How Women Directors Influence Corporate Governance and Firm Performance - Dissertation Example

?Literature Review How Women Directors Influence Corporate Governance and Firm Performance Introduction The structures within the corporate world have always been dominated by male figures of power. However, in the last decade, there has been some increases in the number of CEOs and directors of corporate boards that are women, thus helping to create gender diversity within the composition of the decision making entities. The importance of gender diversity has been found to be profound, increasing performance and success, and decreasing failures due to homogenous decision making processes that neglect various perspectives that would impact the direction that a company will take. Women have been shown to have a positive influence on a board, from aspects of participation such as attendance and dutiful diligence, to higher rates of pay for directors because of observable increases in performance which denote higher rates of return. The female presence on a corporate board provides a variety of advantages to the overall performance of a firm. Male Domination in the Board Room According to Gomez and Moore the statistics of female representation on corporate boards “show a disproportionate representation of women on boards in relation to their roles in society as consumers and employees” (197). According to Sparrow, only 15% of the board members in the United States are women, with only 1% being CEOs. In comparison, Sweden has 23%, Norway has 29%, Finland 20%, and Denmark 18%, because of Scandinavian policies that are encouraging the expansion of roles for women at the corporate level. However, in other European companies there is a lesser representation than in the United States. However, the problem with the statistics is that it does not reflect the number of female board members who are no more than a ‘trophy’ member, who holds several positions on the boards of multiple companies, decreasing the actual percentage of women who hold these positions. According to Reeves “Women’s lack of representation on boards is significant because boards make high level policy decisions that affect large numbers of people, including shareholders, employees, and ultimately consumers” (19). When women are represented on boards, there seems to be a ripple effect as more higher level management positions are then held by women within an organization. According to Reeves, the increases in CEO’s that are women have gone from nine in 2006, ten in 2007, twelve in 2008, and 13 in 2009, so the power balance is shifting, but by 2009, that number of 13 still only represented 2.6% of all corporate CEO’s. Reeves reports that while the average corporation has 21.8 corporate officers, only 3.6 of these positions are held by women. In 2006, 75% of the companies on the Fortune 500 had no women in top-earning positions within the corporate structure. An example to the social deficit that this creates can be seen where “women are more involved than men in the healthcare decisions for themselves and for their families…(however) more than one third of the world’s top 500 healthcare and pharmaceutical companies have no women on their corporate boards” (20). According to Peterson and Philpot, the professional backgrounds of board members on corporate boards shows that women are just as qualified in experience and background as are the men, but that they serve less frequently on executive committees than do men. Peterson and Philpot also find that gender is related to the way in which members are assigned to boards, and that the resource dependent theory provides for the phenomenon of women serving on more human and socially oriented boards, with men providing more representation on financial and budgetary committees. They suggest that there is “some relationship between committee assignment, gender, and the resource dependence role of directors” (193). Using the theory put forth by Nussbaum, the capabilities based approach, the nature of female representation should not be considered by the nature of gender but through “Rawlsian standards of fair equality” (Harris 151). However, despite the equality in qualifications and that women have surpassed men in the number who graduate from college per year, over the course of a lifetime a man with a doctoral degree will earn an average of 3.8 million dollars, whereas a woman will only average 2.5 million dollars. This shows the disparity between the genders in the potential earnings that are gained from education. Women are still falling behind where compensation is concerned, a point that could approach a remedy if more female directors were on boards and the decision making process was more equitable. One of the problem comes from the needs associated with procreation. When approaching a corporate career, taking a break to have children can be a career killer. According to Billger, “Female labor force participation has traditionally been discontinuous, so that it cannot be assumed that all women work for all or even most of their post-school, pre-retirement lives” (172). This presents one of the reasons that women are less available for the higher level management positions. Procreation is a cultural concept, but should be addressed for its importance, rather than for its interference when looking at a career. This dilemma means that some of the top female minds are subverted along the course in a world that is reticent to let them back in post-childrearing. According to Farrell and Hersch, “Over this decade, we show that the likelihood of a firm adding a woman to its board in a given year is negatively affected by the number of woman already on the board. The probability of adding a woman is materially increased when a female director departs the board. Adding a director, therefore, is clearly not gender neutral”(85). Despite the advantages of having women on a corporate board, there is still a reluctance to putting more than a token number. While the discrimination towards women has decreased the ‘glass ceiling’ is still in place, just a few more entrance points allowed. The perception of why the corporate board room is primarily dominated by men is that there is a lack of appropriately educated and experienced women who can fill those positions. According to Terjesen and Singh, women now have a higher average academic qualification level than do men. When placed on the female gender for a reason why there is disparity in female placement on boards in comparison to men, Terjesen and Singh suggest that “interaction-centered explanations for the lack of women’s advancement focus on the aggregated effect of interacting processes, such as women’s reluctance to self-promote or actively manage their careers in organizations with informal promotion processes” (56). However, they also suggest that it is likely that social conventions such as the need of a female in the home or the perception of the lack of ambition might have a significantly higher impact on the lack of a female presence on corporate boards. It must be noted, however, that were risk tolerance is concerned, men are more risk tolerant than are men, suggesting that in some ways women tend to be more conservative when voting on decisions, preserving value (Roszkowski and Grable). However, there is negative valuation that is associated by stockholders for the appointment of female CEOs and directors. In a small sampling of 17 CEOs that were female (as the pool is small to begin with) Lee and James discovered that there is a reaction to the appointment of female CEOs and directors that is more severe than to male CEOs and directors. This indicates that despite having equal or even better qualifications than men, women are still seen as a weakness to the overall structure of a corporate environment. Despite evidence to the contrary, women are socially valued less than men, thus negatively impacting the market when they are appointed. However, Martin, Nishikawa, and Williams refute these findings through their own statistical analysis of the issue. They report that “The mean three day CAR for female CEO appointment is 3.55 percent (significantly at 1 percent level) and the median is 2.6 percent (significantly at 5 percent level). Similarly the matched male sample reacts positively. The mean CAR for male CEO appointment is 2.63 percent (significantly at 1 percent level) and the median is .87 (significant at 10 precent level)” (34). While there is a difference, Martin Nishikawa and Williams believe that this difference is not significant and still shows a positive reception. Characteristics of male and female board members show very little differences. According to the IRRC data base information as calculated by Simpson, Carter, and D'Souza, female directors are usually younger than male directors by between four to five years. The mean difference is at a significance of 0.01. Men and women typically serve on multiple boards at about the same rate, although it is slightly higher for men but not statistically different from zero. Women are more frequently independent directors in comparison to men. While Simpson, Carter, and D’Souza found that the attendance record for women and men as compared to missing 25% or more board meetings was the same, Adams and Ferreira, through a regression analysis, found that fewer women than men miss the same number of meetings. Gender Diversity The discussion about gender diversity on corporate boards begins by understanding that “it is necessary to explore boards as decision making groups” (Huse, Nielsen, and Hagen 581). In exploring boards through the necessity for a solid decision making consortium which can approach solutions through multiple perspectives, gender diversity begins to emerge as an important and valuable tool for creating overall corporate success. According to Baker and Anderson, a diversity in the gender make-up of a corporate board provides a positive relationship to performance. Baker and Anderson quote from Catalyst, a non-profit organization involved in the development of women in the business environment, that “companies with more women board members out perform those with the least by 53 percent” (235). Gender diversity provides a more well-rounded balance during the decision making process as the nature of male decision making in comparison to the way in which females make decisions is processed differently. According to seminal work done by Sandra Bern, the way in which men and women process information has been determined to be though different pathways, although one way is not superior to the other. According to Arfken “"Group think" and unhealthy and possibly unethical decisions often result if everyone on the board shares the same demographic characteristics” (184). Therefore, in having a diversity in gender on a corporate board, problems are addressed from different perspectives. Burgess and Tharenou also argue for the balance that is created when including female members on a corporate board. They state that “Women have been found to contribute to governance, reducing CEO dominance due to their “power sharing” style” (40). This style of governance creates cultures that are typified by a diverse workforce in which long term company success is realized through a range of perspectives that had not been available in corporate atmospheres without a female presence. Burgess and Tharenou state that “Homogenous groups tend to have homogenous ways of solving company problems”, therefore heterogeneous tend to provide a diversity of ways to solve problems, providing resources from which to prevent corporate failures. This provides an economic benefit to a company as the costs of failures are evaded (Hult et al). Resource dependence theory is “ground in sociology and organizational behavior theory (and) explains that corporations seek to decrease uncertainty by gaining access to needed resources (tangible and intangible) through board memberships” (Sarra 204). This makes the board a “bridging strategy” from which the external environment can be engaged through bringing in members from outside the direct corporate structure. This theory provides an relational connection between external and internal members, thus supporting a broader stream of benefits from which to define the decision making process. However Mersland, Roy and R. Orstein Strom caution against having too many external directors that may be disconnected to the work culture of the corporation and that gender diversity should be from both external and internal resources. Sarra goes on to discuss the addition of female members as away to bridge the gap created through male dominated boards that are not in touch with some of the aspects of their business that a female perspective can provide. As an example, “a woman on the board may influence the board to consider human resource issues of particular concern to women” (Sarra 205). In response to resource dependency theory, female board members can be a resource from which an understanding of larger perspectives can be reached. Female Influence on Corporate Governance and Firm Performance Adams and Ferreira discuss the issue of gender diversity in terms of attendance behavior and committee assignments. While Simpson, Carter and D’Souza find that the attendance records of men and women are fairly equal, and Adams and Ferreira find it is slightly higher attendance for female directors, the more interesting statistic that Adams and Ferreira discovered is that with the presence of female directors on a board, male attendance increased. They state that “male attendance problems is negatively and significantly related to the fraction of female directors”. The effect may not be related to gender, but to dutiful peer influences. However, this also indicates that women are more dutiful than men. Machold, Ahmed and Farquhar discuss the nature of a feminist perspective on corporate governance in comparison to a male perspective. They state that a feminist governance model has “the underlying normative foundation in feminist ethics with an accompanying emphasis on reciprocal relationships, the concept of empowerment in unequal power relationships and the duty of care within a governance context.” (674). From this perspective, the concept of ’care’, a word that is found throughout most corporate promotional literature can be attended, where in many other structures, this term is nothing more than rhetoric. In creating a system in which this is addressed, value is increased in a exponentially increasing effect. According to Goel and Thakor, the nature of a CEO will determine how information is passed to the directors of a board, thus creating a gap between what the CEO knows and the board knows. This is in direct relation to the over confidence that is found within the personality of the CEO. “Their personal attributes and behavioral biases, such as over confidence, affect both their information-provision incentives as well as their investment decisions” (2737). In comparing the nature of female CEOs to male, and in taking into consideration the gender relations of female directors in regard to biases, in this instance, a female influence can provide an opening in which information can become more free-flowing. As well, it can shut down the flow of information if the CEO holds a gender bias. The relationship between corporate governance and social responsibility has been a growing trend in the last decade. According to Graaf and Herkstrotter, Corporate social performance, or CSP theory, is built upon the idea that in being socially responsible, the success of the company is increased through a broader presence within the world that is built on more than just strictly financial responsibility. In other words, by building the intangible credit of social exchange value, the long term value is realized in financial value. Graaf and Herkstrotter state in reference to CSP “the governance structure of a company can play an important role in the interaction between a company and stakeholders (in the) processes of responsiveness” (178). In other words, a company that shows a more socially responsible position, including the addition of a diversity of gender in top positions and on the corporate board, is likely to build more positive relationships with stakeholders, creating a higher response rate to needs within those relationships. Williams (2009) discusses the differences between the way in which philanthropic decisions are made by women in comparison to those made by men. Women are far more likely to open up charitable programs within a corporation than are men, although this may not be due to a more charitable nature found in the female over the male perspective. The economic advantages to giving to a charitable organization include tax breaks, social exchange value, and good will within the company. Williams (2009) suggests that the female perspective can see the intangible values more easily than the male perspective, thus creating real economic value to the bottom line. In addressing Corporate Social Responsibility (CSR), MacPhail and Bowles attribute much of the rise in employee participation to the influence of female executives who see this as a way to both do philanthropic work and raise the appearance of CSR within the company. In addressing this issue, the company is raising their image while contributing to the social responsibility that is developed through their employees. In providing ways to contribute back to society, employees are given an opportunity to expand their satisfaction within the organization while helping to raise the valuation of the company through public perception. Weltzien-Hoivik discusses that this effect is also evident in SMEs. Through the increased CSR, a business will help to create a more open and accessible corporate culture, which in turn affects the responsiveness of stakeholders and consumers. Having women on a corporate board appears to have an influence on the level of corporate pay allowed for directors on a board. According to Adams and Ferreira, “We conclude that strong evidence exists that the proportion of female directors is associated with more equity-based pay for directors“ (308), which is suggestive of a board that is more aligned with the interests of shareholders. We also find some weak evidence of higher total director compensation in boards with relatively more female directors”. Through the increases in performance that is seen through diversity and through the addition of women on corporate boards, the overall performance of the firm can be seen for its appreciation in value, thus allowing for higher pay. Campbell and Mi’nguez-Vera discuss the way in which a female presence has an impact on a corporate board. According to an evaluation that utilizes the Blau index to measure the effect of diversity in relationship to firm performance is relational. When diversity is at its maximum, board performance is significantly increased. Campbell and Mi’nguiz-Vera also conclude that while firm value is not effective on diversity of board members, a diversity of board members will have an impact on the value of the firm. According to Yermack, female turnover of directors of corporate boards is significantly lower than that of male directors. “Female directors exhibit significantly lower turnover rates than male directors, a result consistent with the well-publicized efforts of many firms to increase the diversity of their boards” (Yermack 2298). While there are a number of factors that create this disparity, such as men having an older age and often serving on multiple boards, the data is consistent that females leave board appointment more rarely than do males. According to Branson, the nature of the female presence in the business world has often begun through a feminine solution that was not expected in a male dominated business atmosphere. Jill Barad, the CEO of Mattel, began her rise to power by re-inventing the attention that was given to the Barbie doll. She focused marketing on adult collectors, reviving the product and making a name for herself within the company. According to Branson “Barad became known as the “woman who saved Barbie”, which helped to define her innovative approach to problem solving, as well as to provide an opportunity for her to move up the corporate ladder (4). The result of her work took the Barbie out of nostalgia, however, and into the hands of little girls once more as the Barbie moved from an average of one per girl to eight per girl in the United States (Branson 4). According to an article by Morris, Barad “broke the glass ceiling - and did it with style and panache. She has thrived in a man’s world but isn’t afraid to say “I love you” to her staff”. Conclusion The number of ways in which a corporate board of directors can see advantages by including a female member are various and positive. The only negative that might be seen is in the stockholder view of a female appointment, however that has been proven to be negligible. Governance is improved by the influences of a variety of perspectives through gender diversity which is evident when the concept of a board is studied in relationship to decision making processes. The culture of a corporation becomes more widely addressed when a variety of perspectives become a part of the decisions which define the way in which the business has created an identity. Through gender diversity, the company becomes more responsive to the needs of all the stakeholders. Women provide a stability within the board environment that contributes to better attendance and dutiful attention because most women who are on corporate boards realize that they are representative of a social group within society that is not well represented in the corporate world, thus they take their position seriously. Men respond due to peer connections that inspire dutiful attention through the example of others within a group. The social importance of having women on corporate boards is supported not only by the desire for equality, but by the advantages that are evident by the presence of a woman in the boardroom. Works Cited Adams, Renee and Daniel Ferreira. Women in the Boardroom and their Impact on Governance and Performance. Journal of Financial Economics. 94.2 (2009): 291-309. Arfken, Deborah E. Stephani L. Bellar and Marilyn M. Helms. The Ultimate Glass Ceiling Revisited: The Presence of Women on Corporate Boards. Journal of Business Ethics. 50.2 (March 2004): 177-186. Baker, H K, and Ronald Anderson. Corporate Governance: A Synthesis of Theory, Research, and Practice. Hoboken, N.J: Wiley, 2010. Print. Bern, Sandra L. Gender-Schema Theory: A Cognitive Account of Sex Typing. Psychological Review. 88(1981): 354-364. Print. Bilger, Sherrilyn M. Does Attending Predominantly Female Schools Make a Difference? Labor Market Outcomes for Women. Journal of Economics and Finance. 31.2 (2007): 166- 185. Branson, Douglas M. No Seat at the Table: How Corporate Governance and Law Keep Women Out of the Boardroom. New York: New York University Press, 2007. Print. Branson, Douglas M. The Last Male Bastion: Gender and the CEO Suite in America’s Public Companies. New York: Routledge, 2010. Print. Burgess, Zena and Phyllis Tharenou. Women Board Directors: Characteristics of the Few. Journal of Business Ethics. 37.1 (April 2002): 39-49. Print. Campbell, Kevin and Antonio Mi’nguez-Vera. Gender Diversity in the Boardroom and Firm Financial Performance. 83 (2008): 435-451. Print. Farrell, Kathleen A. and Phillip L. Hersch. Additions to Corporate Boards: The Affect of Gender. Journal of Corporate Finance. 11.2 (2005): 85-106. Francoeur, Claude, Re?al Labelle and Bernard Sinclair-Desgagn. Gender Diversity in Corporate Governance and Top Management. Journal of Business Ethics. 81(2008): 83-95. Print. Goel, Anand M. and Anjan V. Thakor. Overconfidence, CEO Selection and Corporate Governance. The Journal of Finance. 63 (2008): 2737-2784. Gomez, Pierre-Yves, and Rickie Moore. Board Members and Management Consultants: Redefining the Boundaries of Consulting and Corporate Governance. Charlotte, N.C: Information Age Pub, 2009. Print. Graaf, Frank J. and Cor A. J. Herkstroter. How Corporate Social Performance is Institutionalized within the Governance Structure. Journal of Business Ethics. 74.2 (August 2007): 177- 189. Print. Harris, Jared D. What’s Wrong with Executive Compensation? Journal of Business Ethics. 85(2009): 147-156. Hult et al. An Assessment of the Measurement of Performance in International Business Research. Journal of International Business. 39(2008): 1064-1080. Huse, Morten, Sabina Nielsen Tacheva and Inger Marie Hagen. Women and Employee-Elected Board to Board Control Tasks. Journal of Business Ethics. 89(2009): 581-597. Lee, P.M. and E.H. James, “She-e-os: Gender Effects and Investor Reactions to the Announcements of Top Executive Appointments,” Strategic Management Journal (March 2007), pp. 227-241. MacPhail, Fiona and Paul Bowles. Corporate Social Responsibility as Support for Employee Volunteers: Impacts, Gender Puzzles, and Policy Implications in Canada. Journal of Business Ethics. 84 (2009): 405-416. Machold, Silke, Pervaiz K. Ahmed and Stuart S. Farquhar. Corporate Governance and Ethics: A Feminist Perspective. Journal of Business Ethics. 81(2008): 665-678. Print. Martin, Anna D., Takeshi Nishikawa, and Melissa A. Williams. CEO Gender: Effects on Valuation and Risk. Quarterly Journal of Finance and Accounting. 48.3 (2009): 23-40. Mersland, Roy and R. Orstein Strom. Performance and Governance in Microfinance Institutions. Journal of Finance. 33.4(April 2009): 662-669. Morris, Kathleen. The Rise of Jill Barad. Business Week. 14 May 1998. Web. 9 July 2011. Nussbaum, M. C. Women and Human Development: The Capabilities Approach. New York: Cambridge University Press, 2000. Print. Peterson, Craig A. and James Philpot. Women’s Roles on U. S. Fortune 500 Boards: Director Expertise and Committee Memberships. Journal of Business Ethics. 72.2 (May 2007): 177-196. Print. Reeves, Martha E. Women in Business: Theory, Case Studies, and Legal Challenges. New York: Routledge, 2010. Print. Roszkowski, Michael J. and John Grable. Gender Stereotypes in Advisors’ Clinical Judgments of Financial Risk Tolerance: Object in the Mirror are Closer than they Appear. The Journal of Finance. 6.4(2005): 181-191. Sarra, Janis. Corporate Governance in Global Capital Markets. Vancouver, B.C: University of British Columbia Press, 2003. Print. Simpson, W. Gary, David A. Carter, and Franit D'Souza. What Do We Know About Women on Boards? Journal of Applied Finance. 2(2010): 27-39. Sparrow, Paul. Handbook of International HR. Oxford: Wiley-Blackwell, 2008. Print. Terjesen, Siri and Val Singh. Female Presence on Corporate Boards: A Multi-Country Study of Environmental Context. Journal of Business Ethics. 83(2008): 55-63. Print. Williams, Robert J. Women on Corporate Boards of Directors and Their Influence on Corporate Philanthropy. Journal of Business Ethics. 42.1 (January 2009): 1-10. Print. Weltzien-Hoivik, Heidi von. Can an SME Become a Global Corporate Citizen? Evidence from a Case study. Journal of Business Ethics. 88(2009): 551-563. Wolford, Karen M. Gender Discrimination in Employment: Wage Inequity for Professional and Doctoral Degree Holder in the United States and Possible Remedies. Journal of Finance. 31.1(2005): 82-100. Yermack, David. Remuneration, Retention, and Reputation Incentives for Outside Directors. The Journal of Finance. 70 (October 2004): 2287-2299. Read More