Research: Board Gender Diversity Does Not Improve Company Performance

You can read this article as it was originally published in the New Zealand Herald here

There is no evidence available to suggest the addition, or presence, of women on a company board causes a change in company performance

In the past five years a drumbeat has echoed through business, a mantra if you like, that companies perform better when women sit at the board table.

It intuitively appeals to our sense of fairmindedness and equality. It has become accepted wisdom, organisations as august as McKinsey, Harvard and, locally, the Institute of Directors have led the charge in promoting gender diversity.

Unfortunately, it's also incorrect. There is no empirical evidence that supports this thesis at all.

In 2015 two separate meta studies of board gender diversity were published*. Together they synthesised more than 140 separate studies with a combined sample of more than 90,000 firms from more than 30 countries. They found that: "The relationship between board gender diversity and company performance is either non-existent (effectively zero) or very weakly positive."

The conclusion is simple: "There is no evidence available to suggest the addition, or presence, of women on the board causes a change in company performance."

The "very weak" positive correlation observed was tiny: about two-tenths of 1 per cent (0.2 per cent) of the variance in company performance and only in respect of accounting performance. There was no statistically significant correlation with market performance (such as stock performance or shareholder returns).

Meta-analyses are important because the statistical averaging of results of prior studies means such findings are significantly more credible than any one individual study. The fact that the two meta-analyses are independent and used different techniques but still reached an effectively identical conclusion reinforces the findings.

Further it is important to note that even if the meta-analyses had revealed a stronger relationship between gender diversity on boards and company performance (which they did not), this would be a correlative not causative effect. Board diversity proponents have fallen for the fallacy cum hoc ergo propter hoc (they mistake correlation for cause).

It is simply not possible to conclude board gender diversity causes firm performance. To establish a causal relationship between women on boards and company performance it would be necessary to undertake a randomised control trial of companies in real world markets with differing genders on their boards.

Such a study is impossible, for a variety of reasons, not the least of which is that it would require companies to accept randomly assigned board members.

The results of these 140 studies are troubling given that in recent years there has been a substantial push to get more women on to boards. Companies such as Spark, Air New Zealand and GSK NZ have loudly trumpeted board gender diversity. The Institute of Directors has publicly berated organisations for their lack of gender diversity.

Felicity Caird, manager of the Institute's governance leadership centre, proclaimed companies should "aim to achieve a 30 to 50 per cent mix of female directors" and lamented the relative lack of progress among NZX listed companies.

The Government has (predictably) gone further. It has a stated target to reach gender equality on public boards. Forty-three per cent of board positions are now occupied by women – the product of several years of intense focus on promoting female candidates.

There have been numerous reports of otherwise qualified male candidates being "passed over" for public board roles due to a preference for female candidates. Casual comments from the chair of one board to a male candidate that, "You don't have a chance, you don't have breasts", reflect what is in effect, state sanctioned gender discrimination.

Opposition to such discrimination has inevitably been met with the "better performance" rationale. Unfortunately, as we have seen, this justification is completely without empirical support. For the Government and society at large to promote discriminatory policies for which there is no empirical foundation is deeply concerning.

It follows then, that in the absence of any evidence that promoting women to boards improves company performance gender activists frequently resort to a related argument: that teams (and boards) that include both men and women somehow make better decisions than boards that include only one gender.

Caird again: "The dividend that diversity pays is bringing different perspectives and more robust decision-making, effective risk management and (of course) better company performance."

The argument is that women differ from men in their knowledge, experiences and values and thus bring novel information and perspectives to the board. They increase the board's "cognitive variety".

The greater a board's cognitive variety, the theory goes, the more options it is likely to consider and the more deeply it is likely to debate those options. It sounds great in theory, but regrettably again it is incorrect.

First, we would expect the benefit of "board cognitive variety" to ultimately show up in company performance, which it does not. Second, even at a micro (team) level the cognitive variety thesis does not stack up empirically. Despite wishful thinking that teams with gender diversity outperform those composed only of men (or women), rigorous research does not support this conclusion.

Meta-analyses linking team gender diversity to team performance reach much the same conclusion as meta-analyses linking board gender diversity to company performance — that is, the relationship between gender diversity and team performance is tiny and again it is correlative not causative.

Encouraging a diversity of opinions and skills on a board is good for a company, assuming such diversity occurs because of the directors' gender isn't.

Where does this leave us? It is quite simple: neither the Government nor any other institution should be promoting one board candidate over another due to their gender other than capability (as defined by their ability to add value to the company they serve). There is no scientific or moral justification for doing so.

Taking any other position is contrary to the interest of shareholders and lacks any scientific foundation.

* Post and Byron (2015) Women on Boards and Firm Financial Performance: A Meta-Analysis, Academy of Management Journal. Pletzer, Nikolova, Kedzior, and Voelpel (2015) Does Gender Matter? Female Representation on Corporate Boards and Firm Financial Performance - A Meta-Analysis.

Alex Davis

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Alex Davis is a business executive and director of several companies in New Zealand and overseas.