Dear Sir Norman Fountainhead,
I refer to your request for advice on the following matters regarding the corporate governance practices of Fountainhead Ltd:
- Gender diversity on the corporate board of directors;
- Approaches to ensuring gender diversity on corporate boards;
- The issue of gender quotas to increase the number of female directors.
The question of workforce diversity has been a topical one in the corporate world for the past several years. As research indicates, there is evidence in support of workplace diversity because it was found to positively affect financial performance by reducing the risk of insolvency and stimulating stock growth (Strydom et al., 2016). When speaking of workplace inclusion, the issue of gender diversity draws a significant focus and provokes debates. Gender diversity implies establishing more workplace equality between women and men. Most often, the efforts to ensure gender diversity involve improving the representation of women in companies and various organizations.
Corporate boards of directors constitute the main bodies that govern their respective companies, and the female members’ presence on them becomes a considerable challenge. In other words, there is uncertainty as to whether it is necessary to ensure that more women become members of corporate boards. Gender quotas are one of the tools implemented in order to bring change and achieve gender diversity. Nevertheless, despite the effectiveness of increasing the number of female directors, gender quotas do not yield any significant benefits.
Research on the Effects of Female Representation on Boards
Currently, researchers have conducted numerous studies to assess the impact of more gender diversity on companies’ profitability and performance. For example, Strydom et al. (2016) discovered that gender diversity could positively affect companies’ performance in terms of earnings quality only when the share of women on the board surpasses twenty percent. Such evidence demonstrates that there is a need for a certain critical mass of females on corporate boards for businesses to achieve better results.
Strydom et al. (2016) also found that a larger number of females sitting on the board of directors contributes to a less volatile stock price. It is possible to assume that companies with a more gender-diverse board can choose business strategies which support the stability of their stock. Khan et al. (2017) conducted a study in Malaysia which involved several businesses and their analysis indicated a positive relationship between corporate boards with women and companies’ profitability, as well as financial performance. The research shows that there is indeed evidence in support of the notion that the presence of females on corporate boards can improve the capacity of an enterprise to generate a larger profit.
Although the factor of economic performance is vital for companies, additional studies were conducted focusing on a variety of other aspects related to the presence of gender diversity on corporate boards. Reddy ad Jadhav (2019) studied Spanish companies and their boards of directors and discovered that an increase in the number of women occupying top-management positions led to significant rise in the overall organizational performance. Based on such evidence, it is possible to suppose that female directors possess different types of skills and knowledge which can assist the governing bodies in making better decisions.
It is also interesting to analyze the impact of gender-diverse boards on the level of innovation within companies, which also constitutes an important element of firm performance. According to Griffin et al. (2020), companies with boards with gender diversity tend to produce more patents and demonstrate better innovative efficiency, as well as have CEOs who are more failure-tolerant. Thus, the women’s presence on boards actually translates into an enhanced ability of companies to innovate and generate new ideas, which are vital for staying competitive. Evidence found in the aforementioned studies lets one conclude that gender diversity in the context of boards does benefit companies’ performance, yet the question of whether it should be enforced still remains.
Approaches to Corporate Gender Diversity and Quotas for Corporate Boards
When attempting to ensure that corporate boards comply with gender diversity, several strategies can be implemented, and gender quotas are the most popular ones. Essentially, gender quotas imply forcing businesses to have a certain number of women on their boards, and such an approach has been found not to produce any negative effects on companies’ value (Greene et al., 2019). Nevertheless, research results from Norway, the country which introduced a 40% quota, indicate that such measures especially implemented unexpectedly, can make boards extremely independent which can undermine their companies’ value (Bøhren & Staubo, 2016).
In other words, the necessity to change board composition to a considerable extent can be a shock for companies. The use of government enforcement to bring change can be considered controversial, therefore some countries introduced other measures to ensure diversity. For example, governments may introduce corporate governance codes which contain recommendations for board composition in terms of gender (Gabaldon, Mensi-Klarbach, Seierstad, 2017). Thus, there can be two possible ways of approaching diversity on corporate boards, namely, regulatory and voluntary.
The current paper contains important information derived from peer-reviewed sources which concerns the topic of corporate boards’ gender diversity. Relying on the data, I believe that more female directors can provide numerous benefits to companies. Essentially, studies indicate that board members who are female can bring positive impact and enhance performance of enterprises. Namely, as noted above, when a certain milestone in terms of females’ number on a board is achieved, companies can ensure fewer stock price fluctuations and show better financial performance. Businesses also become more capable of innovating when having women sitting on the board.
Thus, I fully support an expansion of employment and promotion opportunities for women helping them to achieve the corporate board level. As for mandatory quotas, I am certain an introduction of mandatory quotas is unnecessary and mere recommendations outlined by the government in codes are sufficient. As the Norwegian example demonstrates, a sudden implementation of quotas with high targets can negatively impact companies’ performance. Therefore, enterprises must realize the benefits of having female corporate board members and voluntarily increase their number.
Modern governments and companies are concerned about the gender diversity issues and engagement of females in top-management. Therefore, such issues have to be addressed through various effective efforts on the part both businesses and authorities. Research results indicate that companies with female board members demonstrate better performance in terms of their finance, as well as overall functioning. Businesses which have managed to attain gender diversity on their boards experience less stock price volatility and better profitability. They also tend to produce new patents and innovations more often, which contributes to their competitiveness.
While it is clear that women bring unique expertise, knowledge, and skills to corporate governance, the means of increasing their presence on boards can be different. Diversity quotas are a practice of forcing companies to appoint female employees as directors, which can yield positive results. Yet, as research shows, such measures can also negatively impact the performance of companies and lead to a drop in their value. Thus, to avoid such situations, governments have to introduce voluntary initiatives to promote the growth in the female board members’ numbers.
Bøhren, Ø., & Staubo, S. (2016). Mandatory gender balance and board independence. European Financial Management, 22(1), 3–30. Web.
Gabaldon, P., Mensi-Klarbach, H., & Seierstad, C. (2017). Gender diversity in the boardroom: The multiple approaches beyond quota regulations. In C. Seierstad, P. Gabaldon, & H. Mensi-Klarbach (Eds.), Gender Diversity in the Boardroom (pp. 261–284). London: Springer.
Greene, D., Intintoli, V. J., & Kahle, K. M. (2019). Do board gender quotas affect firm value? Evidence from California Senate Bill No. 826. Journal of Corporate Finance, 60, 1–60. Web.
Griffin, D., Li, K., & Xu, T. (2021). Board gender diversity and corporate innovation: International evidence. Journal of Financial and Quantitative Analysis, 56(1), 123–154. Web.
Khan, H., Hassan, R., & Marimuthu, M. (2017). Diversity on corporate boards and firm performance: An empirical evidence from Malaysia. American Journal of Social Sciences and Humanities, 2(1), 1–8, 2017. Web.
Reddy, S., & Jadhav, A. M. (2019). Gender diversity in boardrooms – A literature review. Cogent Economics & Finance, 7(1), 1–11. Web.
Strydom, M., Hue Hwa Au Yong, Rankin, M. (2016). A few good (wo)men? Gender diversity on Australian boards. Australian Journal of Management, 42(1), 404-427. Web.