Having more women in the boardroom improves a company's governance but can actually have a negative effect on its bottom line according to new research from the London School of Economics and Political Science (LSE) published in the Journal of Financial Economics this week.
Dr Daniel Ferreira from the Departments of Management and Finance at LSE and his co-author Professor Renée Adams from the University of Queensland looked at how the behaviour of boards change when there are more women on them.
They found boards with more women are more effective when looking at measures such as the monitoring of CEOs with, for example, CEOs being more likely to be replaced for poor stock price performance.
An increased participation of directors in decision making was also found. Female directors have a better record of attending board meetings than their male counterparts and this seems to have a positive knock-on effect – the greater the fraction of women on the board, the better the attendance of male directors.
Dr Ferreira said: 'Women directors appear to have a significant impact on the governance of companies. However, it is not necessarily that the women on the board are doing all the monitoring. The behaviour of the board as a whole is affected by increased diversity.'
Female directors are more likely to sit on monitoring-related committees than male directors. In particular, women are more likely to be assigned to audit, nominating and corporate governance committees, although they are less likely to sit on compensation committees.
However the researchers also found that, on average, firms with proportionally more women on their boards are less profitable and have a lower market value. This suggests that in well-governed companies increased monitoring could have a negative effect. In contrast, badly governed companies were found to benefit from having more women on their boards.
Dr Ferreira said: 'This is a complicated picture. Our research shows that women directors are doing their jobs very well. But a tough board, with more monitoring, may not always be a good thing. Indeed we see that increased monitoring can be counter-productive in well-governed companies.
'Clearly the message is not that we need less women on boards. A board is not, after all, exclusively directed towards profit. However, we can see that when you meddle with boards there may be unintended consequences. This is particularly important to bear in mind in the current context when companies are under increasing pressure to change the composition of their boards.'
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6 August 2009