No, this is not a post arguing for polygamy or marital infidelity. Instead, I want to take up a topic that I last touched on a year ago: Gender diversity on the board of directors of a company. Back then, I argued that the first woman promoted to an otherwise all-male board is often less effective in changing a company’s culture and risk-taking than the second, third, etc. The research shows that often, the first woman to break the glass ceiling is one who is especially well adapted to an all-male culture and doesn’t bring much behavioural diversification to the board. Only when there are more women on the board of a company can diversity of thinking take hold and the company tends to benefit, usually through lower risk-taking and as a result, higher profitability, because there are fewer risky things that go wrong.
But there apparently is also a second driver through which gender diversity reduces excessive risk-taking in companies. Kingsley Wabara from Washington University looked at both the number of women on the boards of US corporations as well as their influence. On the one hand, he confirmed what we already knew. If there is one woman on an otherwise all-male board, the benefits to the company are minimal or non-existent. However, he suspected that his doesn’t necessarily have something to do with the personality of the first woman to come on a board but here influence on the board. He argues that it is easy for a board of directors to ostracize a single director and reduce her influence. However, it gets much harder to ostracize a large minority. And it gets even harder to defy a single woman if she is in a powerful position. For example, Wabara found that if he looked at companies with an all-male board and a male CEO the addition of one female director did not materially change the company’s profitability, financial leverage, or risk-taking. However, companies that had a male CEO and one woman on the board but then added one or more additional female directors to the board saw their operating income relative to total assets increase by 3% while debt relative to total assets declined by 4% on average. Thus, these companies managed to become more profitable despite reducing their financial leverage.
Finally, Wabara looked at companies that switched from a male CEO to a female CEO. By changing one influential position (in this case the CEO), the company’s dynamics were already changing substantially. Companies that switched to a female CEO experienced a significant reduction in share price volatility and a small but insignificant increase in profitability. While far from being proof, this clearly shows that the more influential women get on a board of directors the better the company performs. My own research indicates that once women make up more than one-third of the directors on the board, corporate profitability starts to rise substantially. And this is why I endorse regulations like the one in the EU where listed companies have to have at least 40% women on their board. While I am normally sceptical of regulation, this is one that is supported by the data.
Totally disagree. Aside from giving encouraging figures you are using terms like "small but insignificant". Anecdotal evidence aside, i find (and many men have noticed the same thing) that once you pass a certain male to female ratio in a company (33% female typically), the company starts to adopt a more female oriented mindset, which kills performance. The same applies to the boards. It is a signal for high performers to leave and pursue more rewarding endeavours. Also last i checked, less risk taking also leads to less innovation and lower performance and adaptability over time, not sure how that is a good argument. And finally, if you have to "force diversity" through quotas then that is a serious problem. It means we are giving power to people who otherwise under fairer circumstances would not have risen, great way to kill meritocracy in the name of social engineering.
I typically read all your articles the day they are published, this one has disappointed me though.
Is there a study specifically showing which specific industries board membership (beyond the null hypothesis that):
1. Benefits from gender diversity? And why just women? Are there no improvements from LGBTQ?
2. Does not benefit from gender diversity - either gender-neutral or perhaps requiring a different diversification?
3. Benefits from racial diversity/cultural diversity?
4. Benefits from other kinds of diversification?
I have no issue with the results you show if indeed data supports it, but I am concerned that data is viewed only under one prism and it reduces the differentiation to gender, rather than perhaps other factors that sometimes gender does affect but sometimes do not.
Even if the board members are women, would certain women be more contributory than others depending on the industry?
Just as an extreme example, I remember this quote I read in grade school but cannot remember who said it. It goes something like this (paraphrased) "Mothers should be the signatories of the declaration of war".