Gender Diversity

In 2005, the Ethical Investment Research service examined over 1,600 companies listed on the FTSE All World Development Index and found that women only made up 7% of directors in these leading companies (Maier, 2005). Given this scarcity of female directors on boards, gender diversity has become one of the most debated, but important, element of board composition that has led to a growing body of research in business ethics and corporate governance (De Cabo, Gimeno & Nieto, 2012). Although female representation on corporate boards is also now of increasing importance for policy makers around the world, there has been a slow advancement of the number of women on the board of directors (Terjesen, Sealy, Singh, 2009).

Many European countries, such as Spain and France, have imposed minimum quotas for female representation on the boards of publicly traded organisations (De Cabo et al., 2012). The UK, on the other hand, has implemented voluntary standards to promote gender balance in boards (Visser, 2011). In 2012, the UK government put gender diversity in the boardroom at the top of its agenda, however in that same year nine out of ten board roles went to men (Neate, 2012). According to Singh and Vinnicombe (2004) female representation on boards is an area of concern because women’s talents are not being fully utilised. In addition, male directors had formed an elite and exclusive group in the UK’s corporate world which led to more homogenous boards than otherwise would have been the case. This makes gender diversity an important element of achieving board heterogeneity (Singh & Vinnicombe, 2004).

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There have been inconsistent findings on the impact of gender diversity on firm performance and the existing literature on women on corporate boards is inter-disciplinary with research emerging from psychology, sociology, leadership, finance, management and corporate governance fields (Terjesen et al., 2009). De Cabo et al.

(2012) found that banks with larger boards had a higher proportion of female directors on their boards, which could be a signal of smaller boards preferring homogeneity.

Although some research identified that women have traits that make them well positioned for roles requiring trust, Bigelow and Parks (2006) (as cited in Terjesen et al., 2009) observed that investors were willing to invest 300% more in male led firms than female-led ones. In contrast to this, Farrell and Hersch (2005) found that female directors were more likely to serve on boards of better performing firms suggesting this could be for two reasons. One could be that a shortage of supply allows women to self-select the companies in which they serve or the better performing firms were able to focus more on diversity goals. Carter et al. (2003) drew upon agency theory to explore the link between gender diversity and firm value, and found a positive relationship between the two on Fortune 1000 boards. Although the findings on gender diversity have produced mixed results, Konrad, Kramer and Erkut (2008) pointed out that there should be more than one female director on a board before female members can exert a positive influence on performance.

Liao et al. (2015) identified that males and females are culturally and socially different which is reflected in their personalities, communication skills and educational backgrounds. Furthermore, a report by the Financial Reporting Council (2012) observed that women contribute significantly to a board as they are generally more committed, diligent, innovative and bring good dynamics to the board. Hillman and Dalziel (2003) state that in order for boards to effectively exercise their monitoring function, they need to have the right mix of experience and capabilities to monitor management and evaluate business strategies. Fondas and Sassalos (2000) argued that from an agency theory perspective, gender diversity through more female representation on boards, should improve the board’s monitoring role in protecting shareholders’ interests. This is because women have higher expectations about their responsibilities as directors which can make the board more effective in monitoring management (Fondas & Sassalos, 2000). Furthermore, Huse and Grethe-Solberg

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(2006) found that female directors can enhance board independence and improve corporate governance of firms. This is because women tend to take directorship roles more seriously by being better prepared for meetings and through more questioning and discussions than their male counterparts (Singh & Vinnicombe, 2004). This is reflected in a study conducted by Singh and Vinnicombe (2004) who found that the FTSE 100 firms in the UK that had female directors were quicker to adopt and report the recommendations of the Higgs review than male dominated boards.

Other scholars who use the resource dependence framework argue that because firms operate in increasingly complex and uncertain environments, their boards must be composed of diverse individuals who can provide a breadth of resources (Terjesen et al., 2009). Hillman at al. (2007) further state that women have the potential to link firms to different networks or resources than men do by virtue of their different values, experiences and beliefs. In this context, greater board diversity expands board members’ networks and contacts, which in turn expands the networks and links of companies with their external environment (Hillman et al., 2000). A combination of societal expectations, institutional investors and recommendations from codes of best practice have placed pressure on firms to be more diverse and legitimate in their governance practices (Hillman et al., 2007). Research on firm legitimacy suggests that larger firms are more visible to the public therefore will experience more pressure to conform to the expectations of society (Suchman, 1995). Bilimoria (2006) proposes that female directors can also provide legitimacy to firms as their presence signals that a firm values the success of women in society. Institutional investors have also increased their scrutiny of boardrooms for diversity; therefore the reputation and credibility of a firm may be improved through gender diversity (Terjesen et al., 2009).

In light of this, large firms, such as those in the FTSE 350, can improve their legitimacy and gain from a wider range of resources through gender diverse boards. A different body of research by Hillman et al. (2007) found that female representation on boards is linked to firm size, industry type and firm diversification strategy. Some studies have found correlations between particular industry sectors and female directors, such as retail, finance, media, banking and health care sectors (Hillman et al., 2007; McCormick-Hyland & Marcellino, 2002). A retired CEO of Avon Products Inc. concluded that because 60% of the company’s purchases were made by women,

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it made more business sense to have female directors on the company’s board (Sweetman, 1996). Therefore, in certain markets, female directors may provide a vital resource by suggesting new strategies of bringing products to market based on knowledge of females as customers (Singh & Vinnicombe, 2004).

Traditionally, women have made fewer investments into education and work experience which is reflected in lower pay and promotion (Tharenou, Latimer &

Conroy, 1994). Research by Oakley (2000) suggested that women are not offered organisational rewards, such as promotions or developments, because of the assumption that women lack adequate human capital for board positions. However, upper echelons theory suggests that individuals make decisions based on their cognitive bases and Pelled, Eisenhardt and Xin (1999) further suggest that people of different genders have different beliefs, attitudes and perspectives based on these differences. Therefore gender diversity can have a significant impact on the overall diversity of a board and on firm performance (Hillman et al., 2007). Gender is also said to be associated to risk seeking behaviour and Huang and Kisgen (2013) observed that male executives were more risk seeking than female executives when it came to issuing debt and acquisitions. However, Johnson and Powell (1994) argue that the perception that women are more risk averse than men is a stereotypical preconception that does not reflect women’s actual economic behaviour. Therefore, the following hypothesis is proposed:

Hypothesis 3. Gender diversity on the board of directors is positively associated with financial performance.