Diversity in the boardroom — and elsewhere in a company — has become a buzzword among business people, politicians and their advisers. Loud and vocal choruses preach its virtues: the plurality of perspectives, the appeal to diverse stakeholders and the ability to connect with varied networks and knowledge sources. With all that on the table, greater diversity would positively affect the bottom line and improve performance.
In particular, gender diversity on boards has received substantial attention. Female managers and directors bring different managerial qualities and styles, and their presence may also affect the conduct of their male counterparts. The absence of female directors in the boardroom has become a stigma and a potential impairment for a firm’s reputation. Governments have introduced legislation and recommendations imposing quotas to boost gender equality on boards, such as Germany’s law that requires companies to have 30 percent of board seats occupied by women.
The consequences of these acts are not clear, however. Theory and empirical studies on the performance effect of women in top management teams are inconclusive. Studies that control the effect of intervening factors that may jointly affect nominations and performance effect find no relationships at all and, in some cases, negative ones. This is alarming at a time when firms are responding to their stakeholders’ pressure and increasing the presence of women on their management teams and on boards.
To offer firms guidance in responding appropriately to these pressures, a forthcoming large-scale study based on a sample of all publicly traded companies in Malaysia seeks to shed light on the impact of female directors on firms’ performance. (Editor’s note: The author is one of the researchers.)
As the first country in Asia to introduce policies designed to advance women in top managerial positions, Malaysia offers a rich context for this study. It also provides an interesting setting in which to observe the effect of cultural and religious beliefs regarding gender-related differences on women’s performance in the boardroom.
Two of the study’s findings are particularly noteworthy:
- Female directors create economic value, but the market underestimates their contribution. The impact of female directors manifests in conflicting directions. Companies that have at least one female director on their boards have higher returns on investment than those that have none, but the firm’s market value is lower. These findings suggest that although women directors create economic value, the market, whose responses are shaped by deeply rooted cultural and religious perceptions around women’s role in society, underestimate it. These findings speak to the strength of gender bias in Malaysia and of the challenge of increasing women’s participation on boards.
- The performance consequences of women on boards vary across firms. The characteristics of firms and their boards shape the corporate environment in which female directors operate and their ability to influence board functioning and firm performance. Notable firms characteristics that affect this variation are ownership and governance structure — women on boards with more independent directors create more value.
Putting more women on boards might not be right for every company. Here are two tests that indicate whether it is:
- What is the likely response of the major shareholders to women’s presence on the board? Be mindful that gender-bias responses that undermine economic considerations have been found in the most unanticipated places, including among sophisticated investors on Wall Street and in Silicon Valley. Because it might be challenging to get this right, consider the possibility that positive contributions from female directors on the bottom line might be tempered by a company’s performance on the equity market.
- Does the corporate culture and governance structure provide opportunities for women to make a difference and leave their mark on conduct and performance? Rather than following the trend or responding blindly to stakeholder pressure, carefully evaluate the level and extent of women’s involvement that is suitable for a particular company, given its industry, line of business and distinctive strengths and weaknesses.
Government policies should also be formed with explicit recognition of the trade-off between benefits associated with women in the boardroom and market response. The variations across firms call for nuanced responses by governments to women’s board nominations. Gender quotas imposed uniformly on all firms, as most governments do, would benefit some firms but could be inappropriate for others. Lastly, understanding the institutional and societal connotations of gender inequality as they manifest in relation to women on boards should be used as a basis for policies that bring about change to improve women’s impact.