INSEAD research finds investors are not walking the talk of gender diversity
Middle East, Asia, Europe
29 November 2019
In recent years investors have become vocal advocates for gender-diverse boards. But how committed are they?
New INSEAD research suggests that despite proclamations of support, investors perceive companies which increase female representation on their board as having a weaker commitment to shareholder value and are likely to punish them accordingly.
Specifically, it found that:
- Among the firms that had made other investments in gender diversity, the appointment of female directors to the board reduced the firm's market value relative to the value of the company's physical assets by almost 6 percent.
- The market penalty is unrelated to actual board performance
- The effect dissipates after two years
Drawing on 14 years of panel data from 1,644 US public firms, the study’s authors, INSEAD Assistant Professor of Organisational Behaviour Kaisa Snellman and INSEAD postdoctoral fellow in Economics Isabelle Solal found that there was no evidence or suggestion firms were less profitable after adding a female director to the board. However, they found that for companies that had made prior investments in diversity, an additional female appointment to the board reduced the firm's market value relative to the value of the company's physical assets by almost 6 percent. Solal and Snellman suggest that investors infer, in those cases, that the company is less committed to maximizing shareholder value than other goals.
Their paper, Women Don't Mean Business? Gender Penalty in Board Composition, recently published in Organization Science, suggests that firms do little to address this effect and may actually exacerbate it by highlighting the gender of a new female appointment over the experience and competencies which got them the job.
“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 effect on how investors evaluate the company,” says Solal.
“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,” continues Snellman.
To test this theory, the researchers conducted an experimental study with 193 alumni from a top tier business school. They found that that observers associate the appointment of female directors with a firm’s tendency to care more about social goals and less about profit maximization. Further, they found that when firms emphasise the new appointment as an example of the company’s commitment to diversity, it lowers observers’ perception of the appointee’s competence.
Companies can take steps to address and eliminate these damaging assumptions by reframing how they talk about female leaders and directors - focusing on merits rather than gender - and reassuring shareholders of corporate goals. However, Snellman says the findings also turn the mirror back on investors and the glaring discrepancies which often exist between what they say and what they do.
“Despite considerable efforts by policymakers and diversity advocates to increase female representation on corporate boards, this research suggests that investors, and activist shareholders in particular, don’t reward for efforts to promote diversity,” she notes.
The paper references a 2016 Bloomberg analysis which showed that while five of the biggest U.S. activist funds had succeeded in getting 108 board members appointed over a five-year period, only seven of their nominations had been women.
“Shareholders have a lot of power to change things if they want to but, although more and more conversations are being had around diversity issues, the change in boardrooms is not commensurate with these discussions,” Snellman notes. “Our study shows that when it comes to gender diversity shareholders are not following up on their promise.”
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