Board Diversity as a Signal of Firm Preferences

For decades, proponents of gender diversity have pointed to the potential economic gains resulting from more women in top management positions and corporate boards. Increasing the number of female directors should increase the diversity of perspectives represented on the board and improve the way in which the board functions as a group, leading to an increase in firm value.

As it happens, reality falsify this well intended thesis… The reason? Investors pulling the strings from behind the scenes…

We examine investor responses to board diversity and highlight a previously unexplored mechanism to explain negative market reactions to senior female appointments. Drawing on signaling theory, we propose that an increase in board diversity leads investors to update their beliefs about firm preferences. Specifically, we argue that a gender-diverse board is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value. Consequently, firms with more female directors will be penalized. We test our argument using 14 years of panel data on U.S. public firms. We find that firms that increase board diversity suffer a decrease in market value and that this effect is amplified for firms that have received higher ratings for their diversity practices across the organization. These results suggest that observers respond to the presence of female leaders not simply on their own merit but as broader cues of firm preferences and that firms may counteract any potential signaling effect through careful framing.

Solal, Isabelle, and Kaisa Snellman. ‘Women Don’t Mean Business? Gender Penalty in Board Composition’. Organization Science, vol. 30, no. 6, Oct. 2019, pp. 1270–88. pubsonline.informs.org (Atypon), doi:10.1287/orsc.2019.1301.

Pinar Keskinocak, president elect of INFORMS, the Organization Science Journal publisher, remarked:

There is strong evidence that diverse and inclusive teams make better decisions, faster, leading to improved outcomes. Society and businesses are making slow but steady progress in breaking down barriers and embracing the rich value that comes with greater diversity and inclusion, but this important research is another reminder that we still have a long way to go,

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