Advocates say board diversity creates shareholder value because varied experiences and values enable decision-makers to have a broader and richer understanding of the firm’s marketplace, prevent “group think”, and ensure that boards adequately monitor the firm, among other expected benefits. They point to multiple studies finding that firms with women on their boards enjoy better financial performance.

Opponents say boards should be focused on fulfilling their fiduciary responsibility rather than pursuing social causes. Supporting this view, several other studies have concluded that firms with women on their boards have worse financial performance.

So what are we to make of these conflicting studies and perspectives? Until recently, little could be said definitively about whether women directors have any relationship to firms’ financial performance.

To make sense of this mass of inconsistent research, we systematically examined all of the studies that have looked at the relationship between board gender diversity and firms’ financial performance to date.

In an article recently published in the Academy of Management Journal, we combined these 140 studies—representing more than 90,000 firms in more than 35 countries—using a statistical technique called meta-analysis.

We found that, in general, firms with more women on their boards are indeed more profitable. Other research helps to explain why female directors may contribute to this.

Reasons

Several studies have found that female directors differ from their male counterparts in fundamental ways. For example, Renée Adams (University of New South Wales) and Patricia Funk (Barcelona Graduate School of Economics) found that female directors are more likely to value interdependence, benevolence, and tolerance, which may help elicit information and perspectives from, and stimulate collaboration among, all board members.

Our study found two additional reasons why female directors may be associated with higher profitability.

First, we found that boards with more female directors tend to spend more time in board meetings and are more likely to monitor the CEO and the firm in general.

Second, boards with more female directors are more likely to be concerned with and involved in influencing the firm’s strategy.

We also found that the strength of the relationship between women on boards and firm profitability depends on the country-specific context.

Profitability protections

The positive relationship between board gender diversity and profitability is strongest in countries such as New Zealand and Israel that have more stringent laws and regulations that prevent directors from enriching themselves, allow shareholders to sue for director misconduct, and provide other shareholder protections.

It may be that shareholder protections motivate boards to be more inclusive in their decision-making and listen to a wider range of voices on the board.

This makes sense in light of other research finding that groups are more likely to leverage their diversity when they are held to higher accountability standards.

In a 2007 study, researchers from the University of Amsterdam and RSM Erasmus University found that groups that were held accountable for their decision-making process were more likely to share and deeply process information, and thus produced higher quality decisions.

Although firms with more women on their boards are, on average, more profitable, surprisingly, this advantage is not reflected in market valuations.

Ambivalence mirror

Perhaps mirroring society’s ambivalence with women in leadership positions, we found that female board representation is not generally related to firms’ valuations in the market.

Rather, how investors evaluate firms with more female directors depends, in part, on the level of gender parity in a particular market.

In countries with high gender equality such as Sweden and Norway, investors evaluate firms more positively when they have more female directors; in countries with low gender parity such as India and Kuwait, investors evaluate firms more negatively when they have more female directors.

Although markets are supposed to be unbiased, we would not be the first to document that gender biases may influence investment decisions.

In a study presented at a Dutch Central Bank-sponsored conference, Alexandra Niessen-Ruenzi and Stefan Ruenzi of the University of Mannheim demonstrated that implicit biases against women in finance explained why investors were significantly less likely to invest into female-managed funds as compared with similar male-managed funds.

Should countries consider a law forcing a quota similar to Germany’s? Our findings suggest that quotas fail to provide an easy answer. Rather we suggest that efforts to ensure director accountability and to open educational and employment opportunities to girls and women are more likely to provide the conditions that will motivate firms to select female directors for their performance-enhancing potential.

Kris Byron is associate professor at Georgia State University’s J. Mack Robinson College of Business.
Corinne Post is associate professor of management at Lehigh University.