Firms are under pressure to appoint more women as directors. This pressure is partially due to the moral or social justification that the current demographic of many boards of directors does not reflect that of the workforce or the population as a whole.

It is also often argued that there is a “business case” for more appointments of female directors. For example, because studies in economics and psychology find women to have less appetite for risk than men, it is suggested that female directors can curb excessive risk-taking.

Some commentators even suggested that the 2008 financial crisis would not have happened if the Lehman Brothers had been “Lehman Sisters”. Is there evidence supporting these claims?

Correlation vs causation

Studies tend to find a negative correlation between boardroom gender diversity and various proxies for risk-taking. Simply put, companies with more women directors tend to be less risky.

But how true is this?

To answer this question, we analysed a large data set of US S&P1500 firms between 1996 and 2012.

To test whether female directors cause the change in firm risk, we considered the possibilities that gender diversity and risk can be correlated due other reasons.

First, it is possible that directors are appointed based on how risky the company is. For example, risky companies may choose to have a less diverse board so that the board can reach a consensus quickly.

The second possibility is that there are other factors that we cannot observe, such as corporate culture, that influence both boardroom gender diversity and how the company takes risk.

After taking this into account, we do not find any evidence that boardroom gender diversity is related to any market-based or accounting-based measures of the company’s risk.

Our results corroborate an earlier study by David Matsa and Amalia Miller, who look at the impact of Norway’s gender diversity quota on firm policies. Renee Adams and Vanitha Ragunathan, from the University of New South Wales and University of Queensland, recently explored the same question in the financial industry and reached a similar conclusion.

Therefore, it appears that the data does not support the “business case” for boardroom gender diversity, at least from a risk perspective.

Is there a case for boardroom gender diversity?

Because gender diversity does not appear to matter for a firm’s risk, does this mean that we should not aim for higher gender diversity in the boardroom?

We believe that, ultimately, the case for greater gender diversity on corporate boards rests on a sense of fairness rather than on pure economic considerations.

The lack of strong empirical evidence on the relationship between gender diversity and risk, therefore, does not make gender diversity any more or less desirable.

More importantly, we find that firms are less likely to appoint female directors if they already have a high proportion of female directors on their board. This suggests tokenism.

Additionally, we find evidence consistent with a recruitment bias in favour of the status quo: women are more likely to be appointed when female directors have recently departed the firm.

Although we do not find that risk affects the gender of new directors, our results demonstrate that board appointments are not gender-neutral. Discriminatory practices in the recruitment of directors should thus attract scrutiny by regulators.

Do our results support mandatory gender quotas? Although we find that the appointment process is not gender-neutral, we do not find that the practice adversely affects firm outcomes.

We also have to consider the possibility that firms’ existing board compositions are already optimal given both internal and external competitive environments.

Regulations such as gender quotas could cause a deviation from optimality and adversely impact firm value.

Therefore, regulations around increased diversity disclosure and demands for more diversity by investors may offer a more cautious route towards encouraging firms to bring more gender diversity to their boardrooms.

Dr Vathunyoo Sila is an early career fellow in finance at the University of Edinburgh Business School. Dr Angelica Gonzalez is a senior lecturer in finance at the University of Edinburgh Business School. Professor Jens Hagendorff is professor of finance and investment at Cardiff Business School.

The full study, ‘Women on Board: Does Boardroom Gender Diversity Really Affect Firm Risk?’, has been published in the Journal of Corporate Finance.