No quotas for women on corporate boards
Although women moved into the workforce in great numbers in the 1980s, they still have to catch up to men in terms of leadership positions in corporate America. The New York human resources firm Catalyst found that women hold 16.9 percent of officer positions in American corporations, and only 11 percent of senior leadership line roles.
The question is, why are there so few women corporate board members? Those who have a proclivity to assume sex discrimination might fear the worst. Others might simply assume that relatively few qualified women were available for board slots, or that boards with women performed poorly in the marketplace.
Earlier this month the London School of Economics released a new study showing that publicly-traded companies with more women on the boards of directors do better in terms of firm management but worse in terms of economic performance. The study, entitled Women in the Boardroom and Their Impact on Governance and Performance, was just published in the Journal of Financial Economics.
The authors, economists Renee Adams of the University of Queensland, Australia, and Daniel Ferreira, of the London School of Economics, conclude that additional women improve the governance of the firm. Female board members were more likely to be assigned to audit, nominating, and corporate governance committees and they had higher attendance at board meetings. Chief executive officers of companies with female directors are held to a higher standard of accountability.
Surprisingly, the authors claim to have statistical results that reveal precisely this politically incorrect result: firms with women on board have lower return on assets than firms without women board members. The firms are less profitable and have lower financial performance.
If that result seems counter-intuitive, you may be correct. The statistical results presented by the authors are not robust to changes in specification, and many of the key estimated parameters are not significantly different from zero. Even more troubling, some of the statistical techniques employed appear to be poorly chosen.
The authors used data from 1996 to 2003 collected by the Investor Responsibility Research Center, a group that funds research on corporate governance, and ExecuComp, a database that tracks compensation of the top five directors in S&P 500, S&P 400 MidCap and S&P SmallCap 600 indexes. The sample contained data on 1,939 firms and, within these, 86,714 directorships.
On average, these firms had slightly more than 9 board members each, but 39 percent of the annual observations are firms with no women. Moreover, 40 percent of observations were firms with only one woman on the board. Thus, fully 79 percent of the observations are firms with boards with either one or no women on the board. On average, fewer than 10 percent of all directors are women.
Professor Ferreira explained his results this way in a press release issued by LSE, ”Our research shows that women directors are doing their jobs very well. But a tough board, with more monitoring, may not always be a good thing. Indeed we see that increased monitoring can be counter-productive in well-governed companies.”
He continued, “When you meddle in boards there may be unintended consequences. This is particularly important to bear in mind in the current context when companies are under increasing pressure to change the composition of their boards.”
As the global economy struggles to recover from the recession, this conclusion is worth bearing in mind. Women will only be harmed if it is perceived that they have gained their directorships through a system of quotas. Rather, they need to make sure that they put in the hours of work and go for the tough negotiating strategy so that they move to the top on their own and gain board seats on their own merit.