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The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance

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Abstract

The European Commission has recently proposed the introduction of legally binding quotas for women on corporate boards of European companies. This proposal has put the spotlight on the question of whether increasing female representation on the board brings economic benefits to the firm. In order to shed light on the issue, this study investigates the direct and indirect effects of women on the board on firm value. We use a simultaneous equation model to estimate the effects of women on the board on firm value, financial performance, and compliance with ethical and social principles adopted by the firm. We find no evidence that a higher female representation on the board directly affects firm’s value. However, we find indirect effects. Women on the board are positively related with financial performance (measured in terms of return on assets and return on sales) and with ethical and social compliance, which in turn are positively related with firm value. The findings in this study suggest that greater female representation on corporate boards of large European firms can increase firm value indirectly. Further, part of the indirect effect comes from stronger compliance with ethical principles, something that is not captured by accounting-based financial performance.

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Notes

  1. The relevant law was adopted in 2003, and the measures were made obligatory as of 1 January 2006.

  2. For more details on countries’ mandatory and voluntary initiatives see European Commission progress report (European Commission 2012b).

  3. We verify that the correlation between the error terms of the equations is high. For the model that uses ‘proportion of women on board’ the correlations between the error terms of the equations are Eq1/Eq2 = 0.460, Eq1/Eq3 = −0.848, Eq2/Eq3 = −0.608. For the model that uses ‘30 % or more women on board,’ the correlations between the error terms of the equations are Eq1/Eq2 = 0.393, Eq1/Eq3 = −0.435, Eq2/Eq3 = −0.485.

  4. Because the existence of an ethics and social responsibility committee is self-determined, it is important to treat the variable as an endogenous one. The simultaneous equation model does that.

  5. The sample firms are large firms that report under IFRS. Only five of the Swiss firms do not report under IFRS, but exclusion of these firms does not change the results. All the financial data are in Euros. In countries that do not use the Euro, financial data are converted to Euros using the exchange rate at fiscal year date.

  6. We recall that the women on board variables are lagged variables, and the statistics shown in Table 1 are thus for women on board in year t − 1.

  7. Just to ensure that our results are not driven by the simultaneous estimation methodology we estimate an OLS regression of Tobin’s Q on women on board, ROA, and ethical and social compliance plus control variables. The conclusions do not change. The estimated coefficient for women on board is not statistically significant, whereas the coefficients for ROA and ethical and social compliance are both positive and significant.

  8. To take advantage of the panel data, we re-estimate the model adding firm individual effects. Our results are similar, and the conclusions remain the same.

  9. Estimated coefficients (and z-stats) for the variables of interest are the following. Equation (1): women on board at year t 0.679 (1.52), ROA 0.437 (2.16), ethical and social compliance 2.19 (4.14). Equation (2): women on board at year t − 1 1.165 (3.25), ethical and social compliance 1.93 (5.99). Equation (3): women on board at year t − 1 0.474 (2.56). We obtain similar results using ROA before tax.

  10. The estimated coefficients (and z-stats) for the variables of interest are the following. Equation (1): women on board −0.412 (−078), pre-tax ROA 0.764 (3.92), ethical and social compliance 1.632 (3.82). Equation (2): women on board 0.867 (2.45), ethical and social compliance 1.318 (5.35). Equation (3): women on board 1.359 (3.75). The results using the variable ‘30 % or more women on board’ yield similar conclusions.

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Authors and Affiliations

  1. ISCTE IUL Instituto Universitário de Lisboa, BRU-IUL, Avenida Forças Armadas, 1649-026, Lisbon, Portugal

    Helena Isidro

  2. Deloitte, Lisbon, Portugal

    Márcia Sobral

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  1. Helena Isidro
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  2. Márcia Sobral
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Correspondence to Helena Isidro.

Appendix

Appendix

See Table 6.

Table 6 European Legislative and Voluntary Initiates for Gender Diversity in the Board of Directors
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Isidro, H., Sobral, M. The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance. J Bus Ethics 132, 1–19 (2015). https://doi.org/10.1007/s10551-014-2302-9

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