What role does firm size play in the relationship between board gender diversity and firm performance?
Sana Mohsni and Alia Shata of Carleton University explored this question in their 2021 Hillsdale Investment Management – CFA Society Toronto Investment Research Award– winning paper, “Board Gender Diversity and Firm Performance: The Role of Firm Size.”
Mohsni and Shata looked at 371 Canadian companies listed on the S&P/TSX Composite Index from 2010 to 2019 and used several measures of board gender diversity, as well as return on assets (ROA) and performance. equity (ROE) as measures of business performance.
Their conclusion? Smaller is better.
Company size is key to effective board diversity
Mohsni and Shata’s results show that the larger the company, the weaker the positive relationship between board gender diversity and company performance. They also found that women directors have a greater impact on small business performance compared to their larger counterparts and hypothesized that small businesses may provide a better environment for women directors to realize their potential.
These findings may explain conflicting results from previous studies on gender diversity on boards and corporate performance. They suggest that the benefits of gender diversity on the board may be limited for some companies and that the context of an organization must be considered to better assess and reap the benefits of gender diversity.
This company size can reduce the added value that gender diversity on the board brings to performance means larger companies need to better leverage the skills, knowledge and ideas of their female board members . These companies may need to re-evaluate their organizational structures and communication methods to facilitate better discussions at the board level, better decision-making and better integration of women directors.
“Investment managers and practicing analysts interested in gender diversity and good governance should target small businesses with broad diversity initiatives.” Mohsni said The analyst. “They can also pressure big corporations to create work environments that allow female directors to reach their highest potential, because female directors are good for results.”
According to research, the value that gender diversity on the board adds to performance is strongest in financial services, consumer staples, utilities and real estate. The effect is negative and significant in manufacturers. The results also suggest that the negative moderating effect of size is strongest in financial services, consumer staples, utilities, and real estate, and that the negative correlation between gender diversity within boards of directors and the performance of industrialists is accentuated in large organizations.
Make changes, not empty policies
Mohsni and Shata also found that policies aimed at increasing gender diversity on the boards of large corporations can sometimes hurt performance. Women who are included on boards of directors due to the application of policies or quotas may be perceived as less competent or less qualified because they are expected to come from a smaller pool of candidates. This, in turn, can undermine the effectiveness of these initiatives.
Since 2014, for example, the Ontario Securities Commission’s Board Gender Diversity Policy, which requires companies to annually disclose the number and percentage of women on boards. board, has had a negative effect on the relationship between gender diversity on boards and corporate performance. , and the moderating effect of firm size persisted after the rule was implemented.
While Mohsni and Shata’s research was limited to the Canadian context, institutional and cultural systems are important influences in gender diversity and board performance dynamics, and therefore cross-country studies add to our understanding.
The authors believe there is ample room for further research in this area. Their report considers only gender diversity, but ethnicity and age, among other factors, can also influence company performance, and company size can moderate this influence. In addition, Mohsni and Shata focus on financial performance measures, but note the growing importance of non-financial performance measures – environmental, social and governance (ESG) criteria, for example – and suggest that they may merit a further examination.
Balancing corporate obligations successfully
Indeed, corporate boards today are increasingly accountable for corporate social responsibility and sustainability issues, and although a growing number of studies indicate that the inclusion of women directors can influence various decisions of the board, the role of firm size in such contexts is not well understood and requires further analysis.
Chris Guthrie, CEO of Hillsdale Investment Management, which co-sponsors the award, said Mohsni and Shata’s research demonstrates that analysts need to measure the benefits of diversity as carefully as ROA and ROE and perhaps should develop a ” feedback on diversity” (ROD) metric.
To be sure, perspectives vary on the influence of gender diversity on performance. Some speculate that it can contribute to a better understanding of the market and a broader view of the business environment and improve a company’s reputation. On the other hand, some believe that the more diverse the perspectives and skills of an organization, the more difficult it can be to manage, reach consensus and make decisions.
Given these conflicting theories, the influence of board diversity on corporate governance and value requires the kind of precise testing and analysis demonstrated in Mohsni and Shata’s research.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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