When it comes to increasing female board representation there continues to be a lot of talk with very little action. Governments have sought to hasten the glacial pace of voluntary change by emulating Norway and imposing gender quotas on publicly listed companies. Vocal opponents may be right to question the merit of such moves, but to date there has been little consistent evidence demonstrating that board gender characteristics influence company performance one way or the other.
Academics have long explored the issue of gender differences in leadership and governance roles. It has been suggested, for example, that men are more likely than women to engage in risk-taking behaviour. However, applying these findings specifically to board members is problematic due to the small number of survey-based studies in this area and suggestions that the effect on risk is heavily contingent on the task and context at hand.
The big question remains: What effect, if any, do female directors have on the board’s actual decision-making process?
We sought to answer this question by drawing on social identity theory — the idea that collective phenomena cannot adequately be explained by individual differences or personality traits alone.
This theory suggests that individuals in a larger group self-categorise, and categorise others, into smaller subsets. Members will see their category as the in-group and people from another category as the out-group.
This can create an “us and them” mentality. In these intergroup situations, people are more likely to be competitive and less likely to cooperate, as individuals will favour in-group members. In response, out-group members — particularly those representing marginalised or minority categories, such as women on corporate boards — tend to become more active in demonstrating their distinctiveness during interactions.
All this suggests that boards with one or more female directors will have more contentious and comprehensive discussions when making decisions, and will be less likely to rapidly come to a consensus.
Female and male directors are likely to have had different career experiences and will often hold different opinions. In addition, research has shown that male directors engage in their duties more diligently and miss fewer meetings when there are female directors on the same board. Taken together, these findings make it highly likely that increasing the representation of women on a company’s board will make board decision-making processes more thorough and comprehensive.
If this is true, then boards with one or more female members should be more active in exercising oversight and be more ready to block proposals that seem overly speculative.
Drawing on the social psychological processes discussed above, we expected that boards with one or more female directors would take longer to reach a decision to greenlight an acquisition (compared with all-male boards) and would be more likely to eventually shelve a proposed deal. In short, we expected such boards to make fewer acquisitions.
Using the same logic, we expected that, among those firms that do engage in acquisitions, female board representation would be associated with smaller acquisitions, as larger deals are riskier for a firm’s long-term health and pose more complex challenges.
To test these hypotheses we looked at 2,998 acquisitions made by 1,542 firms listed on the S&P500 between 1998 and 2010.
We assessed each board’s approach to acquisitions by controlling for a list of firm-level, board-level and M&A deal-level factors. As expected, female board representation reduced the number of acquisitions and acquisition size. These findings were confirmed in a subsample of firms that experienced the death of a male director, resulting in an unplanned change in female director representation on the board. We found that after the male director’s death, there was an increased influence of female directors on the same board and a simultaneous decrease in the number and size of acquisitions.
Economically, the difference between firms with below average levels of female board representation and firms with above average female board representation was associated with an 18 per cent decrease in acquisitiveness and a 12 per cent decrease in acquisition size, equating to a reduction in US$97.2 million in M&A spending in a given year.
The issue of female representation on public company boards has become an increasingly contentious topic in the business and general media.
But it is not all window dressing or scholarly curiosity. As our research suggests, the issue of women on boards has substantial practical implications for firms. This is not necessarily because women are smarter, wiser or more diligent, although that may be true. It is because diverse groups tend to make more thorough, more comprehensive decisions.
However, we also urge caution, as this may not always be an unequivocally good thing for firms. Comprehensive decision-making and oversight is undoubtedly vital in many situations, especially when managers’ proposals are underdeveloped or self-serving. However, multi-category boards, where women and men find themselves in opposing camps, may also lead to reduced cohesiveness and increased coordination costs, which could be harmful to a firm’s long-term goals.
Our findings also raise the question of what might happen if the percentage of female directors increased to more than 50 per cent. If our theory is correct, this might again make decision-making processes incrementally less thorough and comprehensive, possibly resulting (eventually) in reduced competitiveness.
It’s interesting to think about.
Guoli Chen is an assistant professor of strategy at Insead.
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