Women on Company Boards and Their Impact in Financial Performance - Literature review Example

Women on Company Boards And Their Impact In Financial Performance

Both researchers as well as academics have engaged in discussions concerning gender diversity within the workplace. Over the past several years, the subject of gender diversity within boardrooms as well as top management has received a large amount of attention within academic literature and also in the popular press. Indeed corporate boardrooms are still not considered as diverse with regard to gender with one in three companies operating in Europe not having any female board members. Countries in Asia are even more behind in terms of directorships in the board holding only about 5% of seats within the board. However, this is a situation that is fast starting to change with a steady rise in the number of women who are on boards in companies all around the world. This paper will therefore examine how the presence of women within a company’s board impacts on the financial ratios of performance of these companies.

According to Ahern and Dittmar (2012, p. 137) women have been found to show a number of critical characteristics that are important for good governance. More specifically, they have been said to be meticulous, averse to risk, having greater skills in both finance as well as accounting and positive decision makers. As a result of this human resource managers are encouraged to ensure that women are prepared for leadership positions and in the long run ensure that more women are appointed to company boards. Triana et al (2013, p. 609) contend that during board meetings, women are said to be better listeners to other speakers, provide more respect and consideration and ensure that the group is better able to identify compromises that are more satisfactory in terms of solving problems that are of a delicate nature. As outlined within agency and resource dependency theory, female directors behave in a much different manner than their male colleagues and their presence brings changes to behaviour of the board since they are said to provide better services for monitoring as well as advising. For instance Dobbin and Jung (2011, p. 809) found that female directors often took on roles that were more active within the board and made use of power far more than directors.

Impact on Return On Assets (ROA)

Matsa and Miller (2011b, p. 219) found a positive and significant link between the presence of female directors and the accounting performance as measured by ROA. They link this to the unique styles of management that are adopted by the women especially since in some societies women also bear a financial burden that is equal to men to support the family which subsequently empowers the women to make decisions that are equal. Bohren and Strom (2010, p. 1281) looking at 100 leading companies over five years found a positive link between the diversity of the board on Return for Assets however, they provide a suggestion that performance might be encouraging diversity as opposed to the diversity of the board leading to a more positive performance. Moreover, Adams and Ferreira (2009, p. 291) examined the gender and racial composition of committees of Fortune 500 companies and found that there were select positive impacts on diversity on ROA.

There is a second school of thought which examines negative effects. In their study Terjesen and Singh (2008, p. 55) made use of panel data on over 1, 000 American firms, whereas they did find that boards that were made up of a greater number of women do much better at examining firms, they also found that there are negative impacts of female board members on ROA. In this instance, the argument is that firms that have positive financial performances are more likely to appoint women into boards but once this is done, women have either negative or neutral impacts on performance. A number of studies have examined this idea more directly, Terjesen et al (2009, p. 320) examined a sample of Fortune 500 companied and showed that firms that had strong profits or ROA are far more likely to appoint female directors however, these female directors do not have an effect on the company’s performance.

Impact on Return On Equity

Carter et al (2010, p. 396) found that companies that operate in the Netherlands which have women directors perform much better with regard to Return on Equity as opposed to firms that do not have women on their boards. This might be as a result of the fact that gender diversity creates the chance for consideration of a greater number of perspectives and in the long run leads to more efficient decisions. In addition, Isidro and Sobral (2014, p. 3) agree that the return on equity of firms that have women on their boards is far higher than for those companies that do not have indicating higher returns. The reward that accompanies these higher returns is thereafter seen in the valuations that are given to these companies which means higher price to book values (P/BV). A higher P/BV ratio essentially implies that investors are driven by the expectation that management will create a higher amount of value from the company’s existing assets. Additionally, Torchia et al 2011, p. 299) argue that the amount of earnings that are paid out as dividends to the shareholders, referring to the payout ratios also far higher at firms that have higher than 10 percent of the women within top management as compared to those firms that have fewer women.

However, Luckerath-Roves (2013, p. 491) did not find any strong relationship between having women on the boards of firms operating in the United Kingdom with the company’s accounting performance measured as Return on Equity. In the same way, Bohren and Strom (2010, p. 1284) found that the average impact on gender diversity on the performance of the firm was not negative.

Impact on Tobin’s Q

Tobin’s Q refers to the performance index for a firm that is based on the market and is often calculated by dividing the market capitalisation of a firm at the end of the year and the average book values of the company’s overall debt at the at the start and end of a given financial year by the average of book values of the overall assets at the beginning and also the end of the financial year. In examining Tobin’s Q, Triana et al (2013, p. 611) found that the ratio of female members within top management and having a female as the executive head of the board is positively linked to Tobin’s q ratio. However, Matsa and Miller (2011b, p. 221) argue that female representation on the board led to increased ROA of the firm but was negatively linked to Tobin’s q values. This often suggests that within emerging markets, investors might not perceive female representation on boards as positive. Researchers also found that organisations in Malaysia which had more women on the board had higher ROA but lower Tobin q values. Ahern and Dittmar (2012, p. 139) attributes this to the fact that higher ROA came about as a result of firms that made use of human capital that was not tapped in a manner that was more effective which includes women on their boards. However, the lower values of Tobin q for these same firms is considered as being a reflection of the continuing unfavourable view that is held by a large section of investors about the role that women should play in business positions that are considered as influential.

On the other hand Terjesen and Singh (2008, p. 57) found a positive correlation between female board directors who have been newly appointed and Tobin’s Q and the results they provide can be seen in both small as well as large firms. It should be noted that as Carter et al (2010, p. 398) argue, statistically large results for Tobin’s Q might not show that boards that are diverse lead to variations in the performance of the firm but instead that firms that have been well managed often contain more women within their board rooms. However, the key finding in this instance is that women are far more likely to impact on Tobin’s Q ratios if they are representation of at least 30 percent of the board.

Torchia et al (2011, p. 301) examined the impact of laws which encourage companies to have a certain number of women on the board such as in Norway had a decline in the price of stocks on the day that they made the announcement to bring in more women and that subsequently Tobin’s Q declined over the next several years. These particular results are thought to be because of the fact that these firms were forced to recruit women who were younger and therefore less experienced in order to adhere to the new regulations.

Conclusion

The question of gender diversity, that of including more women within higher levels of management has increasingly become a subject of debate. As the analysis above has shown, the presence of women in the boards has a number of mixed impacts on aspects of ROA, ROE and Tobin’s Q. While some studies have found a positive link between an increased number of women in the board with positive ROA, ROE and Tobin’s Q, other researchers are of the opinion that aspects such as Tobin’s Q can only be increased if representation of women on the board is at 30 percent.