Abstract: How does gender-balance affect the working of boards of directors? I examine boards that have been required for two decades to be relatively gender-balanced: boards of business companies in which the Israeli government holds a substantial equity interest. I construct a novel database based on the detailed minutes of 402 board- and board-committee meetings of eleven such companies. I find that boards that had critical masses of at least three directors of each gender in attendance, and particularly of three women, were approximately twice as likely both to request further information and to take an initiative, compared to boards that did not have such critical masses. A 2SLS model confirms these results.
Consistent with these findings, the ROE and net profit margin of these type of companies is significantly larger in companies that have at least three women directors. In addition, boards that included a critical mass of women directors were more likely to experience CEO turnover when firm performance was weak. At the level of the individual directors, both men and women directors were more active when at least three women directors were in attendance.
Q: What is the main finding of your paper “Does the Gender of Directors Matter?”
A: I find that the gender of directors does matter. Specifically, I find that boards that are relatively gender balanced, which I define as boards that have at least three directors of each gender, are approximately twice as active compared to non-gender-balanced boards. For example, compared to non-gender-balanced boards, the gender-balanced boards are approximately twice as likely to request further information or an update from the CEO when discussing a particular issue. Furthermore, the gender-balanced boards were also those that exhibited better financial performance.
Q: What makes your study any different than the dozens of studies that have already examined the association between the gender composition of boards and financial performance?
A: I think two features of this study are quite unique. First, I examine detailed minutes which are quasi transcripts. These minutes allow me to observe the actual actions boards take at their meetings. Accordingly, I am not confined to assessing when and which actions boards take using only observable outcomes such as financial performance. Because I have the minutes for a period of one year for each firm, I can observe how the gender composition in attendance (which varies somewhat from meeting to meeting) for a given company, impacts upon the frequency a board takes action.
The second unique feature is that I examine relatively gender-balanced boards: They comprise of roughly 37% women. This diversity is different from most boards around the world which on average usually include only 5%-16% women directors. The latter boards may offer an ill-suited setting for generating an understanding concerning the effects of gender diversity, if board were gender balanced.
Summary: I find that boards with a dual-critical mass, defined as boards that have at least three directors of each gender in attendance, are more active than boards that do not have such a dual critical mass. These results are particularly driven by the existence of a critical mass of women directors. I find that boards with a dual-critical mass are approximately twice as likely to take an action in board meetings – both to request further information and to take an initiative. These findings are also documented for periods in which boards are particularly crucial – when companies are between CEOs. These findings suggest that critical masses of each gender are required to allow boards to benefit from the potential benefits gender diversity may offer. Also above the surface similar patterns are documented: the ROE and the net profit margin of GBCs are found to be significantly larger in firms whose boards include a critical mass of at least three women directors – thereby becoming gender balanced boards. Taken together with the findings documenting a causal positive relation between gender balanced boards and the frequency they take actions, the findings pertaining to financial performance imply that the positive impact of a critical mass of women directors trickles up to the financial performance of the firm.
On the level of the individual directors, the study documents that both men and women directors are more active when a critical mass of three women directors is in attendance. In addition, women directors were found to be more likely than men directors to take actions on supervisory issues, and they were more likely to be active when companies were between CEOs. Last, having more women in board-committees was found to increase the extent of communication. These findings imply that each gender of directors has, to a certain extent, different skills and interests.
On the academic level, this study demonstrate that gaining access to the “black box”, allows a more direct and delicate examination of the work of boards – in this case, of the impact of gender upon it. On the practical level, these findings suggest that, in a steady state, gender-balanced boards seem to have an advantage.
Publisher’s Comment: I’m delighted to see this study based on actual observation. We need more researchers inside the “black box” of boardrooms. For an excellent roundup of recent research, see Women on Corporate Boards: A Global Update by Matt Orsagh, CFA, CIPM (@mattorsagh).