Women on the board, but please, the right women

One of the most enduring findings of all of ESG research is that greater gender diversity on the board of a company and in senior management increases business performance and reduces corporate risk. There are hundreds of studies that confirm this result for different sectors and industries but if you aren’t up-to-date with the research on that topic, I recommend you read this 2009 paper by Renée Adams and Daniel Ferreira (free pdf available here). Looking at almost 2,000 of the largest companies in the United States, they showed clearly that companies that had women on their boards had higher sales, higher return on assets, higher valuation, and lower risk. It was this study that spawned an entire field of studies in corporate finance.

Number of scientific articles on board diversity

Source: Baker et al. (2020).

Generally speaking, women in leadership positions and on corporate boards have a moderating influence on the testosterone-driven risk-taking of men. In other words, women tend to ask crucial questions about the risks of certain actions and the sustainability of business practices in bad times.

Even a single woman can make a difference, but research shows that the benefits accrue as board and management diversity increases. In this respect, it is interesting to reflect on a new study that tried to look at the kind of women that make it onto a board. A group of Italian researchers noticed that the attitude towards women is different from country to country. Some countries, like Italy, are more masculine-oriented than others (e.g. France). Masculinity is here based on the Hofstede Model that has several dimensions and that I have used here before.

What the study assumed was that in more masculine societies, the women that make it on boards of corporations (particularly the trailblazers) are women that have adapted to societal norms in the boardroom much better than average. In other words, if you are the first woman on an otherwise all-male board of directors in a masculine-oriented culture, chances are that you are much tougher than the second or third woman on a board in a less masculinity-oriented culture. But while toughness is a good trait for these women in masculinity-oriented cultures, it reduces their effectiveness as board members to mitigate risk-taking.

And indeed, the study found that the volatility of Return on Assets of banks declined as more women joined the board. But the trailblazing woman on the board tended to have a much weaker effect on risk-taking than any subsequent female board member. And the more masculine the culture in a country was, the worse this effect became. In masculine cultures, the women who want to progress have to become like men and as a result, the benefits of inviting them to the board are greatly reduced.

For corporations, this has several important implications. First, no board should think that their job is done if they have appointed a token woman to their board. Strive for somewhere between one third to two-thirds of all board members to be female. That is the sweet spot for board effectiveness. Second, make sure you don’t hire the toughest woman you can find or the women that enjoy men’s locker room talk. These are likely to be less effective than women who push against that kind of machismo behaviour. Third, culture matters. It is not just how many women are on the board, but how people interact with each other in discussions and at the workplace.