Simply appointing women to the board of a top company in response to regulatory pressure has, at best, a limited effect on firm performance. What really makes a difference is appointing women to the governance committees that appoint CEOs and set pay and bonuses.
These are the main findings of research by Colin Green and Swarnodeep Homroy, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016. Their study follows the 100 largest publicly listed European firms over the period 2006-12. More than half of these firms have more than one female director, while 10% of boards are gender-balanced.
The researchers find that new women directors are more likely to be appointed to audit committees than to nomination and remuneration committees. This might partially explain the persistence of a gender pay gap at executive level.
But they also find that a percentage point increase in female representation on nomination and remuneration committees increases a firm''s value by almost 5%. By contrast, the same increase in representation on boards only increases value by 1%. Simply put, allowing talented women to have a say in how the company is run does far more good than just appointing them in order to meet regulations. The authors comment:
''It is the deep integration of female directors into the mechanism of governance that is the key challenge for modern corporations.''
''Without bringing them into the decision-making process, new female director appointments designed to meet compliance targets risk drifting once more into the realm of token symbolism.''
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There is increasing public scrutiny of the gender diversity of corporate boards. This partly reflects concerns about equity: while the share of female employment in large firms have increased dramatically, this has not been reflected in the gender composition of executive boards, which remains very low, especially in the United States and the UK.
As a response, there have been a number of reforms aimed at increasing female representation on executive boards. These range from the US requirements that firms disclose their gender diversity policy in board recruitment, advised gender diversity targets in the UK, through to enforced gender quotas in Norway.
While these reforms may be a step in the right direction, an issue is that the focus on representation may miss the actual underlying issue of female integration into firm governance. While regulatory and institutional pressures can lead to appointments of female directors on the board, they do not necessarily ensure the active participation of appointed female directors in the governance mechanism. In this sense, female directors can add value if and only if there are enabling mechanisms within the board to facilitate that.
This is an important point as existing evidence on the effect of gender diversity tends to focus on the effect of appointing the first female director. Female representation on corporate boards of US and UK firms has historically been low, and is only recently been increasing. It is difficult to extrapolate the effect of moving towards more equal gender representation from these settings where the proportion of female directors in the median firm is zero.
This study examines the mechanisms through which female directors may add value to the firm. In particular, it looks at the integration of female directors in the governance mechanism. To a great extent the way a board influences companies is through committees that focus on narrowly defined jobs, such as the nomination committee, the remuneration committee and the audit committee.
These groups of executives articulate the goals and strategic plans of the organisation in a specific area and serve as a source of specialised expertise. As a result, focusing on these committees is fertile ground to examine the appointment of female directors, and the performance impact of such appointments.
In the setting of this research, which follows the 100 largest publicly listed European firms over the years 2006 to 2012, over 50% of firms have more than one female director, while 10% of boards are gender-balanced.
The researchers find that women are more likely to be appointed to monitoring-related committees, like the audit committee. But they are less likely to be appointed to nomination and remuneration committees, where new CEOs are appointed and where pay and bonuses are set. The fact that fewer female directors make it on to these committees might partially explain the persistence of a gender pay gap at executive level.
The study finds that a percentage point increase in female representation in key governance committees increases firm value by 4.6%. In comparison, a percentage point increase in female board representation is associated with a more modest a 0.9% increase in firm value.
Simply put, the performance benefit to the firm of appointing female directors to the key committees is three times greater than just appointing them to the board. The implications are important and twofold:
• First, appointing women to the board in response to regulatory pressure has, at best, a limited effect on firm performance.
• Second, appointing women to key committees may be indicative of a flexible board that simply includes high-ability individuals in the governance mechanism, notwithstanding the gender. In that sense, it is the ability effect that enhances firm performance.
Quotas don''t necessarily advance the underlying cause of gender equality. Female directors appointed for Norwegian firms to meet the gender quota earned the unfortunate ''golden-skirts'' epithet. It is the deep integration of female directors into the mechanism of governance that is the key challenge for modern corporations.
Companies need to be encouraged to embed female directors in the decision-making process. Without that, new female director appointments designed to meet compliance targets, risk drifting once more into the realm of token symbolism.
Female Directors, Corporate Governance, and Firm Performance – Colin Green and Swarnodeep Homroy
