks that are mentioned most often in the context of the crisis.

We first examine the relationship between board composition and size and performance in a sample of data on 35 BHCs from 1986-1999. We deliberately focused on a relatively small number of BHCs over a longer period of time to ensure that there would be sufficient variation in governance variables which typically do not change much over time. In addition, we collected detailed data on variables that have received attention in the law, economics, and organization literature and which are recognized to be correlated with sound corporate governance, but that are generally not studied as a group due to high data collection costs.

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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.