Women on Board: Does Boardroom Gender Diversity Affect Firm Risk? (Digest Summary)

The authors attempt to ascertain whether increased female board representation
affects firm risk. Although the data suggest riskier firms are less likely to
appoint women directors, it may be that women prefer to work for less risky firms.
The authors develop models that consider that firms ultimately have a choice in the
composition of their boards, and such factors as the current board composition, the
level of firm risk, and stakeholder expectations feed into this decision. After
taking these factors into account, they find that greater gender diversity does not
affect the risk level.

The past decade has seen an increased focus on the importance of corporate governance
and risk oversight to both the corporate world and investment managers. Board
structure is a key element of corporate governance.

The authors show some evidence that the proportion of female board members tends to
be driven by the level of firm risk. Although they find no significant evidence that
increased gender diversity leads to lower or higher firm risk, they do find that
lower-risk firms have a higher female board representation. The authors also find
that firms are less likely to appoint female directors if the board already has high
female representation. Resigning female board members are more likely to be replaced
with women, suggesting that a quota system rather than a merit-based approach is
being followed.

Finally, prior literature suggests that boards populated by male directors who have
worked on boards with female directors tend to have higher female representation.
The authors are unable to verify this finding.

Data for 1,960 firms over 1996–2010 are from Compustat, Execucomp, and CRSP.
Director-level data are from the RiskMetrics database. There are 7,101 observations
in which at least one director is appointed. The authors identify a number of
explanatory variables consistent with prior literature. These variables are grouped
under board characteristics (i.e., board size, board independence, and proportion of
male directors with board connections to women), such firm policies as CEO
risk-taking incentives (CEO tenure and remuneration incentives), and firm
characteristics (price-to-book ratio, levels of R&D, return on assets, and
leverage).

The authors measure equity risk using three different metrics: total risk, systematic
risk, and idiosyncratic risk. The summary metrics indicate that 10% of directors are
female and are generally on larger boards of mature companies with more independent
directors. The metrics also suggest that female board representation is consistent
with lower equity risk measures.

The authors develop models to allow for the impacts of (1) omitted, unobserved
factors, such as a firm’s goal of being recognized as a responsible corporate
citizen, and internal gender quotas and (2) reverse causality whereby lower-risk
firms appoint more female directors rather than female directors influencing firm
risk. The authors use a dynamic panel system generalized method of moments estimator
to capture these impacts and to consider historical risk levels.

To confirm the robustness of the results, the authors test different lag periods for
the risk variables in the model. The changes make little difference to the results.

Consistent with prior literature on governance, the authors initially remove
financial services firms and utility companies from the raw data. Their examination
of the financial services industry does not affect their conclusions.

The authors use a probit model to determine the characteristics that affect the
appointment of female directors. The results from this model suggest that a quota
system rather than a merit-based system is often used to replace exiting female
directors.

From an equality perspective, increased boardroom diversity along both gender and
cultural lines is a worthy goal and should lead to improved governance and
decision-making outcomes. But given the large number of variables involved, it has
been difficult to prove that increased boardroom diversity leads to better economic
outcomes. Because boardroom diversity is a relatively new concept, it may take
longer to assess. It is also difficult to measure the positive impact of preventing
strategic actions that could disadvantage the firm. Finally, one of the complicating
factors is that in a rapidly changing world, bad outcomes can occur to well-managed
companies. Ultimately, luck can play a greater role in determining corporate success
than most managers would care to admit.