Women on Corporate Boards and Firm Financial Performance - Norway - Case Study Example

Women on corporate boards and firm financial performance Name: Tutor: Course: Date: Abstract The aim of this study was to establish the relationship between female representation in corporate boards and firm financial performance. The study considered the following variables; board size, board gender diversity, board meetings per year, CEO duality and percentage of independent directors as independent variables to predict female representation on corporate boards. Dependent variables were Tobin’s Q and Return on Equity (ROE) to predict firm financial performance. Based on a quantitative study of 46 firms from the United Kingdom, data on female representation on corporate boards was extracted from annual reports of these firms. Using 368 observations, the study found that 12.98 percent of the boards were constituted by women. The firms had higher probabilities of creating competitive advantage and effectively allocating resources as most of the company stock is undervalued. The study found that ROE was positively correlated to Tobin’s Q but negatively correlated to the number of board meetings per year. The study obtained that board gender diversity was positively correlated to percentage of independent directors, log of total assets and market to book value, but negatively correlated to the current ratio. The study obtained that board size, board gender diversity, percentage of independent directors and board meetings per year had significant effect on firm financial performance. The variable also had influence on the relationship that female representation on corporate boards would have on firm financial performance. On the contrary, the study did not find any influence that CEO duality would have on the relationship between firm financial performance and female representation on corporate boards. Key words: Tobin’s Q, Independent directors, board gender diversity, CEO duality, log of total assets Table of contents Abstract 2 1.1 Aim of the study 5 1.2 Objectives of the study 5 1.3 Hypothesis 5 2.0 Literature review 5 2.1 Introduction 5 2.2 Theoretical perspectives 6 2.3 Gender diverse boards and firm performance: Empirical evidence 6 2.4 Norway Case Study 7 2.5 Conclusion 7 3.0 Data and methodology 8 4.0 Results and discussion 9 Pletzer, JL Nikolova, R Kedzior, KK & Voelpel, SC 2015, Does Gender Matter? Female Representation on Corporate Boards and Firm Financial Performance - A Meta-Analysis. Huerta-Quintanilla Plos One. vol. 10, no.6, pp. 13-44. 14 Post, C & Byron, K 2015, Women on boards and firm financial performance: A meta-analysis. Academy Management Journal. vol. 58, no. 5, pp. 1546-1571. 14 Appendices 15 Appendix I: Descriptive statistics 15 Appendix II: Correlations 15 Appendix III: Regression results for predicting ROE 16 Appendix IV: Regression results for predicting Tobin’s Q 17 Appendix V: Test of normality 17 1.0 Introduction Female representation in corporate boards of management is a subject of growing political and societal debates globally. However, men dominate the corporate world despite increased efforts to involve women in top management. Given that financial success is an innate feature of every company, increasing female representation may be influenced by regulations that demand that women be promoted to high positions in management. A number of previous studies have investigated the relationship between female presence in corporate boards and firm’s financial performance (Pletzer, et al. 2015; Post & Byron, 2016; Reguera-Alvarado, et al. 2015). Evaluations of investors who provide human capital tend to consider societal gender differences are a key indicator of future earnings of prospective firms that have more female directors (Post & Byron, 2016). However, where other factors are not considered, representation of females in corporate boards has not relationship with firm financial performance (Pletzer, et al. 2015). Higher economic results in firms are positively related to increase n the number of females in their boards (Reguera-Alvarado, 2015). On the same note, Bjarnadóttir (2013) argues that firms with more than two women in their board of management have higher chances of higher Return on Equity compared to those firms with one or no women in their board of management. Nonetheless, Carter, et al. (2010) observes that the effect of ethnic and gender diversity on boards are different depending on the times and circumstances. Other than future financial performance, the decisions regarding appointment of ethnic minorities and women to corporate boards need to be based on other criteria. Regression and correlation analyses show that board diversity has influence on firm’s financial performance (Erhardt, et al., 2003). Existing data on this topic seem to provide conflicting evidence from a number of primary studies, and thus this study aims to provide an in-depth understanding of the relationship between female representation and firm’s financial performance. 1.1 Aim of the study To investigate the relationship between female representations in corporate boards and firm’s financial performance. 1.2 Objectives of the study 1. To investigate the relationship between gender diversity in boards and firm’s financial performance 2. Influence of female representation on corporate boards on financial performance of firms 1.3 Hypothesis H1: There is a relationship between female representation in corporate boards and firm financial performance influenced by board size H2: There is a relationship between female representation in corporate boards and firm financial performance influenced by board gender diversity H3: There is a relationship between female representation in corporate boards and firm financial performance influenced by board meeting per year H4: There is a relationship between gender diversity in corporate boards and firm financial performance influenced by CEO Duality H5: There is a relationship between female representation in corporate boards and firm financial performance influenced by percent of independent directors 2.0 Literature review 2.1 Introduction Female representation in corporate boards is a drive to promote and ensure more women are in higher position of management in companies. Whether their presence in the top management brings about increased financial performance is a subject of empirical studies. This study explores various literatures such as books and journals to bring forth theoretical perspectives, empirical evidence and case study of Norway as best practice. 2.2 Theoretical perspectives A number of theories are involved. First, agency theory is the most commonly used theory in corporate governance (Daily, et al., 2003). The theory provides that people are rational and aims at maximizing their personal benefits. However, the theory does not offer a clear-cut prediction regarding firm performance as influenced by board characteristics (Smith, et al., 2006). Yet, the impact on firm financial performance by gender diverse boards in a variety of aspects can be hypothesized (Carter, et al., 2003). On average, female directors are better monitors as suggested by empirical evidence (Adams & Ferreira, 2009; Carter, et al., 2010). Dang, et al. (2014) observes that firms are more probable to receive equity-based compensation if their board managers are gender diverse. This leads to a better alignment of shareholder- manager interests. Second, the resource dependency theory posits that firms relate with constituencies external and entities through open systems that are interdependent (Pfeffer & Salancik, 1978). The linkages between resources and entities influence the success of organizations (Daily et al. 2003). For example, the linkage of directors to external parties is the value they bring to the organization. Female directors, in a resource dependence perspective, bring to the boards some valuable resources. This underlines the relevance of independent or external directors in enhancing organizational and effectiveness firm performance. 2.3 Gender diverse boards and firm performance: Empirical evidence Some of the earliest studies in gender diversity in boards were done in the 1990s. Carter, et al. (2003) while analyzing Fortune 1000 firms that are publicly traded, measured in Tobin´s Q, found that there is a positive relationship between firm value and the proportion of female board directors. The is a positive correlation between the Return on Assets (ROA) and Return on Equity (ROE) and the effect of female directors in Chinese firms (Liu, et al., 2014). While examining Mauritian companies, Mahadeo, et al. (2012), discovered that there exists a significant positive performance in gender diverse boards as opposed to those without female representation. However, Adams and Ferreira (2008) report the possibility of over-monitoring which negatively affect shareholder protection since women directors are more active monitors. Measured in Tobin´s Q, Rose (2007) found no significant connection between firm performance and gender diversity of boards. Francoeur et al. (2008) examined corporate governance and top management of Canadian firms and found that gender diverse boards did not have more value than other board although it does create sufficient value to pace up with normal stock returns. During crisis times, gender diversity of boards had no effect on financial performance of the firms (Engelen, et al., 2012). 2.4 Norway Case Study In Norway, the corporate governance system is dominated by Public limited liability companies. These firms are required to have at least three members in the board of directors being members of a different gender. These members elect the CEO who does not constitute the board of directors (NPLLCA, 2014). It is through the general meeting that the directors are elected. An employee representative is also appointed to the board of directors for companies with more than 30 employees (NPLLCA, 2014). By studying the influence of the mandating this quota, Nygaard (2011) at the end of 2005, found that the quota had beneficial for firms with low information asymmetry as it helped create value effects. Besides, there was improvement from 2004 to 2008 in firm performance, measured in ROA, for these Norwegian firms. 2.5 Conclusion The review of literature has found two underpinning theories, agency theory and resource dependency theory. While the former aligns shareholder- manager interests, the latter provides the linkages between resources and entities influence the success of organizations. Empirical evidence has shown that gender diversity in boards have positive influence of firm financial performance. However, a number of studies also show a little or no relationship between firm performance and gender diversity in boards. Finally, a case study of Norway found that gender representation in boards of directors has increased information flow and firm value. 3.0 Data and methodology Data was extracted from annual reports of 46 public listed companies (plc) in the United Kingdom, and Bloomberg as one of the investor services. The data was extracted from the year 2006 up to 2013. Gender diversity of boards in the sample was measured as the percent of female directors in aggregate. The photographs or biographical information of the female directors were considered when identifying them from the annual reports as listed in the board of director’s page. Effort was made to establish the board size, board meetings per year, CEO duality, percentage of independent directors and board gender diversity. CEO duality implies that the CEO is also playing the role of the chairman to the board of directors. Independent directors are those who are not related to executive personnel or persons performing the audit of the company. Regarding firm financial performance, accounting-based performance and market-based performance measures were employed. Return on Equity (ROE) and Return on Assets (ROA) are common accounting-based measures while Tobin’s Q is the market-based measure. Tobin’s Q is computed as; [(total assets + market equity – common book equity)/ total assets]. A high Q value shows a good market perception and effective governance mechanism. Data was analyzed using descriptive, correlation and regression. 4.0 Results and discussion The data was analyzed based on descriptive, correlation and regression measures. The data was obtained from 368 observations from 46 companies between 2006 and 2013. ROE and Tobin’s Q were used because they are effective in measuring organizational performance and relatively objective. The results and discussion are as discussed below. As shown in Appendix I, the average board composition is 11 members with the maximum being 17. The mean percentage of independent directors stood at 59% which indicated that most of the directors were not related to auditors, employees of members of the board. The results also show a mean of 8 board meetings per year with 12.98% of the boards as constituted by women. ROE was 20.94% which was reasonably low as well as the Tobin’s Q which stood at 1.87, greater than 1, which means that the firms had higher probabilities of creating competitive advantage and effectively allocating resources. However, it is not subjective by using self-reported data. Again, the Debt to Asset ratio is 23.49% which indicates that most of the companies had higher levels of liquidity. Similarly, the current ratio was positive at 4.41 indicating that the most of the firms had higher asset levels compared to liabilities. The mean market to book value is 2.42 which mean that most of the company stock is undervalued at the stock exchange. In Appendix II, ROE had significant positive correlation with Tobin’s Q (.275**; p Read More