Is gender diversity actually good for boards?

The push for gender diversity, especially on listed boards, has been relentless, not just in Singapore, but also across the world.

To be sure, progress has been made, though not everyone is happy. For its proponents, progress has not been fast enough, whilst sceptics complain of an overdone exercise in political correctness.

Why diversity?

One area in which the advocacy of gender diversity may be overdone lies in the oft-championed position that it improves company performance.

Here, the central argument is that diversity (not just gender, though) brings different experiences and points of views to the table, and helps avoid groupthink and the risks associated with it.

True, some social science studies bear this out. Yet, other studies show that diversity creates fault lines, and unless this is managed effectively, a diverse group could create other more serious rifts.

In other words, it is not a given that a diverse group (whether of gender or other attributes) naturally works better. Rather, the contention of ideas in a diverse group has to be constructive. And that could vary from board to board.

Business impact

Advocates often trot out study after study to show that female directors add business value, such as the company achieving a higher return on assets or other measures of financial performance. But there are also studies showing the opposite results.

Regardless, a correlation of factors – which is all that these studies demonstrate – does not prove cause-and-effect. A myriad of other factors, such as board practices, management talent and market dynamics, can affect board and company performance.

So, who is right?

Professor Katherine Klein at Wharton, for one, believes that studies by consulting firms, information providers and financial institutions such as McKinsey, Thomson Reuters and Credit Suisse – which are often positive of the results of female representation on boards – should be taken with a pinch of salt (Does Gender Diversity on Boards Really Boost Company Performance?, Knowledge@Wharton, May 2017).

She argues that such studies are not as rigorous as peer-reviewed academic research, and suggests looking at a broader meta-analysis, i.e. study of these studies on the subject.

Indeed, there is a growing body of work, including from US academics, Corine Post and Kris Byron, who looked at 140 studies covering 90,000 firms in over 30 countries (Women on Boards and Firm Financial Performance, Academy of Management Journal 58(5), November 2014).

A similar meta-analysis of 20 studies by four European researchers features a combined sample of over 3,000 companies from both developing and higher-income countries (Does Gender Matter?, PLOS 10(6), June 2015).

A more recent study by two Indian professors, Sudheer Reddy and Aditya Jadhav reviewed the growing literature on gender quota legislation that mandates female directors on boards (Gender Diversity in Boardrooms, Cogent Economics & Finance, July 2019).

The firm conclusion from these meta-analyses is that the result is inconclusive. The peer-reviewed studies do not suggest that the companies perform better or worse when they have (or have more) women on board.

If these studies are consistent on any metric, it is that we cannot prove definitively that women directors improve board performance.

Social and political arguments

Should we still then bother with board gender diversity?

The answer would be “yes”. And the reason: social justice.

The fact is that women represent half the global talent pool, yet they are disproportionately under-represented on boards across the world. In Singapore, we are one of the worst culprits. We lag behind most of our peers at 15.7 per cent of female directors on listed boards.

The main reason this has happened is due primarily to the tradition of the old boys’ club approach of selecting board members. Attitudes are changing. But the challenge is to move away from potential tokenism to a system that seeks to put together a diverse board based truly on merit.

In giving women more than a fair chance at the opportunity to come on board, companies should consider the many potential women directors out there who are suitable for a board role, not because they are women, but because they are qualified.

The attitudes that need to change are not just from the boards and their nominating committees, but also from other stakeholders.

A recent study by INSEAD Professors Isabelle Solal and Kaisa Snellman of 14 years’ worth of data of 1,800 US publicly-listed companies found that an increase in board gender diversity resulted in lower stock prices – even though there was no material difference in the companies’ return on assets. (Women Don’t Mean Business?, Organization Science 30(6), November 2019). Their conclusion is that a gender-diverse board is seen by investors as “revealing a preference for diversity and a weaker commitment to shareholder value” and “firms with more female directors will be penalised”.

One problem with the social justice argument is that it gets into the space of gender quotas and the charged arguments around political correctness and the unintended consequences of affirmative action. This, however, is a debate for another day.

So, is gender diversity actually good for boards? Well, there is no clear business case for or against a company to have a more gender-diverse board. But it is necessary to do so, in all fairness to the women who are qualified and suitable.



This article was first published on 13 January 2020 in The Business Times under the column “Boardroom Matters” by the Singapore Institute of Directors.