Diversity in the Boardroom

I just loved Isabelle Solal and Kaisa Snellman's piece over in Organisation Science. 

They look at the effect of the gender of a company board appointment on subsequent sharemarket performance (Tobin's q). They summarise the existing literature, concluding (in line with the rest of the academic literature) that there is no particular effect of boardroom gender on company performance.

But then they do something rather neat. They look at how things vary based on company rankings on the KLD corporate social performance index. That index ranks companies by their commitment to corporate social responsibility objectives, and includes an index ranking a company's commitment to gender diversity.

They find that the gender of a board appointee has no effect on sharemarket performance, among firms with a low ranking on the KLD index. But firms with a high ranking on the KLD index, the appointment of an additional female director reduces Tobin's q. They reason that investors infer different things in the two cases:

We examine investor responses to board diversity and highlight a previously unexplored mechanism to explain negative market reactions to senior female appointments. Drawing on signaling theory, we propose that an increase in board diversity leads investors to update their beliefs about firm preferences. Specifically, we argue that a gender-diverse board is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value. Consequently, firms with more female directors will be penalized. We test our argument using 14 years of panel data on U.S. public firms. We find that firms that increase board diversity suffer a decrease in market value and that this effect is amplified for firms that have received higher ratings for their diversity practices across the organization. These results suggest that observers respond to the presence of female leaders not simply on their own merit but as broader cues of firm preferences and that firms may counteract any potential signaling effect through careful framing.

I liked the piece enough that I made it my column over in the Fairfax papers today.

It is too easy to convince ourselves of things that are not true.

We all do it and it is hard to avoid. Some beliefs, from religion to sport, are just comforting. And when some comforting beliefs are very popular, being the one to say otherwise can be a bit risky.

But, at least in business, believing things that are not so can eventually get you into trouble. Businesses face the market test. And, for publicly listed companies, share prices can provide a quick signal that you may have made a bad decision.


The latest issue of Organisation Science, a top academic management journal, provides a wonderful case study.

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And that helps us to understand why investors might respond in the way that Solal and Snellman discovered.

It may now be a bit passé to say it but improving shareholder value is a company's ultimate responsibility. There are plenty of wonderful things that companies do to help the communities they serve, but shareholder value is a hard bottom line. It is part of the market test.

Companies that keep that sharp focus on the bottom-line will make board appointments that they think will do the most to improve the company's performance.

When investors have little worry that the latest board appointment was made for any reason other than improving the company's performance, the gender of the latest board appointment has no effect on share prices. Investors simply expect that the best candidate was chosen.

But among firms highly rated for their commitment to gender diversity, an additional female appointment to the board reduced the firm's market value relative to the value of the company's physical assets (Tobin's q) by almost 6 per cent.

Solal and Snellman suggest that investors infer, in those cases, that the company is less worried about shareholder value than about other objectives. And that can be a worry if you care about your portfolio's returns.

While the literature showing no particular effect of boardroom gender on corporate performance is rather substantial, Solal and Snellman's results are still just one study. Others could yet overturn it.

But it does provide a bit of a warning for companies that put substantial effort into advertising their corporate social responsibility credentials.

If Solal and Snellman are right, then investors can be quick to infer that companies demonstrating their commitment to popular but mistaken beliefs have taken their eye off the ball.

The market test matters. And mistaken beliefs can be costly. 

The piece has not met with universal acclaim.

Over at LinkedIn, Sky director Rob Campbell writes:

I’m not sure whether Dr Crampton has ever worked in a listed company or been a director of one. As an academic he would not get much traction by grabbing one study in a quite active literature, even one based on meta analysis, and building an argument on it. The academic world has its own rigour.

But back in the listed corporate world the thinking runs a good deal deeper than “let’s appoint a woman or two and see if it lifts the share price”. We are all looking to improve the performance levels of our boards and management and it would be foolhardy to ignore the negative impacts of mono gender, mono ethnicity, mono experience on that. Not least because our shareholders (rightly) demand that we make the shift. So sell your shares in any business I’m involved with Dr Crampton, we will keep searching for better solutions.

It's a bit funny really. I note how desperately people want to believe something to be true that isn't true, and pointed to the metastudies of dozens of prior studies that show that there is no effect of boardroom gender on company performance, and that's the reply.

I hadn't known about the KLD index before. Someone's likely already done this study, but if it hasn't been done, it would be a lot of fun.

I'd be keen to know whether firms subject to greater regulatory risk show up differently in the KLD index. Maximising shareholder value, for some firms, also involves making sure that the regulators have warm feelings towards a firm because the regulatory risk is substantial. Anticipating the social preferences of those regulators and working to demonstrate shared values could be a way of buying friendlier relationships with the regulators.

Different firms and industries will face different regulatory risks from different administrations. There'd then be potential for identifying effects by looking at the composition of congressional oversight boards, or changes in the Presidency as the regulatory agencies will be affected by the tone set in the Executive, or firms that face regulatory risks in different states as well as federally.

You might think that, in general, firms that depend more on friendly relations with regulators will invest more in CSR efforts where doing so buys friendlier relations. It would be neat to see whether that's the case. One does hear incredibly interesting anecdotes consistent with that kind of story, but does it show up in the data?