Master Thesis
Board gender diversity and firm financial performance
An analysis of financial firms in the United States and in Europe
Federica Maffezzoli (S3813851)
Supervisor: Prof. Dr. J. de Haan
Co-assessor: Dr. H.U. Haq
MSc International Business and Management
Faculty of Economic and Business
University of Groningen
Academic Year 2018/2019
ABSTRACT
In the last decades, organizations have faced new challenges and complex worldwide scenarios. In this context, firms deal with societal changes and an increasing degree of heterogeneity and diversity among their members.
Among demographic diversity, gender diversity in the boardroom has been studied and discussed from ethical, cultural, sociological and economic perspectives. While some studies reported benefits, such as a better representation of stakeholders’ interests and a greater access to a pool of talents and perspectives, which may lead to better decision-making processes, on the other side, other researchers underlined increased costs, social conflicts and difficulties in communication.
Despite the consistent number of studies regarding the impact of women’s presence on the performance of the firms, results are still inconclusive. This paper aims to examine the relationship between the presence of female directors in the boardroom and the financial performance of financial firms. The sample includes 194 financial firms operating in Europe and in the US and their financial performances have been measured relying on two accounting-measures ratios, ROA and ROE. In addition to this, the analysis takes into consideration the implementation of mandatory legislative measures, in the form of gender quota, in some countries in Europe.
The findings show that board gender diversity has not a statistically significant impact on the financial performance of firms; however, mandatory gender quota systems proved to lead to a more negative effect of board gender diversity when the financial performance is measured by ROE.
TABLE OF CONTENT
1. Introduction……….4
2. Literature review……….7
2.1 Corporate governance and boards of directors………...7
2.2 The effect of diversity………8
2.3 Board gender diversity……….11
3. Methodology……….15
3.1 Sample……….15
3.2 Variables……….16
3.2.1 Dependent variables - Firm financial performance………...16
3.2.2 Independent variable - Board Gender Diversity………...16
3.2.3 Control variables………16
4. Analysis and results ………..19
4.1 Descriptive statistics………....19
4.2 Correlation analysis……….22
4.3 Model analysis- Board gender diversity and firm financial performance………….23
5. Discussion……….27
6. Conclusion………31
References………..33
1. INTRODUCTION
Over the years, many countries have discussed issues such as female participation and gender equality, leading to the adoption of various legislative and self-regulatory initiatives, aimed at encouraging greater participation of women in working life. These measures were adopted in line with the consideration that a greater presence of women in organizations will positively affect both society and the value of firms (Adams and Ragunathan, 2013). Since social norms and customs are subject to continuous changes, women started representing a larger proportion of the workforce, even if non-uniformly, with different path and speed. Although female representation and participation in working life have increased, gender equality has not yet been achieved. Indeed, factors such as cultural norms and traditions, insufficient support for family responsibilities and insufficient flexible working options still represent barriers to female employment.
This phenomenon has attracted international business scholars’ attention, who started studying it in the corporate governance mechanism. In particular, several researchers focus on the impact of female directors in the boardroom (Carter et al., 2010).
According to a report of the European Commission (Jourovà, 2016), even if the share of female director on boards has increased in 23 of the 28 Member States of the European Union from October 2010 to April 2016, the proportion of women is still low, with the average share of female directors reaching 23,3% in April 2016. Figure 1 illustrates the percentage of female director in the board of large listed companies in European Union countries.
Figure 1: Board gender composition of the boards of large listed companies in the European Union, April 2016
In the financial field, in particular, only 20% of the board directors were female in 2016 and this percentage is estimated to be still lower than 30% in 2048 (Wyman, 2016).
The analysis of board gender composition and its effects requires firstly to understand how group formation can affect board effectiveness in operations. Indeed, the effectiveness of the board can’t be dissociated from the analysis of its composition, characteristics and internal mechanisms that influence its functioning (Adams and Funk, 2011). Secondly, the corporate governance literature is called to further analyze the impact of heterogeneity and diversity, as it proved to change the setting and the equilibrium of the corporate boards, which affect the value and the performance of the firm. According to Catalyst (2015), a homogeneous board may be considered a symptom of poor corporate governance and represent an obstacle in the competition with other firms. In this paper, these considerations will be further analyzed with respect to three theories: the agency theory, the resource dependence theory and the upper echelons theory.
With respect to gender, differences involve attitudes, values, management styles, previously collected experiences, interests and educational background (Hilliman et al., 2002; Nielsen and Huse, 2010; Seierstad and Opsahl, 2011).
Although many studies reported the positive implications of gender diversity on the board, the impact of this presence on the financial performance of the firm is still unclear and the topic is considered controversial (Shrader, Blackburn and Iles, 1997). Indeed, results differ among researchers. Several researchers proved that board gender diversity increases firm financial performance (Carter et al., 2003; Erhardt et al., 2003; Campbell and Minguez-Vera, 2008), but many others reported negative results (Shrader et al., 1997; Darmadi, 2011), while other studies did not show significant results (Randoy, 2006; Smith, Smith and Verner, 2006; Carter, D’Souza, Simkins and Simpson, 2010). This implies that the impact of board gender diversity on the performance of the firm cannot be determined a priori and that many factors, such as the analyzed country, the year or time series, the indicator of firm performance, the sample chosen for the analysis, contribute to different results.
The aim of this research is to investigate the impact of board gender diversity on firm financial performance.
composed of 194 financial firms listed on Forbes 2000 Global 2017 and Fortune 500 Global 2017, operating in the USA and in Europe. The financial performance of these firms will be calculated through accounting-based ratios, ROA and ROE.
Moreover, taking into account recent legislative measures and directives set up by the European Union Organs, the analysis controls for the effect of a mandatory gender quota in the country.
The structure of the paper is going to be as follows. The first part (chapter 2) contains the corporate governance literature reviews and focuses on the board of directors, presenting different theories about its composition and role. Then, the paper analyses how diversity can impact board effectiveness and, in particular, board gender diversity and its implications are discussed
2. LITERATURE REVIEW
2.1 Corporate governance and boards of directors
In line with the Cadbury Report (1992), we may define the term corporate governance as “the system by which companies are directed and controlled”. All the governance mechanisms comprise different actors, internal and external to the company, and interests, such as the management, directors, shareholders and stakeholders (Campbell and Minguez-Vera, 2008).
In particular, the board of directors has a key role as a control mechanism in curbing managerial self-interest. According to Finkelstein and Hambrick (1996), among its duties, the protection of shareholders’ interests is considered a central board’s role and implies hiring the right managers, compensating them properly, and overseeing managerial choices (Carter, Simkins and Simpson, 2003). In addition to monitoring and controlling managers, the board is involved in other important functions such as providing information and counsel to managers and linking the corporation to the external environment (Mallin, 2004). Regarding its structure and composition, the board can be seen as an information-processing multi-level structure and group. Indeed, as reported by Pfeffer and Salanick (1978), the multiple roles of the board fulfill the environmental dependencies and serve as a link to other external organizations. Across countries, there are different board systems; some countries have one tier board systems, which consist of executive and non-executive directors. These are a characteristic of Anglo-American companies and consist of a unitary board composed of executive and non-executive directors (Jungmann, 2006). On the other side, in some European countries (e.g, Germany and the Netherlands) companies present a two-tier board structure. This consist of a management board, responsible for managing strategic tasks and setting long-term goals, and of a supervisory board, which is responsible for monitoring activity and is involved in the appointment and dismissal of the members of the management board (Jungmann, 2006; Darmadi, 2011).
Despite the differences in corporate governance codes and tier structure, the board has a crucial impact on the company’s decision-making process and is also actively involved in the determination of the corporate strategy, since it can identify objectives and actions aligned to the mission and the vision of the organization as well as balance potential risks (Campbell & Minguez-Vera, 2007). These elements lead to a widespread assumption: properly structured boards should lead to a greater level of board effectiveness (Finkelstein and Hambrick, 1996; Mallin, 2004; Monks and Minow, 2004).
the board to function in an effective way and they come from information-processing issues, which can inhibit directors from monitoring (Ryan and Wiggins, 2004). In general, boards face barriers caused by both external and internal factors, including job demands, information asymmetry and unfavorable group dynamics (Boivie, Bednar, Aguilera and Andrus, 2016). Among internal barriers, heterogeneity within board members proved to represent a double-edged sword, bringing both challenges and opportunities to the firm (Adams, de Haan, Terjese and van Ees, 2015).
2.2 The effect of diversity
Diversity refers to “the degree to which there are differences or similarities between a group and team” (Jackson et al., 2003). The literature distinguishes between two different types of diversity. On one side, cognitive diversity (or task-related diversity) refers to the background of the directors of the board, both functional and educational, and to specific previously collected experiences. On the other side, demographic diversity (relationship-oriented) includes observable demographical such as gender, age, nationality and ethnicity (Milliken and Martins, 1996; Adams et al., 2015).
The paper relies on three theories- the agency theory, the resource dependence theory and the upper echelons theory- to analyze and explain how differences within the composition of the board can impact on its functions and on the decision-making process.
Agency theory
Resource dependency theory
Researchers in the field of international business considered the resource-based view a successful approach to the analysis of the bond between the company and its environment. The resource-based view is the perspective according to which rare and inimitable resources provide value and sustain to the firm, as they form a unique bundle that is not duplicable by their competitors (Westphal and Milton, 2000). For this reason, this bundle represents a unique source of competitive advantage for the firms (Barney, 1991). Hillman et al. (2000) considered the resource dependence theory as an extension of this perspective, as it argues that, alongside material resources, human capital-based and personal resources play an important role in the survival of the company, as they are difficult to imitate and reproduce (Penrose, 1959). For this reason, heterogenous boards of directors, combining different demographic and task-related characteristics may represent a unique source of competitive advantage for the company in the formulation of its strategy and allocation of resources (Fiol, 1991).
Upper echelons
As a framework that seeks to find a link between diversity in board and firm performance, this perspective analyzes how directors differ in their cognitive frames, which are responsible for influencing firm outcomes (Hambrick 2007). According to the studies conducted by Hambrick and Mason (1984), values and cognitions of the upper echelons, who represent the dominant coalition at the top of an organization, affect firms’ strategic choices. These values and cognition are linked with individual characteristics, both task-related (such as industry experience, education level) and demographic (age, ethnicity, nationality) (van Veen and Elbertsen; 2008). Since the perception and interpretation of stimuli is difficult, relying on directors’ observable characteristics (such as race and gender) may overcome the bounded rationality of the members of the organization, constituting a proxy for cognitive frames (Krishnan and Park, 2005).
In line with these findings, the upper echelons theory provides an explanation for the top management team’s selection of new members and new directors’ appointment, which result in hiring members who show similar characteristics as the existing members, guided by observable characteristics which lead to a similarity-attraction phenomenon (Nielsen, 2009).
stakeholders, and therefore it could better represent their interests (Harjoto et al., 2015). This aspect is relevant for firm performance because, as underlined by Cornell and Shapiro (1987), good corporate governance requires effective stakeholder management and it leads to company success. Secondly, according to Luoma and Goodstein (1999), diversity represents a key and necessary element for a more complete and effective decision-making process; for this reason, an organization will benefit from different point of views in understanding the complex environment which broadens the range of strategic options considered (Shrader et al., 1997; Campbell and Minguez-Vera, 2008; Carter et al., 2010).
However, despite these positive outcomes, diversity also proved to negatively impact the management of the firm. Firstly, because it implies a longer decision-making process due to a greater presence of different perspectives and ideas to be discussed in the boardroom. This may lead to higher costs linked to the effort and the amount of time required to overcome the increased level of complexity (Lau and Murninghan, 1998). Indeed, despite the increased information search and variety, greater heterogeneity can be responsible for more difficult communication among the members of the board.
board and from intervening in board discussions. This phenomenon is not only linked to a consequential increase in the number of relational conflicts, but may also lead to group biases, such as pluralistic ignorance, and a less effective decision-making process, which have a negative impact on the performance of the firm (Westphal & Bednar, 2005; Boivie, Bednar, Aguilera and Andrus, 2016).
2.3 Board gender diversity
This paper focuses on non-tasked-related diversity and, in particular, on gender diversity (or female board representation), calculated as the proportion of women on the board of directors. Over the years, several studies have been conducted about innate gender differences and the impact these can have in different fields, including the business field. From one side, according to the upper echelons theory, female and male directors may differ in their cognitive frames, while, on the other side, there are many other differences due to historical and cultural reason, which have still great implications in terms of role assignments and experience collected as business experts (Terjesen, Sealy and Singh, 2009).
critical in asking question, willing to change deeply rooted procedures and more likely to monitor managers effectively, which makes them correspond to independent directors (Carter et al., 2003; Brammer et al. 2007; Adams and Ferreira, 2009).
At the same time, since female directors traditionally do not belong to the male dominant coalition, female presence implies firms tapping broader talent pools and boosting their access to human capital (Maznevsky, 1994; Carter et al., 2006). In line with the resource-based view and the human capital analysis, based on which firms that rely on a unique bundle of talents, capabilities and perspectives have an inimitable competitive advantage, female presence in the boardroom may enhance increase firm value (Smith et al., 2006; Kang et al., 2010).
Moreover, in respect to the working environment, female directors are reported to assume a more cooperative attitude and to face fewer attendance problems (Nowell and Tinkler, 1994). Regarding female attendance, several studies assert that the greater the female presence in the board, the better will be, in turn, the attendance of male directors in imitation; this represents a positive outcome, as it leads to a greater participation of directors in the decision making processes (Dawson, 1997; Adams and Ferreira, 2009).
In addition to the retrieved positive implications for the stakeholders discussed before, stakeholders assert to be more and better represented by a gender diverse board, as they perceive this female presence as an additional form of legitimacy and a sign of a greater awareness of their needs (Hillman, Shropshire and Canella, 2007; Harjoto et al., 2015).
Furthermore, the ethical issue is another factor to be considered in the impact on firm financial performance. The presence of female directors is often stressed and emphasized by the firm itself, since it attract positive attention by the public, media and the final customers, and this might positively influence the reputation of the firm, leading to an increased performance (Brammer et al., 2007; Adams and Ferreira, 2009).
findings of a study conducted upon directors in Sweden by Adams and Funk (2012), who retrieved that female directors were more risk-loving than their male counterparts.
Despite the mixed results, it is relevant to underline that all these different perceptions in female characteristics and attitudes may negatively affect the investors’ behaviors (and, consequently, the financial performance of the firm), because they might perceive the presence of female directors in the boardroom as a threat for their operation and for the future prospects of the firm (Hillman et al., 2007).
In particular, the banking sector is considered the sector in which specific expertise and characteristics of the board of directors play a crucial role. This field has been traditionally dominated by men, while female directors tend to be excluded from the boards of the financial institution (Adams, de Haan, Terjesen and van Ees, 2015). According to Hillman (2015), considering the female low risk propensity, investors may perceive female directors as a threat for the future financial operations of the firm and expect lower accounting return (Darmadi, 2011; Minguez-Vera and Martin, 2011). However, as reported by Zhu, Shen and Hillman (2014), if female directors succeed in being perceived to be similar to existing directors with respect to job-related dimensions such as background, education level, expertise, they might gain legitimacy and be considered as in-group members and gain a relevant role in the boardroom.
From one side, Adams and Ferreira (2009) report that, despite the initial positive correlation between gender diversity and firm financial performance, on average results do not support the hypothesized positive relationship; conversely, they show that firms tend to perform worse in the presence of a greater gender diversity of the board, linked with the fact that this implies a greater board monitoring action, responsible for a reduction of the shareholders’ value. On the other side, Nguyen & Faff (2012) and Singh, Vinnicombe and Johnson (2001) underlined that the return on assets generated by those firms which showed more female directors will be higher than that of their competitors and, further, Campbell and Minguez-Vera (2010) reported this gender heterogeneity to be related to positive reactions of the stock market.
Therefore,
Hypothesis 1: The greater the gender diversity in the boardroom, the better the financial performance of the firm
Figure 2: Conceptual model
3. METHODOLOGY
3.1 Sample
For this research, a sample of 194 financial firms listed on Forbes 2000 Global 2017 and Fortune 500 Global 2017 is used. The firms are located in the US and in Europe, comprising the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Norway, Poland, Portugal, the Russian Federation, Spain, Sweden, Switzerland, the Netherlands, the United Kingdom and the United States.
The Forbes Global 2000 comprises the top 2000 public companies in the world since 2003 according to their sales (minimum cutoff value of $3.95 billion), profits (at least $257.0 million), assets (minimum $9.34 billion) and market value (from the value of $5.65 billion). Data are calculated at April 7, 2017, in US $, including all common shares outstanding; they are retrieved from FactSet Research System and checked using data sources such as Bloomberg and the financial statements released by the companies themselves. In order to be in the ranking, a company must qualify for at least one of the four sub-lists (Forbes, 2017).
The Fortune Global 500 is the ranking of the top 500 corporations collected worldwide every year according to their total revenues at the end of the fiscal year (in the paper, until March 2017).
From both rankings, banks (both major and regional) and other financial firms have been selected. According to the criteria established by Thomson Reuters, financial firms are firms that “provide banking and investment services, consumer financial services, financial investments, thrifts, and mortgage finance or operate as insurance brokers (retrieved from Thomson Reuters Database, March 2018).
All the firms analyzed in the paper operate in the financial field, providing banking and investment services, insurance, collective investments. Considering the existing differences between banks and other financial firms, the analysis will look separately at the results of banks and of the other financial firms.
3.2 Variables
3.2.1 Dependent variables - Firm financial performance
The financial performance of the firms is the dependent variable of the analysis. In line with the majority of the studies, it is calculated by two ratios: return on assets (ROA) and return on equity (ROE). Both ratios have been used by analysts and bank regulators to assess the profitability of the firms and the performance of the industry (Gilbert and Wheelock, 2007). Measures have been retrieved from Thomson Reuters’ Database Eikon (ROA Tot Asset, % FY). ROA indicates “the ability of the firm to produce accounting-based revenues in excess of actual expenses form a given portfolio of assets measured at amortized historical costs” (Carter et al., 2010, p. 403). It may reflect how corporate governance is functioning and whether the board is monitoring management effectively or not (Al-Matari et al., 2014). It is calculated as the net income generated by the firm divided by the total assets and shown as a percentage.
The second ratio, ROE (return on equity), is calculated as the total income available to common equity generated by the firm, divided by the average common equity owned by shareholders, shown as a percentage. It is an indicator of the profitability for the providers of equity capital (Rose, 2007). Measures have been retrieved from Thomson Reuters’ Database Eikon (ROE Comm Eqty, % FY).
3.2.2 Independent variable - Board Gender Diversity
The independent variable of the research is board gender diversity, BGD. It represents the proportion of women on the board. Following previous studies (Campbell and Minguez-Vera, 2008; Francoeur et al., 2008; Adams and Ferreira, 2009; Liu, Wei and Xie, 2014), I calculated the percentage of female directors in the board to the total number of directors in the boardroom in 2017 for all the 194 firms. The data were retrieved from Thomson Reuters’ Database Eikon.
3.2.3 Control variables
Several variables are included in the regression analysis to control for other factors which can impact the firm’s financial performance.
were retrieved from Thomson Reuters’ Database Eikon, in the ESG section: board size has been calculated as the number of directors in the boardroom at 31.12.2016.
Then, the percentage of the independent board member is included in the corporate governance control variables (B_Ind). Data were retrieved from Thomson Reuters’ Database Eikon, which indicates the board structure (whether unitary, two-tier or mixed two-tier board structure) adopted by each company in accordance with the codes of corporate governance in their home countries. I use the percentage of independent board members as reported by the companies themselves.
The firm size (F_Size) has been calculated as the natural logarithm of the total assets (all converted in Euro). The choice to rely on total assets rather than on the number of employees is explained by the fact that the companies in the sample are all large in terms of revenues and employees since they are listed on Fortune and Forbes Lists. The size of the firm is associated with a greater performance due to the increasing market power and to the possibility to exploit economies of scale and scope (Pfeffer and Salancik, 1978; Richard, 2000). In addition, as reported by Labelle et al. (2015), larger companies can further increase their profitability level by attracting more capital (also human capital) and funds. On the other side, larger firms are often discovered to face greater issues such as information asymmetry, higher coordination, and control costs (Penrose, 1959).
Total assets are retrieved from the database Eikon which distinguishes some of their determinants based on the type of firm; regarding banks, total assets are calculated including cash and due from banks, other earning assets and net loans, while insurance companies consider insurance receivable, notes receivables and deferred policy acquisition costs (retrieved from Thomson Reuters, 2018).
Regarding firm characteristics, the age of the firm (F_Age) is calculated as the difference between the year of interest for the analysis, 2017, and the year in which the company was founded. Older firms are expected to have larger earnings due to their collected experience and reached stability. On the other side, young firms have less experience and will face higher costs in the initial phases of their production (Petkova, Wadhwa, Yao and Jain, 2013). Despite these considerations, there is still no unanimous consensus about this net impact. Indeed, according to Lipczinsky and Wilson (2001), older firms, despite proving to be more productive, reported a lower level of profitability due to a decline in the life cycle of their product.
shows one of the lowest numbers of female directors in the board and represents a field dominated by men (Adams et al., 2015).
Finally, the last control variable considers whether the home country of the firm has established a mandatory gender quota legislation or not. According to the report of the Directorate General for Justice and Consumers of the European Commission, Belgium, France, Germany, Greece, Italy, Norway and Spain have instituted mandatory gender quotas (Jourová, 2016). For these countries, the variable 1 has been assigned. Austria has been included among the countries without a mandatory gender quota because in 2017 a gender quota was applied only to state-owned companies and the firms included in the same don’t present this characteristic. A new law (“Law on equality for women and men as non-executive directors on company boards”) adding publicly listed companies and firms with more than 1000 employees was adopted and entered into force on January 1, 2018. The same happens to Portugal, which has been excluded from the countries with gender quotas because these have been introduced on January 1, 2018 (Law 62/2017 of August 1, 2017) (European Commission, 2018).
Table I provides a summary of the control variables considered in the paper, their measurement and the references to the literature.
Table I: Control Variables
Control Variables Measurement References Board size (ln) Natural logarithm of
the total number of directors in the boardroom
Sah and Stiglitz (1991); Shrader et al. (1997); Carter et al. (2003); Campbell and Mínguez-Vera (2008); Adams and Ferreira (2009); Jackling and Johl (2009).
Board independence Percentage of the independent board members
Rechner and Dalton (1991); Carter et al. (2010)
Firm size (ln) Natural logarithm of Total asset (in Euro)
Pfeffer and Salancik (1978); Richard (2000); Campbell & Mínguez-Vera (2008); Carter et al. (2010, 2003); Darmadi (2011)
Firm age Difference between the foundation year and the year of the analysis (2017)
Lipczinsky and Wilson (2001); Jackling and Johl (2009)
Type of firm 1=bank
0=other types of financial firm
Carter et al. (2003); Erhardt et al. (2003); Kang et al. (2007); Lückerath-Rovers (2013); Adams, de Haan, Terjesen and van Ees (2015)
Gender quota 1= gender quota existing in the country
0= no gender quota
4. ANALYSIS AND RESULTS
This chapter describes the empirical analysis and its results.
First, table II presents the descriptive statistics for all the variables analyzed in the research and table III shows an overview of the firms based on whether they are European or from the United States. Then, table IV reports the correlation between the variables. Finally, the results of the regression analysis are presented. Since I have two dependent variables for the financial performance of the firms, ROA and ROE, I perform two separate multiple linear regressions for each of the ratios (tables V and VI).
ROAi,j= β0 + β1Board Gender Diversity (BGD)i,j + β2 Board Independence (B_Indep) i,j +
β3 Size (B_Size) i,j + β4 Firm Age (F_Age) i,j + β5 Firm Size (F_Size) i,j + β6
Gender quota(G_quota)j+ β7 Type of firm(F_Type) i,j + β8 BGD i,j *G_Quotaj+e i,j
(1)
ROEi,j= β0 + β1Board Gender Diversity (BGD)i,j + β2 Board Independence (B_Indep)i,j+ β3
Size (B_Size) i,j + β4 Firm Age (F_Age)i,j+ β5 Firm Size (F_Size)i,j + β6 Gender
quota(G_quota)j+ β7 Type of firm(F_Type)i,j + β8 BGDi,j*G_quotaj +ei,j
(2)
4.1 Descriptive statistics
Table II: Descriptive statistics of the 194 firms analyzed in the paper.
Variables N Minimum Maximum Mean Std.
Table II provides the descriptive statistics for the dependent, the independent and the control variables. In the table, the mean, the standard deviation, the minimum and maximum values of the variables are reported for all the 194 firms of the sample.
The representation of female directors on the board varies among the analyzed firms. Regarding the presence of female directors in the boardroom, on average firms have 25,80% female directors in the board, with a maximum presence of 54,55%, while some firms do not have any female directors, as indicated by the minimum observed value of 0%. Considering the two dependent variables, the performance measure ROA shows on average a positive value of 2,20%, as well as the ROE with 10,43%. However, ROE shows a greater range of values from -63,20 % to 84,36%, in respect to the range of value -40,90% and 30,95% of ROA, which signifies that there are many differences in the profitability across firms in the sample.
Considering the control variables, the age of the firm has the greatest variance, with a range from 0 (Banco BPM, founded on January 1, 2017) to 313 years (Wendel, founded in 1704, with an average value of 77,24 years. Regarding the percentage of independent directors, the average value is 72,79% with a minimum value of 17,39% and a maximum value of 100%. This value takes into account the differences in corporate governance boards structure among one-tier, two-tier and mixed two-tier boards. Regarding these differences, Eikon reports the percentage of non-executive board members and independent board members taking into account these differences in the structure and in the codes of corporate governance.
The variables indicating the existence of mandatory gender quotas (G_quota) and the type of financial firm (F_Type) are both dummy variables in the model. If the variable equals 1, there is a mandatory gender quota in the country they operate in and the firm is a bank, while if the variable is reported with a value of 0 these characteristics will be absent. The variables show an estimate of 0,19 for the gender quota and 0,43 for the type of financial firm. This means that on average around only one out of five (19%) firms operate in a country with a mandatory gender quota and, on average, 43% of the firms are banks.
Table III: Descriptive statistics of the 194 firms of the sample divided according to their European or US origin
Table III shows that European financial firms have on average a greater number of female directors in the board (30,01%) in comparison with US firms (22,09%), but for both there is a minimum level equal to 0.
Looking at the two ratios, ROA and ROE, the averages are quite similar (between 2,13% among European firms and 2,26% for US firms for ROA, while between 9,87% and 10,92% for ROE). Moreover, European firms are on average older (as shown by the average number of years 63,15 for the US compared to 93,20 for European firms) and slightly bigger (considering the total assets as natural logarithm, 5,41 compared to 4,86 of the US).
Finally, with respect to gender quotas, the United States doesn’t have a mandatory gender quota while seven countries (among the seventeen European countries of the sample) had a mandatory gender quota in 2017.
Mean Std. Dev Min Max
4.2 Correlation analysis
Table IV reports the correlation matrix of the Pearson coefficients of all dependent, independent and control variables for all the 194 firms of the sample.
Table IV: Correlation matrix
Number of observations=194. * denotes that correlation is significant at the 0.05 level (2-tailed); **denotes that correlation is significant at the 0.01 level (2-tailed).
The strongest correlation among the Pearson coefficients is between the two dependent variables, ROA and ROE (r=0,780), significant at the 0.01 level (2-tailed). This can be explained by the fact that both are financial statement ratios which measure the profitability of the firms (Al-Qudah, 2016). Besides that, board gender diversity correlates with the control variables board size (r=0,151), firm age (r=0,225) and with the dummy variable gender quota (r=0,403). Looking at the column of the ROA and ROE, both the ratios have a significant but negative correlations with the size of the board (respectively, r=-0,185 and r=-0,152), firm age (r=-0,181 and r=-0,200) and firm type (r=-0,209 and r=-0,167). In addition, ROE correlates negatively with the dummy variable gender quota (r=-0,199). Furthermore, considering the intra-correlations among the control variables, the size of the board correlates positively and significatively at the 0.01 level (2-tailed) with the age of the firm (r=0,271), the size of the firms (r=0,187) and both the dummy variables, gender quota (r=0,338) and the type of financial firm analyzed (r=0,295).
Regarding the interaction between the independent variable (board gender diversity, BGD) and the dummy variable gender quota (G_quota), the correlation matrix shows negative coefficients for both the ratios but significant only for ROE (at the 0.05 level).
Looking at table IV, the correlation matrix shows that there is not multicollinearity. Multicollinearity represents a violation of the OLS assumptions and arises when the explanatory variables are perfect linear functions of another (Studenmund, 2014). To better explain the effect of the control variables, the VIF test (Variance Inflation Factor) has been conducted.
Appendix table II shows the results of the multicollinearity test. This has been conducted for the variable included in the analysis by means of the variance of the coefficients reported in the correlation matrix and it reported the VIF value calculated as the inverse of the tolerance value. For both the ratios, the average VIF value is 1,290. This value is smaller than the critical value of 10, which is the cutoff threshold traditionally accepted by scholars to control for multicollinearity issues (Hair, Anderson, Tatham and Black, 1995; Veltrop et al., 2015).
Even when relying on the findings of Akinwande, Dikko and Samson (2015) and the threshold fixed at the critical value of 5, the test shows that multicollinearity doesn’t affect the analysis.
Moreover, looking at all the single VIF values, all the variables report values below the fixed level of 10. Therefore, there is no multicollinearity in the analysis.
4.3 Model Analysis- Board gender diversity and firm financial performance
Tables V and VI present the results of the regression analyses. Both regressions have been conducted on a sample of 194 firms. The hypothesis tested is whether female presence in the board of directors positively influences the financial performance of firms in the financial field. This hypothesis is tested for two dependent variables, ROA and ROE, in order to retrieve more robust results. Consequently, the regression analysis is conducted separately for each of the ratios. Table V shows the empirical results when ROA is the dependent variable, while table VI presents the outcomes with ROE as dependent variable.
Table V: Regression output with ROA as dependent variable.
Variables ROA (1) ROA (2) ROA (3) ROA (4)
BGD - 0,021 (0,042) -0,050 (0,038) - B_Indep -0,054 (0,023) -0,058 (0,023) - - B_Size (ln) -0,083 (1,594) -0,082 (1,598) - - F_Age -0,173** (0,007) -0,176** (0,007) - - F_Size (ln) 0,106 (0,190) 0,104 (0,191) - - G_quota dummy (existing=1) -0,057 (1,182) -0,066 (1,295) - - F_Type dummy (bank=1) -0,213*** (0,869) -0,211*** (0,873) - - BGD (G_quota) - - - -0,118 (0,029) R-squared 0,1 0,1 0,002 0,014
Number of observations: 194. The first number in each cell is the standardized regression coefficient. Standard errors are reported in parentheses. Levels of significance: *for p<0,1 ; ** for p<0,05; ***for p<0,01
Table VI: Regression output with ROE as dependent variable.
Variables ROE (1) ROE (2) ROE (3) ROE (4)
BGD - 0,006 (0,077) -0,080 (0,070) - B_Indep -0,023 (0,042) -0,024 (0,043) - - B_Size (ln) -0,031 (2,928) -0,031 (2,936) - - F_Age -0,185** (0,012) -0,186 ** (0,012) - - F_Size (ln) 0,029 (0,349) 0,028 (0,351) - - G_quota dummy (existing=1) -0,094 (2,171) -0,097 (2,379) - - F_Type dummy (bank=1) -0,160** (1,597) -0,160** (1,605) - - BGD*G_quota - - - -0,151** (0,052) R-squared 0,081 0,081 0,006 0,023
Number of observations: 194. The first number in each cell is the standardized regression coefficient. Standard errors reported in parentheses. Levels of significance: * p<0,1; ** p<0,05; *** p<0,01
Looking at tables V and VI, for both models 1 and 2, all the control variables have a negative coefficient except for the size of the firm. The variable reporting the age of the firms (F_Age) and the dummy variable indicating the type of financial firm (F_Type) are the only variables which are statistically significant (with coefficients of -0,173 and -0,176 on ROA, -0,185 and -0,186 on ROE
for the age of the firm; -0,213 and -0,211 on ROA, -0,160 on ROE for the type of financial firm).
This signifies that younger firms report overall better financial performance than older companies and that financial firms different from banks show greater profitability.
and ROE. However, both the control variables are not statistically significant at the 1%, 5% and 10% significance levels. In addition, it’s noticeable that these two control variables show greater coefficients, in absolute terms, when doing the regression for ROA rather than for ROE. This happens also controlling for the dummy variable reporting the type of financial firm, while the opposite happens when controlling for the age of the firm and for the dummy variable gender quota.
Analyzing the dependent variables, the value of the coefficients b1 shows the percentage effect on
ROA and ROE. Tables V and VI show negative coefficients when the analysis only consider the relationship between the independent and the dependent variable, both ROA and ROE, without including control variables (model 3), while these relationships have a positive sign when controlling for other variables (model 2).
However, despite the sign of the coefficient, results are not statistically significant at any levels (1%, 5% and 10%) in models 1,2 and even in model 3, which considers the relationship between the dependent and independent variables without controlling for any other factors.
Finally, looking at the isolated interactions between the independent variable and the dummy variable gender quota (model 4), the coefficients are negative for both ROA (-0,118) and ROE (-0,151) but statistically significant only for ROE. The coefficient of -0,151 (significant at 5% level) on ROE that the slope on board gender diversity and ROE is 0.15 points lower for countries with a gender quota.
5. DISCUSSION
The increased interest in firm heterogeneity has led to an intense examination of the relation between diversity in the boardroom and firm performance. However, regarding board gender diversity, the results of these studies are still ambiguous and inconclusive.
The hypothesis tested whether board gender diversity has a positive and significant impact on the financial performance of financial firms. The results of the multiple regression analysis show the absence of statistically significant results for the first three models for both dependent variables, ROA and ROE. Even when the relationship is examined controlling for several control variables (namely, the percentage of independent directors, the size of the board and of the firm, the age of the firm, and two dummy variables which control for the type of financial firm and for the existence of a mandatory gender quota), results are not statistically significant. Therefore, the hypothesis is rejected.
Considering European firms, many countries took legislative actions regarding female participation in the firms, mandating gender quotas with the purpose to increase the share of female directors in the boardroom. In regard to this phenomenon, the fourth model of the regression analysis has represented a further step, adding an interaction between the independent variable (board gender diversity, BGD) and the dummy variable gender quota (G_quota) to test whether the effect of female presence in the boardroom differs across countries depending on whether these mandate gender quotas or not. Relying on this compound variable, results are negative for both the ratios but significant only for ROE. This indicates that gender quota systems lead to a more negative effect of board gender diversity.
It seems noteworthy to underline that the dummy variable indicating the existence of a mandatory gender quota (G_quota) in the country the firms operate in, provides statistically significant but negative results on ROE when it became part of a compound variable with the independent variable board gender diversity (BGD(G_quota)). However, when controlling for the other models (1 and 2), this dummy variable provides negative but insignificant results (looking at the coefficients of the regression in table V and VI, model 2 reports coefficients -0,066 on ROA and -0,907 on ROE, both insignificant).
effect has been discussed by Ahern and Dittmar (2012), who linked the firm value loss to the mandatory adoption of a gender quota; in particular, they reported gender quotas to cause a reduction of the capability of the board to operate effectively in the short-run due to difficulties faced in managing differences among new directors. Other scholars in the field of economics sustained that, according to the economic allocation theory, gender quotas represent a legislative interference in companies’ organization and in the competition among firms (Fichtl, 2013). In addition, these quotas have been retrieved to increase labor costs, due to difference in the leadership style and in labor hoarding conduction, which provokes a reduction of the profitability of the firms (Bøhren and Strøm, 2016).
Overall, the introduction of mandate gender quotas represents still a process in development and not homogenous among all the countries. Indeed, regarding the mixed results, it is important to consider that there are several differences among each country in the mandatory adoption of gender quotas. Firstly, besides the objective of 40% of female directors in listed firms to be reached by 2020, the European Commission does not prescribe a mandatory policy which fits all the countries. Indeed, it allows countries to adapt its regulations and set of directives to their specific context, to set their own measures and to choose other options, such as the sanctions for non-compliant firms (Jourovà, 2016). As underlined by Fichtl (2013), depending on the country they are applied to, gender quotas may address different type of companies (for example, only for firms fully or partially owned by the State) and, according to the corporate governance system, they might be applied to different boards (such as only to management or supervisory boards). Secondly, there might be specific features of the regulations which are difficult to compare and quantify, such as the duration of the transition period (Jourovà, 2016). Regarding this aspect, the effect of these quotas may require time to show an impact on the firm value and other changes in corporate governance, adopted to balance the organizational set-up, may interfere with this relationship.
Moreover, as the impact of quotas may differ among countries, there might be several discrepancies in the impact of a mandatory gender quota among industries and among firms which operate in the same industry, since there are unique characteristics which may influence its adoption (Hillman et al., 2007; Wang and Kelan, 2013).
Nevertheless, it’s important to underline that many other variables, unobservable factors, and conditions may impact the analyzed relationship.
For example, corporate culture is not directly observable, but several researchers affirm it is responsible for affecting gender diversity within firms and their performance (Bajdo and Dickson, 2001).
Other board characteristics, which have not been included in the research, may have an impact on the analyzed relationship. These include the age of the directors, whether there are nationality diversity, racial diversity or ethnic minorities, previously collected experience, whether directors are foreign or domestic, and the working atmosphere in the boardroom. In addition, it’s noticeable that managing heterogeneity within a group of people requires time to find a new equilibrium and that in the process group conflicts may arise; these reduce the level of trust, the innovation and creativity which reduce the overall performance of the firm (Adams and Ferreira, 2009).
The paper relies on two ratios, ROA and ROE, as measures of the firm financial performance. This choice has been made due to the fact that historically these measures are considered an effective indicator of the firms’ profitability. However, many other studies relied on Tobin’s Q, a stock market-based measure calculated as the total market capitalization on the total asset of the firm., in contrast with accounting-based profitability measures such as the ratios ROA, ROE and ROS, criticized for their backward-looking orientations (Al-Matari et al., 2014).
Many researchers debate whether Tobin’s Q, as a measure which accounts for risk and future earnings, is considered to represent a better proxy for the competitive advantage reached by the firms (Montgomery and Wernerfeldt, 1988; Campbell and Minguez-Vera, 2008). From one side, accounting-based measures have been described as too sensitive to the measurements of the income and to the accounting system and standards applied by the firm they refer to, while Tobin’s Q also checks for shareholders and creditors of the firm (Kapopoulos and Lazaretou, 2007; Rose, 2007; Carter et al., 2010). In addition, one of the greater differences involves the focus on short-term financial performance of ROA and ROE, opposed to the long-term orientation of Tobin’s Q, which indicates the expectations of the market for future profits (Campbell and Minguez-Vera, 2008; Gentry and Wei Shen, 2010). Besides these differences, as underlined by Gentry and Wei Shen (2010), both accounting-based and market-based measures are widely used and accepted by researchers.
directors’ complete impact on corporate stakeholders (Shrader et al.,1997). For example, Randoy et al. (2006) measured firm performance through market to book value ratio, while Smith et al. (2006) relied on gross profit margin (gross profit on net sales), contribution margin on net sales, operating income on net assets and net income on net assets. However, both these studies reported insignificant results.
Furthermore, other sources of limitations came from the sample of the firms analyzed in the research. Indeed, the sample consists of 194 listed companies, operating in Europe and in the United States of America, retrieved from Forbes Global 2000 2017 and Fortune Global 500 2017. When considering the criteria applied in the selection of the firms, Forbes Global 2000 lists firms according to their sales (minimum cutoff value of $3.95 billions), profits (at least $257.0 millions), assets (minimum $9.34 billions) and market value (from the value of $5.65 billions, while Fortune Global 500 according to the total revenues at the end of the fiscal year. This implies that the research focused on large firms which meet the required standard in terms of economic performance, value, asset and profitability, but their results cannot be generalized and extended to other companies characterized by different size and values. However, this consideration doesn’t imply that smaller firms will report a lower financial performance a priori. Indeed, according to Erhardt et al. (2003), often smaller firms tend to pay more attention to managing diversity, and they were retrieved to benefit from a greater heterogeneity in the workplace. For this reason, further research should be conducted to test the hypothesis on firms which are not among the highest market value firms and are non-listed.
6. CONCLUSION
Corporate governance theories underlined how the structure and composition of the board of directors influence the way the boards function and, ultimately, affect the performance of the firm. Thus, since the effectiveness of the board cannot be dissociated from the analysis of its composition and internal mechanisms, the impact of diversity and heterogeneity among the board of directors required to be analyzed. As female presence and inclusion in the working environment represent a worldwide relevant aspect of diversity, among demographic differences, this study focused on gender diversity. In particular, this paper analyzed the impact of board gender diversity on firm financial performance.
Drawing from different theories from organization and social theory, in addition to the international business field, this paper provides the theoretical framework for developing and testing the hypothesis of the existence of a positive relationship between the presence of female directors in the boardroom and firm financial performance. According to the existing literature, gender diversity provides access to a broader pool of talent, includes different perspectives in the decision-making process and in the representation of stakeholders’ interest. However, on the other side, scholars underlined that it may be responsible for conflicts, a greater difficulty in communicating and slower decision-making process. Studies reported mixed results and conclusion, describing gender diversity as a ‘double-edged sword’, and indicated that the relationship between board gender diversity and firm financial performance is complex, providing results mixed and still inconclusive.
In particular, the purpose of this study was to test whether board gender diversity may have a positive impact on the financial performance of 194 financial firms, listed on Forbes Global 2000 and Fortune Global 500 2017, in Europe and in the United States of America.
The analysis shows that on average 22,09% of the directors are female in the US, while 30,01% in Europe. These values are still far to reach the aimed threshold fixed at 40% by the European Commission by 2020.
With respect to the dummy variable gender quota, the decision to include that in the analysis was motived by the fact that, since the last decade, several countries started to implement mandatory legislative measures aimed to increase the share of female directors on corporate boards. However, only seven countries out of seventeen including in the sample are retrieved to mandate a gender quota in 2017 and, among these countries, there are still many differences in the target quotas, in the type of firms this was applied to and in the sanctions established for non-compliant companies. Furthermore, regarding the implementation of gender quotas, the regression has been conducted for a compound variable which adds an interaction between the independent variable (board gender diversity, BGD) and the dummy variable (G_quota) provides negative results for both the ratios but significant only for ROE, indicating that gender quota systems lead to a more negative effect of board gender diversity.
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