Saturday, 1 March 2014


Improving diversity on corporate boards is definitely on the agenda, and increasingly so. Typically, diversity is limited to gender diversity. Unfortunately, we still seem to be light years away from a broader approach to diversity, including diversity in terms of age, race, culture, religion and other personal attributes.

So is increased board diversity good or bad? There are many commentators on social media who unequivocally advocate greater diversity and equate increases in diversity to shareholder value creation. Here is just one recent example from Twitter:
The author of this Tweet is obviously convinced that greater diversity is always good and that there is no doubt whatsoever about this. So what does the academic literature tell us? First of all, and this comes as no surprise, women are underrepresented on corporate boards. For example, Marianne Bertrand and Kevin Hallock report that women hold only about 2.5% of top managerial jobs in stock-market listed US firms. They also earn on average 45% less than their male counterparts. Female representation on UK boards is not any better as a study by Clara Kulich and colleagues suggests: only 3% of board seats in listed UK firms are held by women and their pay is 19% lower. However, there are also significant differences in the structure of compensation contracts between female and male executives. Indeed, female executive pay is less performance-sensitive than male executive pay. This goes both ways: the pay of women has less upward potential, but also less downward potential.

Could this suggest that women are more risk averse than men? There seems to be some evidence suggesting that this is indeed the case. John Coates and Joe Herbert study the link between testosterone and risk taking for traders on the London Stock Exchange. They find that testosterone --  at first -- is good as increases in the hormone make traders more willing to take risk and make them look for novel investment opportunities. It also makes traders more persistent which is an important trait for those wanting to outperform others. However, if testosterone continues to increase and remains at consistently high levels traders become less rational and end up taking more risk without greater returns on their investments. While testosterone is mostly a male hormone, it also exists in women but at much lower levels. There also seems to be some evidence that testosterone decreases with age, although that is not the case for all males. 

This can only suggest that diversity is good. An all male board may end up taking excessive risks and compromise the survival of the organisation. In contrast, an all female board may take too little risk and forego some lucrative investment opportunities. This would suggest that it is important to have some diversity on the board. Having too many board members with similar characteristics is also likely to result in group-think, that is too little scrutiny of the strategic choices proposed by the CEO and the other executive directors.

So is the Norwegian way of imposing a quota (of 40% for both genders) the way forward? The Norwegian experience has been somewhat mixed. Those that criticise the Norwegian approach argue that the quota has been introduced too quickly, ignoring the lack of suitable female candidates. They argue that it has resulted in the same few women (the so called 'golden skirts') sitting on most boards. This could have dire consequences for board independence. Øyvind Bøhren's research suggests that some Norwegian firms have even changed their legal form to escape the mandatory gender balance. So what does this suggest? Interestingly, he finds that those firms that change their legal form to escape the quota are of a particular type. They are young, high growth, unlisted and profitable firms with few female directors but powerful non-family owners. This seems to suggest that these firms believe that the costs from greater gender balance outweigh the benefits. So we are back to 'one size does not fit all' (see my blog on the Cadbury Code). 

More generally, and contrary to what some practitioners seem to think, the evidence is still out there as to whether greater representation of females on corporate boards creates or destroys value. Some academic studies (see chapter 7 of my book 'International Corporate Governance' for an overview) find that female directors have a positive impact on corporate performance whereas others find no effect or, even worse, a negative effect. In a nutshell, the type of female director is important. While female CEOs tend to create value (probably because they have to work so much harder and be so much better than their male counterparts to break through the glass ceiling), other female directors tend to destroy value. The firm's industry also seems to matter as female directors seem to create value only (in terms of reputation) in firms that are close to their final customers.

What does this call for? The answer is simple: more evidence based corporate governance regulation. While the intentions of regulators and leading practitioners may be entirely honourable, frequently those behind new policies ignore the implications for firm value. Quotas seem to be a radical way of increasing board diversity, imposing the 'one size' on all firms, whether it fits or not. I am all in favour of board diversity, but at the same time the way to achieve it is important.

Note: Parts of the above blog post are based on chapters 7 and 15 of my book 'International Corporate Governance'.  

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