Investors falling short on backing gender diversity in boardrooms: INSEAD study

Investors falling short on backing gender diversity in boardrooms: INSEAD study

An INSEAD study has shown that business investors are vocal advocates for gender diversity in boardrooms, but in practice are falling short.

Despite proclamations of support for a move towards a better gender balance, new INSEAD research suggests that investors perceive companies which increase female representation on their board as having a weaker commitment to shareholder value.

The study found specifically that among firms that had made other investments in gender diversity, the appointment of female directors to the board reduced a firm’s market value relative to the value of the company’s physical assets by almost 6 percent.

Beyond this, the research revealed that the market penalty is unrelated to actual board performance and the effect dissipates after two years.

The study’s authors, Kaisa Snellman, INSEAD Assistant Professor of Organisational Behaviour, and Isabelle Solal, INSEAD postdoctoral fellow in Economics, drew on 14 years of panel data from 1,644 US public firms.

The research ultimately found that there was no evidence or suggestion firms were less profitable after adding a female director to the board.

Despite this, the study highlighted, companies that had made prior investments in diversity found that by appointing a female director to the board their market value relative to the value of the company’s assets fell by almost 6 percent.

Perception of gender diversity in boardrooms is the main culprit of loss

The INSEAD paper on gender diversity in boardrooms, ‘Women Don’t Mean Business? Gender Penalty in Board Composition’, suggests that firms are doing little to address this effect.

Conversely, firms may be worsening the impact by highlighting the gender of a new female appointment as opposed to drawing the attentions to the experience and competencies that got them the job.

INSEAD’s Isabelle Solal said: “There is no academic evidence to suggest that having a woman on the board has a negative effect on a firm’s profits or productivity. But it does have an effects on how investors evaluate the company.

“Investors notice and react to changes in board membership. When gender is presented as the salient feature of that change, it is not unreasonable for them to assume that gender, in fact, motivated the change.

“If investors believe female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, investors read the signal as a weaker commitment to shareholder value.”

In order to put the theory to the test, the researchers conducted a study with 193 alumni from a top tier business school alumni.

This study revealed that observers associate the appointment of female directors with a firm’s tendency to care more about social goals as opposed to profit maximisation.

As a result, the study states, when firms place focus on the new appointment as an example of their commitment to diversity, overall it lowers an observer’s perception of the appointee’s competence.

The authors note that the solution to this for firms is to reframe the way they talk about female leaders and directors. If they focus on merit over gender, it will reassure shareholders of their corporate goals.

Earlier this year, Global Education Times had featured a blog from Copenhagen Business School articulating their research, which claimed teams perform better when they consist of an equal gender balance between men and women.

Pic: Pawel Chu

Kate Frazer - Global Education Times (GET News)

Kate Frazer is a reporter for Global Education Times with a focus on UK/Ireland and North American education news. When she is not writing for GET News, Kate spends her time as an English and Maths tutor, and is currently pursuing her PGCE in Secondary Mathematics.
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