To promote gender equality, several countries, such as Norway and Belgium, adopted a “hard” approach of implementing a board gender quota by relying on penalties or financial sanctions.[1] France followed their footsteps by introducing in January 2011 the Copé-Zimmermann law, which imposes on companies a quota of 20% of women directors on corporate boards by 2014 and 40% by 2017. In this context, a question is then raised: Does board gender diversity contribute to improving financial performance of the firm?
Diverse perspectives on the relationship between board gender diversity and firm performance
According to upper echelon theory, firms should recruit female directors because women on corporate boards (WOCB) can help in making more balanced and better decisions thanks to their different norms, behavior, beliefs and perspectives. Similarly, agency theory and resource dependence theory consider women directors useful resources for the firm. They are more vigilant in monitoring the firm, bring important advice, counsel, and legitimacy, and help the firm establish connections with influential figures in the community. Thus, WOCB can help improve financial performance through their ability to better advice and monitor managers and thereby minimize agency costs.
However, the phenomenon is not always straightforward. According to critical mass theory, a sub-group of people may be able to affect the decisions of the group as a whole only when it reaches a certain critical mass in terms of size. More specifically, when there are one or two female directors, they are simply tokens or presences. In addition, both contingency theory and configurational theory suggest that the impact of WOCB on financial performance is dependent upon the context/situation and the relationship should not be studied in isolation from other factors such as board characteristics.
Methodology and main results
Our study, published in the academic journal M@n@gement [2], examines the relationship between WOCB and firm’s financial performance in the French context. Our sample includes all the firms listed in the SBF 120 (Société des Bourses Françaises) Index from 2006 to 2017. We adopt the perspective that people categorize themselves and others according to social categories. People resist out-group members’ influence and devalue their inputs during group decision-making. With corporate boards typically being homogeneous groups of corporate elites, the effective integration and contribution of newly appointed female directors may largely depend on their alignment with the existing members in terms of certain characteristics. Thus, women directors’ contribution to the firm’s financial performance depends on whether they fit with the incumbents. Fit is defined here as the similarity in three dimensions: demographics (age and nationality), human capital (top executive, functional and industrial background), and social capital (education and elite school background).
Our analysis shows a negative differential impact of the proportion of WOCB on both Tobin’s q (market-based performance measure) and ROA (accounting measure of operational performance) after the gender quota in France. We also document that when the demographic, social capital, and human capital fit of the women on boards in France decreased after the quota was implemented, this change in fit negatively impacted financial performance. The results are stronger for the ROA measure than for the Tobin’s q measure. This analysis leads us to conclude that the decrease in fit explains some of the negative impact of the gender quota on financial performance. This effect is more pronounced for demographic and social fit than for human capital fit.
Policy and managerial implications
Governments across different countries have adopted gender quotas to increase diversity in corporate boards. While gender quotas may impact board effectiveness, concerns have been raised about the potential impact on board dynamics, such as conflicts, and the appointment of female directors that potentially undermines the principle of meritocracy. In this context, our results are relevant for companies, investors, and policy makers. By putting forward the notion of fit between women directors and the incumbents, we contribute to the understanding of the factors that could damage the effect of gender quotas. Specifically, while it is important to foster women’s representation in corporate boards through gender-balancing quotas, it is also essential to ensure the similarity between new female members and the incumbents in terms of social capital, human capital, and demographics.
Policy makers can evaluate the economic effects of legal measures to enhance equality on boards by investigating the degree of fit between newly recruited WOCB and the incumbents. In doing so, they should be able to identify whether the ultimate impact of these measures is on board functioning or simply on recognizing gender equality. Importantly, it should be noted that gender is only one source of diversity. Imposing gender quotas on corporate boards helps increase the number of female directors, but there might be other sources of diversity, such as social capital, human capital, and demographics. These diversities operate along the different dimensions of fit in influencing the effectiveness of policy measures. Policy makers should go further than promoting equality between men and women to recognize equality between social groups within boards (for example, between ethnic groups or age groups).
Honggang (Hugh) Qiu, Lucia Gao, Rey Dang, L’Hocine Houanti et Linh Chi Vo
Notes
[1] A country may adopt a “hard” or “soft” approach in introducing board gender quotas. The former refers to binding instruments forcing firms to achieve a quota of female directors under the penalty of sanctions such as delisting (in Norway) or nullity of appointments (in Belgium); the latter is non-binding and requires firms to explain their governance practices (as in Denmark, Ireland, Greece or the UK).
[2] https://management-aims.com/index.php/mgmt/article/view/10501
