Percentage of female board members

The number of female board members that make up a company’s boards is one which led to the writing of the Davis report in 2011, the purpose of the report is to increase the

promotion of gender equality on the boards of listed companies. The report (Davis, 2011)

identifies several advantages to companies increasing the number of female directors;

1. Improve performance at Board and business levels through input, and challenge

from a range of perspectives.

2. Access and attract talent from the widest pool available.

3. Be more responsive to market by aligning with a diverse customer base, many of

whom are women.

4. Achieve better corporate governance, increase innovation and avoid the risks of

‘group think.’

‘Improving gender balance in the boardroom not only increases the performance of the board and strengthens the business but is also good for the UK economy, as it enhances

our competitiveness, ability to attract talent and reputation for good governance in a

global market.’ (Philip Hampton, Chairman – Royal Bank of Scotland, p5)

Research findings on share price growth from European companies find high levels of

growth in those companies with a high proportion of women on the senior management

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whose boards contain female representation include a 42% increase in return in sales,

66% increase in return on capital employed, and a 53% return on equity (Joy et al., 2007).

The Davis report (2011) considers female board appointments over a six-year period

between 2004-2010, and the percentage of female board members increases by 3.1%

between the periods studied. Corporate governance reforms focus on the percentage of

NEDs as opposed to the sex of the board members. The Chairman for the FTSE 350

companies is expected to review their executive committees, with regard to the number of

male and female directors, and set out future goals. The Davis report (2011) advises

FTSE 100 companies to aim for a minimum of 25% female representation by 2015.

The procedure in which board members are appointed has increased disclosures as a

result of the Davis report (2011). The annual report must include, under provision B2.4,

the process that has been undertaken in the appointment of new executives. This includes

details about the search and nominations procedure, to enable diversity to be achieved. A

voluntary code of conduct is effective from 2012 to address the issue of listed companies

having poor diversity within their boards.

Reasons why there are so few female directors incorporate several issues. These include

a lack of qualified women with experience of serving on boards, combined with women

not making their interests clear. Findings from a study on FTSE 100 companies during

2001-2004 (Singh et al., 2008) highlight that women are significantly more likely to

bring international diversity to the boards, while a quarter of new appointments during the

period under study highlight previous experience at board level. Previous experience

consists of prior employment at financial institutions, senior positions in the public

sector, and carrying out roles in voluntary and charity organisations. The recommended

duration of female board members is two terms, identical to men, therefore the current

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such example is current CEO of Royal Mail (listed on the stock market in October 2013);

Moya Greene’s previous roles include government and financial positions.

Canadian research studies public, not for profit and private boards, and find that boards

that consist of three or more women demonstrate different corporate governance

behaviours’ in comparison to all male boards (Brown et al., 2002). Boards that consist of gender balance demonstrate a higher level of monitoring of board accountability. This is

a key element of corporate governance, in addition increased communication levels are

identified, with non-financial performance measurements being monitored. The link

between the percentage of female board members and a company’s leverage levels focuses on whether gender has an impact on the choice between debt and equity in the

capital structure. The Board of Director’s attitudes to risk filters into the choices that are made with regard to the capital structure.

Guidelines that have been introduced following the publication of the Cadbury Report

(1992), and the Higgs Review (2003) for the UK, focus on diversity for the members of

the Board, and the ability to select future directors from a wider talent pool. Diversity

can take many forms; gender, race, ethnicity and nationality (Erhardt et al., 2003).

Female board members also provide role models for younger women, and signal career

progression is achievable in companies (Bilimoria, 2000). In addition, the benefits that

diversity brings to the board are the creation of new ideas, and improvements in

communication (Milliken and Martins, 1996).

How and if gender diversity impacts corporate governance and the capital structure

decisions, is an area that this study seeks to identify. Economic growth is based upon the

efficient allocation of capital. CEO gender plays a role in the choice between debt and

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information (Myers and Majluf, 1984) and behavioural considerations (Malmendier et al.,

2011). Previous research considers how gender related differences impact risk levels, and

how this has an influence on the capital structure of a company as debt and equity have

different risk levels. One such study considers the betting behaviour of men and women,

Bruce and Johnson (1994) and Johnson and Powell (1994) provide evidence to support

women exhibiting a lower level of risk in comparison to men. Bernasek and Shwiff

(2001) demonstrate that the allocation of wealth to pensions clearly shows that women

are significantly more risk adverse in comparison to men. How this translates to the

choice between debt and equity in the capital structure surround the higher risk level that

debt has in comparison to equity. For example, the higher the number of female

executives on the Board of Directors could lead to lower levels of debt; therefore, when

companies make decisions for future capital, the use of equity is employed over debt as

the risk of default is lower.

3.2.1.1 Gender Hypothesis

In the UK, the Davis Report (2011a:2014b)7 provides recommendations for FTSE 350

companies to conform to a specific percentage of female directors; however, the

relationship with capital structure is under-researched. The implications of the Davis

Report 2011 can be identified within the data period selected in this research. Firstly, the

increase in the number of female directors can be identified, and secondly whether the

guidelines have an impact on the debt levels in companies. If there is a significant

relationship, the impact on recruitment for future members of the Board would be

affected. The guidelines in 2014 will take time to filter through to companies; this study

is too early to identify what the implications would be.

7 ₂₀₁₁

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Higher debt levels have been found for male directors in comparison to female directors,

in particular the higher level of short-term debt (Graham et al., 2013). The confidence

levels of male directors is higher in comparison to female directors (Malmendier et al.,

2011), indicating a preference for debt over equity. The impact on the capital structure

surrounds whether the choice between debt or equity can be linked to the gender of the

CEO.

The relationship is expected to be negative, in line with behavioural theory (Malmendier

et al., 2011), and previous studies (Graham et al., 2013; Malmendier et al. 2011).

The hypothesis is:

H7: There is a negative relationship between percentage of female board members and leverage.