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Exploring the Corporate Impact of Board Gender Diversity

New research examines whether gender diversity on boards plays a role in corporate outcomes. By Joshua Herbold, Ph.D., CPA | Fall 2024


In 2019, Illinois passed House Bill (HB) 3394, requiring corporations in the state to disclose demographic characteristics of their boards of directors, with the goal of increasing director diversity. As HB 3394 states: “[W]omen and minorities are still largely underrepresented nationally in positions of corporate authority, such as serving as a director on a corporation’s board of directors. … Increased representation of these individuals as directors on boards of directors for corporations may boost the Illinois economy, improve opportunities for women and minorities in the workplace, and foster an environment in Illinois where the business community is representative of our residents.”

Beyond Illinois, currently at least 11 other states have enacted or considered similar laws promoting diversity on corporate boards. In contrast, a few large corporations have decreased or eliminated efforts to promote diversity, and three states (Tennessee, Texas, and Utah) have enacted anti-diversity, equity, and inclusion bills.

On the academic front, numerous studies have identified both arguments for and against diversity on boards. Regarding board gender diversity (BGD), some researchers have found:

  • Female directors have better attendance records than male directors and use more (and more detailed) information when making decisions than male directors, leading to improved monitoring by boards.
  • Diverse boards bring a variety of perspectives to the decision-making process, which can help identify and evaluate opportunities and risks that could be overlooked by a less diverse board.
  • Women tend to be more likely than men to rely on leadership styles based on trust and communication, which can reduce investment inefficiencies caused by incomplete information or miscommunication.

On the other hand, prior research has also shown that heterogeneity in board director characteristics (e.g., cognitive styles, values, personalities, and backgrounds) has its costs. For example, research has shown:

  • Diverse groups may have less overall communication, less cooperation, and more conflict.
  • Group members who are different from each other may be less likely to develop natural communication and interaction due to the lack of shared experiences or common backgrounds.
  • Individuals who have majority status in a group may continue to dominate group discussions and decisions.

Despite these research findings, determining whether diversity on boards matters remains an open question left up for debate. Fortunately, researchers Dave (Young II) Baik at Nanyang Technological University, and Clara Xiaoling Chen and David Godsell at the University of Illinois Urbana-Champaign, provide new empirical evidence on the topic. In their research paper, “Board Gender Diversity and Investment Efficiency: Global Evidence From 83 Country-Level Interventions,” they explore the effects of laws that encourage gender diversity on corporate boards.

“By shedding light on one of the most important societal changes globally, which directly influences the structure at the highest echelons of organizations, our intent was to determine whether BGD and BGD interventions have real effects on corporate outcomes.”

GUIDING THE BOARD DIVERSITY DEBATE: A GLOBAL LOOK

According to the researchers, an “intervention” refers to a country-level policy designed to have an impact on the corporate-level board of directors. In the United States, BGD interventions are too new for reliable data, so the researchers turned their attention to similar laws outside the U.S.

“We were surprised to identify 83 interventions in 59 countries,” Godsell says. “While there are thousands of studies examining the association between BGD and corporate outcomes, nobody has yet considered cataloging all these interventions and using their differences across countries to explore their effects.”

Therefore, the researchers’ first step was identifying and summarizing all the different BGD interventions that countries have adopted. “By cataloging and characterizing these BGD interventions for the first time, our study facilitates future research that seeks to document the economic consequences of BGD and related policy interventions,” Godsell explains.

During this process, Baik notes how fascinating it was to discover how different countries had varied reasons for implementing BGD interventions: “Some countries aim to foster diversity at the upper levels of corporate structures, while others focus on improving corporate outcomes. These differing motivations suggest that the understanding and objectives of BGD interventions are still evolving and not fully standardized across the globe.”

DOES BOARD GENDER DIVERSITY MATTER?

After cataloging the BGD interventions, Baik, Chen, and Godsell gathered accounting and financial data for affected corporations. The team ended up with nearly 330,000 years’ worth of data (where each data point represents one firm in one year), making their research the largest BGD study to date. So, what did they discover?

Overall, the researchers found that BGD interventions do lead to increased female representation on corporate boards. In fact, according to their research paper, “The average post-intervention increase in BGD is 7.3 percentage points.”

By itself, this finding isn’t too surprising. The researchers note that if a country passes a law, most corporations in that country will adhere to the new law. However, they add that the more interesting part of their research is exploring whether increased BGD improves corporate outcomes.

To accomplish this, the team used a “difference-in-differences” research design to explore the effects of BGD interventions on investment efficiency by corporations. A difference-in-differences design uses a treatment group (in this case, companies affected by an intervention) and a control group (companies not concurrently affected by an intervention), along with different time periods (before and after the intervention). Researchers then compared outcomes within each group for the different time periods and across the groups over time to see how much more (or less) the treatment group changed compared to the control group.

“A major benefit of this design is that it goes a long way to ruling out alternative explanations for our results,” Godsell notes. “Because we have 83 interventions in 59 countries, it’s unlikely that an omitted variable could explain our results because it would have to vary with 83 interventions adopted in many different years and countries.”

To measure investment efficiency, the researchers examined how well firms invest in projects that have a positive net present value and avoid investments that have a negative net present value. Based on prior research, the researchers used a regression model to calculate an expected level of investment for each firm. This model includes data about capital expenditures; research and development expenditures; acquisitions/sales of property, plant, and equipment; and sales growth (which could be negative). Investment efficiency is measured by looking at the residuals from this regression model, which represent the difference between actual and expected investments for a given firm. Notably, smaller residuals mean that a firm’s actual investment is close to the expected optimal investment, which indicates higher investment efficiency.

“We found that investing too much in projects—from capital expenditures to research and development to acquisitions—can be inefficient. Investing too little can also be inefficient,” Chen says. “Overall, we found that increased BGD helps companies move toward the ‘Goldilocks’ level of investment—just right.”

Specifically, their research highlights that firms subject to BGD interventions “reduce inefficient investment by 0.6% of total assets, or 6.5% of total investment, and are 4 percentage points more likely to have above-median investment efficiency.”

Responding to the importance of this finding, Baik says, “This project was particularly meaningful as it demonstrates that accounting research can be connected to societal changes. Our study contributes to the understanding of these actions and underscores the potential of accounting research to provide valuable insights into significant societal shifts.”

In other words, this latest research shows that BGD and BGD interventions have real—and arguably positive—effects on corporate outcomes.


Joshua Herbold, Ph.D., CPA, is a teaching professor of accountancy and associate head in the Gies College of Business at the University of Illinois Urbana-Champaign and sits on the Illinois CPA Society Board of Directors.

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