April 27, 2016
In the aftermath of the sudden resignation of the all-male Board of Directors at Nalcor, Newfoundland and Labrador’s energy company, there have been renewed calls for the company to improve its gender diversity, including at the board level.
Although some countries, particularly in Western Europe, have enacted legislation mandating gender quotas on boards, recent evidence supports that firms benefit from appointing women to their boards. An important punch-line from this corporate governance research is that it is in companies’ own best interests to improve gender diversity since this typically leads to better performance in boards’ two core responsibilities: monitoring and strategy formulation.
Research from such disciplines as finance, accounting, sociology, and psychology suggests that gender-diverse boards reduce groupthink and focus intently on confronting more difficult, sensitive issues. The presence of women on a board can expand its available pool of knowledge given that female directors have different perspectives stemming from their unique experiences, interests and social networks. Moreover, prior research has shown that female directors place a higher value on interdependence, benevolence and tolerance that can elicit more information sharing and collaboration in board meetings.
In another way that female board participation fosters sound decision-making, gender diverse boards are more likely to deeply consider multiple perspectives on an issue. Similarly, female directors are more likely to prefer that the board develops a co-operative decision-making framework that tends to improve decision quality when competing interests are at stake.
In short, the underlying narrative is that companies with female directors routinely benefit from the different experiences, knowledge, and values that they bring to the board table.
Indeed, extensive prior research links board gender diversity to several positive outcomes. Reflecting their tendency to apply more rigorous ethical standards, women are more apt to sit on audit and other governance committees responsible for monitoring the company’s management and its financial reporting. Prior work also implies that women are more vigilant about preparing for board meetings, reinforcing that gender diverse boards enjoy better monitoring against managers opportunistically pursuing projects that undermine long-term firm value. Relevant to the withering criticism of the cost overruns and delays at Nalcor’s massive Muskrat Falls hydroelectric project, strict board monitoring constrains inefficient spending according to prior research.
Importantly, recent evidence collectively implies that the appointment of women to boards elicits a positive stock market reaction and leads to higher earnings.
From a monitoring standpoint, the impact of gender diverse boards comes through several channels, including that meeting attendance routinely rises when boards become more gender-diverse. Prior research suggests that the tougher oversight imposed by boards with female directors engenders greater accounting transparency and a higher volume of information flowing to investors. In fact, gender diverse boards are more eager to appoint high-quality auditors to improve the external monitoring of the financial reporting process. Altogether, this research implies that gender diverse boards, relative to all-male boards, are more committed to holding managers accountable in trying to protect stakeholder interests.
Overall, recent research implies that rather than the appointment of women to corporate boards amounting to tokenism, their presence tends to translate into better board performance, making it hard to justify why so many companies in Canada – it would be unfair to single out Nalcor since 40 percent of public companies have no women on their boards – continue to rely on all-male boards.
Governments arguably have a special obligation to play a leadership role on corporate governance issues, including by setting an example for non-state owned firms to follow. However, apart from the broader public policy implications, prior research suggests that female representation on boards also protects the companies’ own more narrow interests. Against the backdrop of the abrupt resignations of all members of the Nalcor board, corporate governance research implies that this would be an opportune time to appoint some female directors. In contrast to the vast majority of governance choices that involve tension – the weighing of costs versus benefits of any governance option – it would be difficult to envision that appointing women to the company’s board would bring any real downsides; i.e., this should be a classic win-win scenario.
After naming an interim board of directors on Friday, Premier Dwight Ball announced that the government intends to appoint a more permanent board this summer. Hopefully, like the interim board, this board will include some women.
Dr. Jeffrey Pittman