Van der Walt and Ingley (2003) describe diversity in the context of corporate governance as the composition of the board and the combination of the different qualities, characteristics and expertise of the individual members in relation to decision-making and other processes within the board. The gender of the board members is therefore only one of the characteristics of diversity. However, this article focuses only on gender forseveral reasons. Firstly, the (normative) debate focuses on gender in the boardroom resulting in quota-legislation in several countries (Norway, Spain, France and the Netherlands). Secondly, gender is the most easy distinguished demographic characteristic compared with age, nationality, education or cultural background, for example. Finally, our study aims to improve the methodology of the popular studies of McKinsey’s (2007) and Catalyst’s (2007) popular studies which also focus on gender.
Whether the presence of women on the board improves the governance of a company is linked to the question of what good corporate governance should achieve. For example, Brown et al. (2002) argue that if good corporate governance does not result in improved performance, then the question of who sits on the board of the company or how that board operates has no practical value, and appointing women to the board then has merely symbolic value. Research into the presence of women on the board is directly connected with other aspects of corporate governance. These include the importance of a good relationship with stakeholders, as proposed by both stakeholder theory (Donaldson and Davis 1991) and resource dependence theory (Pfeffer and Salancik (1978); diversity as a measure of independence as advocated in agency theory [Jensen and Meckling (1976)]; and diversity as a necessity for fair and transparent decision-making Luoma and Goodstein (1999). Huse (2007) found that in Norway, where 40% of all directors are required by law to be female, the gender debate has contributed more to the evaluation of the role and position of the board than any other recent discussion, including shareholder activism or the development of best practices.
Resource dependence theory regards corporate boards as an essential link between the company and its environment and the external resources on which a company depends. This link is necessary for good corporate performance. Using the board of directors as a linkage mechanism with stakeholders provides companies with at least four benefits (Pfeffer and Salancik 1978, p. 145): firstly, linkage may provide the organisation with useful information, secondly, linkage provides a channel for communication purposes, thirdly, linkage is an important step in obtaining commitments of support from important elements of the environment and fourthly, linkage has a value in legitimizing organisations. Hillman et al. (2007) investigated organizational characteristics to determine which of these affect the likelihood of women being appointed. Using resource dependency theory as a basis, they investigated how boards of directors serve as a linkage instrument and under which organizational characteristics gender diversity is most valuable.
By recruiting female directors, companies may provide these benefits from linking with their stakeholders. However, providing legitimacy is especially mentioned in literature on gender diversity in the boardroom. Female directors on boards can provide a valuable form of legitimacy in the eyes of potential and current employees, and women directors also symbolise career possibilities to prospective recruits (Hillman et al. 2007; Singh and Vinnicombe 2004). A board of directors provides legitimacy with regard to several groups of stakeholders. As discussed by Brammer et al. (2007), greater equality of representation relates to direct and indirect benefits that may potentially arise from more closely reflecting the demographic characteristics of key stakeholder groups such as customers, employees and investors. Furthermore, customer-oriented businesses are more inclined to appoint female directors to their board, as such appointments give these businesses legitimacy with regard to their customers and enhances relations with customer stakeholders (Brammer et al. 2007). Also, such businesses show that ‘they are responding to calls for increased diversity for better governance and better use of available talent’ (Singh 2007, p. 2131). This might enhance their reputation and consequently their performance. Hillman et al. (2007) add that legitimacy and conformity to societal expectations are considered key components of organisational survival.
Adams and Ferreira (2004, p. 14) suggest that gender diversity on boards may have a political dimension. ‘Companies may care more about diversity when they are concerned about their public image, either because they are large firms which are visible to outsiders or because they are required to deal with government agencies which have preferences for diversity’. Large organisations are more likely to be a visible target for the demands of others in the social context and thus need to establish linking in the social context (Hillman et al.
2007, p. 944; Pfeffer and Salancik 1978, p.168) Indeed company size is one of the most consistent predictors of a company having female directors, according to Burgess and Tharenou (2002).
Can demographic characteristics of directors actually have so much impact on the organization that its performance improves? Finkelstein and Hambrick (1996) suggest two reasons why the composition of the board might affect the performance of a firm. Firstly, the board has the most influence on a company’s strategic decision-making. Secondly, the board also has a supervisory role, in that it represents the shareholders, must respond appropriately to takeover threats, and monitors the total value of the company. Given that individual board members jointly determine decision-making within the board, the composition of the board can affect the performance of a company. However, when researching the effect of the composition of the board, several complicating factors may arise. These complicating factors include firstly, how to measure diversity over time, secondly, causality between diversity and performance, and thirdly, critical mass theory. In the next section, which addresses previous research on the relationship between gender diversity and firm performance, we will further elaborate on these issues.
Recent literature suggests various arguments as to why the greater representation of women on boards results in better decision-making within the boardroom. The presence of women might improve team performance, because more diverse teams may consider a greater range of perspectives and therefore reach better decisions. These better decisions then ultimately could lead to higher business value and business performance (Burgess and Tharenou 2002; Singh and Vinnicombe 2004; Carter et al. 2003). Failure to choose the most suitable candidate affects company performance and the absence of women might be suboptimal for the firm. Brammer et al. (2007) argue that, if we assume that certain valuable qualities are not evenly distributed among demographic groups (men and women), the company is structurally denying these qualities by excluding women from decision-making positions. Companies with a higher degree of diversity on the board also give an important positive signal to (potential) employees of that company. The competitive situation both inside and outside the company (between existing and potential employees) is strengthened (Rose 2007), and performance should improve (Pfeffer and Salancik 1978). Society also regards a higher degree of diversity as positive, and the reputation of the company improves. When the diversity within the company and its management reflects the diversity within the relevant market, a company is better able to serve and retain that market (Carter et al. 2003; Pfeffer and Salancik 1978; Donaldson and Davis 1991).
Diversity might also contribute to the discussion, exchange of ideas and performance of the group (Kang et al. 2007). On the other hand, however, taking into account a wider range of more perspectives can also be more time-consuming and result in more conflicts. Weighing up more perspectives can delay decision-making and may eventually make the board more divided than a less heterogeneous board would be (Rose 2007). Such behavior has been observed among diverse top management teams which can be more expensive and difficult to coordinate than homogeneous teams, and where the increased costs from lack of coordination can neutralise the increase in financial performance (Dwyer et al. 2003).