New research shows the more women on a company's board, the more market value is lost

November 12, 2019

CATONSVILLE, MD, November 12, 2019 - A company with a gender-diverse board of directors is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value, according to new research in the INFORMS journal Organization Science.

The study examines investor responses to board diversity and finds that one additional woman on the board results in a 2.3% decrease in the company's market value on average, which could amount to hundreds of millions of dollars.

Authors Isabelle Solal and Kaisa Snellman, both of INSEAD, looked at 14 years of panel data from U.S. public firms and saw that firms with more female directors were penalized.

"Firms that increase board diversity suffer a decrease in market value and the effect is amplified for firms that have received higher ratings for their diversity practices across the organization," said Solal.

The paper, "Women Don't Mean Business? Gender Penalty in Board Composition," suggests that investors respond to the presence of female leaders not simply on their own merit, but as broader cues of firm preferences.

"If investors believe that female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, a firm unintentionally signals a weaker commitment to shareholder value than a firm with a nondiverse board," said Snellman.

Some reports by consulting firms and financial institutions have shown a positive correlation between firm value and gender-diverse boards, but recent studies based on long-term data show a negative effect on female board representation. The explanation is found in how investors interpret the decision.

"Our results imply that when additional information on the firm's preferences is available, the market relies on that information in order to lessen the uncertainty surrounding the board diversity cue. Additional information may come from observing other choices the firm makes, notably in terms of diversity policies," continued Snellman.

The researchers argue that fostering awareness is the first step in addressing and eliminating damaging assumptions. They suggest firms should carefully frame female appointments and reassure shareholders of corporate goals.

The paper suggests that over time, just as greater exposure to female leaders has been shown to reduce stereotype bias, the increase in female board appointments should likewise decrease the perception that firms select directors for any reason other than their qualifications.

"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," said Pinar Keskinocak, INFORMS 2020 president.
-end-
About INFORMS and Organization Science

Organization Science is a premier peer-reviewed scholarly journal providing groundbreaking research on organizations including their processes, structures, technologies, identities, capabilities, forms and performance within the field. It is published by INFORMS, the leading international association for operations research and analytics professionals. More information is available at http://www.informs.org or @informs.

Contact:

Ashley Smith
443-757-3578
asmith@informs.org

Institute for Operations Research and the Management Sciences

Related Diversity Articles from Brightsurf:

More plant diversity, less pesticides
Increasing plant diversity enhances the natural control of insect herbivory in grasslands.

Insect diversity boosted by combination of crop diversity and semi-natural habitats
To enhance the number of beneficial insect species in agricultural land, preserving semi-natural habitats and promoting crop diversity are both needed, according to new research published in the British Ecological Society's Journal of Applied of Ecology.

Ethnolinguistic diversity slows down urban growth
Where various ethnic groups live together, cities grow at a slower rate.

Protecting scientific diversity
The COVID-19 pandemic means that scientists face great challenges because they have to reorient, interrupt or even cancel research and teaching.

Cultural diversity in chimpanzees
Termite fishing by chimpanzees was thought to occur in only two forms with one or multiple tools, from either above-ground or underground termite nests.

Bursts of diversity in the gut microbiota
The diversity of bacteria in the human gut is an important biomarker of health, influences multiple diseases, such as obesity and inflammatory bowel diseases and affects various treatments.

Underestimated chemical diversity
An international team of researchers has conducted a global review of all registered industrial chemicals: some 350,000 different substances are produced and traded around the world -- well in excess of the 100,000 reached in previous estimates.

New world map of fish genetic diversity
An international research team from ETH Zurich and French universities has studied genetic diversity among fish around the world for the first time.

Biological diversity as a factor of production
Can the biodiversity of ecosystems be considered a factor of production?

Fungal diversity and its relationship to the future of forests
Stanford researchers predict that climate change will reduce the diversity of symbiotic fungi that help trees grow.

Read More: Diversity News and Diversity Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.