It is frequently and confidently asserted (and inferred) by proponents of ‘improved’ gender diversity in the boardroom – henceforth ‘GDITB’ – that there exists a demonstrable and positive causal link between GDITB and improved corporate performance. What is the evidence? A 2007 McKinsey report, Women Matter, is frequently cited by proponents. We find the following statement in it:
‘The statistically significant studies show that companies with a higher proportion of women on their management committees are also the companies that have the best performance. While these studies do not demonstrate a causal link [my emphasis] they do, however, give us a factual snapshot that can only argue in favour of greater gender diversity.’
In 2010 David Cameron appointed the Labour peer Lord Davies of Abersoch to report on GDITB. The outcome was the Davies Report, Women on Boards, published in February 2011. In the Executive Summary we find a confident reference to the McKinsey report, and then a clear inference of a causal relationship between GDITB and corporate performance:
‘Evidence suggests that companies with a strong female representation at board and top management level perform better than those without1 and that gender-diverse boards have a positive impact on performance2
1Women Matter, McKinsey & Company, 2007
The report shows the superscript – 2 – at the bottom of the page but no reference source for the assertion is provided.
Only two independent studies show a causal relationship between GDITB and corporate performance, and it’s a negative one. The first study was carried out by two academics at the University of Michigan, Kenneth Ahern and Amy Dittmar, and the latest draft was published in May 2011. The report’s full abstract:
‘In 2003, a new law required that 40 percent of Norwegian firms’ directors be women – at the time only nine percent of directors were women. We use the pre-quota cross-sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota. We find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in Tobin’s Q over the following years, consistent with the idea that firms choose boards to maximize value. The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance, consistent with less capable boards.’
Proponents of GDITB have claimed that the negative effect of legislated quotas on Norwegian businesses reflects only the effect of inexperienced directors, rather than any gender effect. So what do we find when organisations voluntarily ‘improve’ GDITB, appointing more female directors on the grounds of perceived merit? We turn to a discussion paper prepared for Deutsche Bundesbank earlier this year, titled ‘Executive board composition and bank risk taking’. The researchers studied German banks over 1994-2010. The report’s full abstract:
‘Little is known about how socio-economic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions. First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a higher proportion of female executives [my emphasis]. In contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines.’
The British business community is, I contend, suffering from a collective delusion about GDITB. The multiple explanations for this delusion merit another article in themselves.
Mike Buchanan is author of The Glass Ceiling Delusion: the real reasons more women don’t reach senior positions.