4.2 Literature review on gender diversity in boards: the economic decision-making perspective

Both the broad concept of diversity and the narrower defined concept of gender diversity are often attributed to have a positive effect on a firm’s financial performance. Since high profile scandals such as Enron, WorldCom, Parmalat and Ahold, policy makers are concentrating on the issue of diversity in corporate boards as an important component of improved corporate governance.1 In general, it is often argued that diverse teams take better decisions; as expressed by Raymond: ‘Where there is real diversity in the boardroom, the directors are better equipped to address the issues presented to them.’2 Although diversity comprises more than gender only, many studies on the relationship between diverse composition of teams and company performance focus on gender diversity.

In a field experiment, Hoogendoorn et al. found that teams with an equal gender mix perform better than male-dominated teams in terms of sales and profits.3 In this study, a total of 550 undergraduate students in business studies were tested by instructing them to work in 45 teams and run a business venture for one year; this was part of their curriculum in an entrepreneurship program.

Other studies on the relationship between female participation in top management and financial performance also found supportive evidence that gender diversity has a positive influence on a company’s performance. Dezsö and Ross established an indirect positive effect of female top management participation and the innovation capacity and outcome within companies.4 Using data of the Standard & Poor’s 1,500 US companies from 1992 to 2006, these authors demonstrated the strong positive association between Tobin’s Q,5 return on assets, and return on equity, on the one hand, and the participation rate of 50 percent (of female top management) on the other. However, their claim is restricted to corporate innovation tasks, i.e., they applied and tested innovation intensity as a moderator able to moderate positively the relationship between female representation in top management and firm performance, which they also found in their extensive panel data. They hypothesized that increased female representation increases the task performance of top management teams especially assigned with complex problem-solving tasks, e.g. necessary for innovation. Dezsö and Ross concluded upon analyzing their extensive empirical data that increased female representation in top management teams indeed increases both top management and middle management task performance which in the end increases overall corporate financial performance:

Another link between gender diversity and financial performance is concluded by Isidro and Sobral, using a data sample of firms included in the Financial Times 2011 classification of the 500 largest European companies from 2010 to 2012.7 They conclude that female participation in corporate boards is positively related with financial performance (measured in terms of return on assets and return on sales) and with ethical and social compliance, which in turn are positively related with firm value. They state: ‘In other words, (…) greater female representation on corporate boards of large European firms increases their firm value, but indirectly’.8 According to them, promoting the presence of increased gender diversity in European companies has both financial and non-financial implications.

In line with Isidro and Sobral, the researchers Zhang et al. found empirical evidence that greater presence of outside (independent) and female directors is linked to better corporate social responsibility (CSR) performance within a firm’s industry.9 Their sample consists of more than 500 firms in 64 industries representing US and international companies listed on US stock markets. Zhang et al. argue that besides empirical importance, their work:

Although several empirical studies indicate a positive relation between gender diversity in top management teams and a company’s innovative, management, financial and CSR performance, this relationship is not applicable to all sorts of performance. An example of a negative relation was argued by Quintana-Garcia and Benavides-Velasco.11 They conducted a longitudinal study into the contribution of gender diversity and innovation capabilities of a particular research-based sector: biotechnology. They examined a sample of dedicated biotechnology firms that went public in the US in the period 1983-2009, and found no support for the prediction that gender diversity in top management teams positively influences the success of raising funds through an Initial Public Offering (IPO). On the contrary, as they deduce:

Whereas most of the previously cited studies found a positive relationship between gender diversity and a company’s performance, we note that such conclusions are derived from studies analyzing large firms, while Quintana-Garcia and Benavides-Velasco examined smaller firms, but in a particular male-dominated sector. This biotechnology sector can be characterized by a risky and uncertain context, since the companies in this sector are research-based firms depending on innovation capabilities, e.g., patents, external citations and products being developed. Finally, Quintana-Garcia and Benavides-Velasco found that functionally heterogeneous top management teams are significantly and positively associated with raising funds through an IPO. In their view, this implies that in a broad sense diverse composed (top management) teams most likely might achieve more positive economic results but not necessarily where gender diversity is distinctive.

In the popular press, the alleged positive relation between gender diversity and financial (organizational) performance is often substantiated13 by reference to the studies by Catalyst14 and McKinsey15 published in 2007. However, these two studies were not set up as academic studies.16 Given the multitude and complexity of factors that interfere with corporate financial performance, it is difficult to prove a (single) causal relationship between gender diversity and financial performance. Lückerath-Rovers argues that at least every business case in favour of higher gender diversity is built on economic and moral arguments.17 As from the financial year 2007, Lückerath-Rovers annually publishes a ‘Female Board Index’, in which she reports on the numbers of female participation in management boards and supervisory boards in Dutch listed companies.18 Her overall conclusion still is that, in the Netherlands, very few women serve on management boards and supervisory boards (see further the discussion in Section 4.3 and 4.6).