This post presents a recent research paper by Samia Belaounia, Ran Tao and Hong Zhao (2020): Gender equality’s impact on female directors’ efficacy: A multi-country study published in the International Business Review.
The only measures adopted so far by the authorities to increase female representation on boards are the introduction of mandatory quotas or recommendations in domestic governance codes. These measures have the advantage of preventing discriminatory treatment of women, particularly in societies with strong cultural resistance, but they do not guarantee that women, once appointed, participate effectively and efficiently in strategic decision-making processes.
Message from our paper
Our main message is that the most effective and sustainable way for the authorities to increase the presence of women on boards is to take measures to promote equal treatment between men and women in society. Only if women have as much access as men to education, to the business world, and do not carry the burden of household chores alone, will they be able to develop expertise, seize professional opportunities and build a social network in order to enjoy the credibility comparable to that of their male colleagues so essential for weighing-in on board decisions. Without this, they will simply be tokens of diversity facilitating company compliance with regulatory requirements. Moreover, only then will the qualities commonly attributed to women materialize into a performance advantage for companies, which is the most powerful motivation for them to appoint more female directors.
Ethics vs performance
We stand out from most reports and press articles concerning the representation of women on the board, as such works adopt an exclusively ethical point of view. They present the appointment of women to the board as a goal in itself without addressing the question of the impact on performance or on the actual conditions under which women directors carry out their mission. We think it is important to emphasize the issue of the effects on performance because we believe that companies will not promote more female directors on the board for purely ethical reasons. The fact that this is likely to improve their performance and efficacy, however, is a strong motivation.
The added-value of women on boards
First of all, appointing women leads to a diversity of approaches on the board, which is likely to result in better quality strategic decisions. Secondly, women are perceived as having a more acute sense of ethics than men, which reduces a company’s inclination to manipulate results, improves the quality of financial statements, and gives shareholders more transparency about the impact of managers’ actions in relation to the board’s oversight mission. Finally, women are less over-confident than men, which avoids excessive risk-taking and empire-building behavior on the part of managers, thus better serving the objective of maximizing shareholder value. However, there is no impact on performance per se: the performance effect of appointing women to the board of directors depends on the socio-cultural context concerning the equal treatment of men and women in society. Gender equality, by promoting the possession of expertise and credibility comparable to that of their male colleagues, increases the likelihood that the economic benefits expected from the appointment of women will be effective.
Empirical study
Our empirical study, carried out over the last 12 years from a sample of 1986 companies in 24 countries, proves this very point. Our measurement of gender equality covers access to health, politics, business, the world of work and education, as well as equal treatment by the legal system (through inheritance and divorce laws). We observe that gender equality amplifies the positive impact of women’s presence on economic and financial performance. In Sweden, the appointment of an additional woman to the Board of Directors is associated with an increase in economic and stock market performance corresponding to four times that of countries where gender equality is at the median level (France and Australia). In China, Japan, Thailand, and India, where gender equality is low, the impact is non-existent or negative. In relation to the monitoring function of the board, our results show that, considered in isolation, the presence of women is neutral on earnings management and excessive risk-taking. It is only in the most egalitarian societies that female presence succeeds in reducing opportunistic behaviors, which are in the shareholders’ best interests.
Recommendation for firms
It is therefore in the interest of companies to appoint women with the required technical skills (without discrimination or preferential treatment compared to men) by allowing them to weigh-in on decisions on the same basis as their male colleagues. The key for companies is an increase in the effectiveness of the board in its advisory role, through improved economic and financial performance, and in its oversight of managers’ actions to ensure that they are effectively aligned with value maximization.
A comment from the Gender & Finance founders
This study shows that the socio-cultural context influences the impact of increasing female representation in Boards. One potential mechanism to investigate and that relates to the Gender & Finance project is the role of gender stereotypes in shaping the perceived fit (or lack of fit) of women to their board role. In less egalitarian cultures, female board members may be perceived as lacking the qualities needed in their role precisely because they are women. In more egalitarian cultures, female board members may be less subject to traditional gender stereotypes and be perceived more favorably when participating in decision-making.
Read the paper: Belaounia S., Tao R., Zhao H. (2020) Gender equality’s impact on female directors’ efficacy: A multi-country study, International Business Review, 29(5)
101737.