A company with a gender-diverse board of directors is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value, according to new research from INSEAD.
Authored by Kaisa Snellman and Isabelle Solal, the paper “Women Don’t Mean Business? Gender Penalty in Board Composition” was published in the INFORMS journal Organization Science.
The paper suggests that investors respond to the presence of female leaders not simply on their own merit, but as broader cues of firm preferences.
The study examines investor responses to board diversity and finds that one additional woman on the board results in a 2.3% decrease in the company’s market value on average, which could amount to hundreds of millions of dollars.
The researchers looked at 14 years of panel data from United States public firms and saw that firms with more female directors were penalised.
“Firms that increase board diversity suffer a decrease in market value and the effect is amplified for firms that have received higher ratings for their diversity practices across the organisation,” said Solal.
Snellman said that if investors believe that female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, a firm unintentionally signals a weaker commitment to shareholder value than a firm with a nondiverse board.
“Our results imply that when additional information on the firm’s preferences is available, the market relies on that information in order to lessen the uncertainty surrounding the board diversity cue,” Snellman said. “Additional information may come from observing other choices the firm makes, notably in terms of diversity policies.”
The researchers argue that fostering awareness is the first step in addressing and eliminating damaging assumptions. They suggest firms should carefully frame female appointments and reassure shareholders of corporate goals.
The paper suggests that over time, just as greater exposure to female leaders has been shown to reduce stereotype bias, the increase in female board appointments should likewise decrease the perception that firms select directors for any reason other than their qualifications.