Researchers find gender-balanced boards enhance the value of independent directors

A recent study raises important questions for investors and boards of listed companies considering issues of diversity, independence and board composition.

Responsible Capitalism and Diversity
Hermes Investment Management, October 2015

AICD Statistics on Board Diversity
Australian Institute of Company Directors, October 2015

Does the presence of independent and female directors impact firm performance? A multi-country study of board diversity
Journal of Management & Governance, January 2015

A recent study of listed companies worldwide, led by researchers at the Kelley School of Business at Indiana University, has found that a higher proportion of female board directors correlates with higher firm performance.

The study also found that independent directors may enhance firm performance, but only when serving on gender-balanced boards. Independent directors were, in fact, negatively associated with firm performance on boards with few or no women.

According to the researchers, the results indicate that ‘gender imbalanced’ boards signal to shareholders that management is “less independent and more entrenched.”

“The empirical results…indicate that board independence becomes secondary when gender diversity is not addressed [first]”, say the researchers.

“Corporate governance codes worldwide should give at least the same importance to gender diversity as they give to the structure of board independence.”

The study used accounting, stock market and corporate governance data from 3,876 listed companies in 47 countries in 2010. Australian firms represented approximately 7.6% of the global sample.

What are the implications of this study for Australian boards and directors?

The study is one of the few to empirically investigate the relationship between gender diversity, independence and firm performance. It is significant due to the large number of countries and firms it evaluates.

Other recent studies have shown a positive correlation between higher proportion of female board directors and financial performance, increased corporate social responsibility and reduced corporate fraud. For example, the Centre for Gender Economics and Innovation and Inifinitas Asset Management released a “Diversity Index” earlier this year. The Index, which measures the performance of S&P/ASX200 companies with a minimum 25% of female directors on the board, shows that companies with more gender diverse boards performed 7% better financially than male-only boards.

Notwithstanding this, a recent study suggests that European and UK investors still do not recognise the value of gender diversity on boards. Of the 109 institutional European and UK investors surveyed by Hermes Investment Management, only 23% considered gender diversity important. Instead, they placed more value on diversity of experience (53%) and board independence (69%).

The Australian Institute of Company Directors has been at the forefront of both the gender diversity and independence debates, with John Brogden recently taking part in the Diversity Council of Australia’s Annual Debate 2015.

According to recent AICD statistics, women still hold less than 20% of board positions on the ASX300. Commentators have suggested that this figure is as low as 10% across the ASX500.

The AICD Governance Leadership Centre has commissioned research on the relationship between independent directors and organisational performance, which may also shed light on how broader diversity on boards affects firm performance.