The Characteristics of Gender Diversity in the Boardroom - Free Essay Example

Literature Review The characteristics of gender diversity in the boardroom and their impact on firm performance post Lord Davies Report (2011-2014) 1.INTRODUCTION 2.THE LITERARURE REVIEW 2.1Agency theory perspectives on Gender diversity 2.2Resource Dependence theory perspectives on Gender diversity 2.3Behaviouraltheory perspectives on Gender diversity 2.4Evidence of empiricism on Gender diversity research 1. INTRODUCTION This proposed research will investigate the relationship between the corporate performance and gender diversity in a sample of 30 FTSE 100 companies for the period post Lord Davies Report (2011-2014). It will also explore the perspectives, which women bring to the board and it will focus on the following research question: RQ: An examination of the characteristics of gender diversity in the boardroom and their impact on firm performance? Sub-questions: To determine the gender diversity on the board of 30 FTSE 100. Impact of gender diversity on internal measures of firm performance. Impact of gender diversity on external measures of firm performance. Does UK need mandatory quotas on the female board representation? 2. THE LITERARURE REVIEW The overall structure of the literature review, takes the form of 2 Sections, including Introduction and Conclusion. A considerable amount of literature has been published on theoretical foundation of the proposed research. These theories have been dominated by Agency theory, Resource Dependency theory and Behavioural theory. 2.1 Agency theory perspectives on Gender diversity Carter at el (2003) have reported that there is relationship between board diversity and firm value in the context of agency theory, as outlined by (Fama, Jensen, Michael University of Chicago,Center for Research in Security Prices, 1982). Agency theory is based on the antagonism between the Agent (the board) and the Principal (shareholders) when their interests do to not coincide (Berne Means, 1932; and Jensen Meckling, 1976). Conflict between the Agent and the Principal more likely to happen when the company does not perform as well as it could. Carter at el (2003) suggest the gender diversity enhances the boardà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to monitor top management and motivate them to increase companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s value. In addition to this, Carter at el (2003) indicate that women more likely to ask the difficult questions in the boardroom than men, which could improve the boardà ¢Ã¢â€š ¬Ã¢â€ž ¢s independence (Campbell and Miguez-Vera, 2008). The agency theory views b oard of directors as an internal control mechanism for safeguarding shareholder interests from managerial opportunism (Hillman Dalziel, 2003). 2.2 Resource Dependence theory perspectives on Gender diversity The Resource Dependence theory (RDT) emphasizes the differences in board composition that may impact upon companiesà ¢Ã¢â€š ¬Ã¢â€ž ¢ performance. The RDT maintains that the board is an essential link between the firm and the external resources that a firm needs to maximise its performance (Pfeffer Salancik, 1978). Boards of directors are a primary linkage mechanism for connecting a firm with sources of external dependency. By selecting a director with valuable skills, influence, or connections to external sources of dependency, the company can reduce dependency and gain valuable resources (Hillman Dalziel, 2003). RDT does not primarily focus on the gender diversity however it indicates that the board should be diverse and directorsà ¢Ã¢â€š ¬Ã¢â€ž ¢ occupational and functional experiences match the needs of companies (Corporate linkages and organizational environment: a test of the resource dependence model. 1990).There is an attempt to integrate agency and RTD theory and sho w that presence of women on board improves companiesà ¢Ã¢â€š ¬Ã¢â€ž ¢ performance (Hillman at el, 2007). 2.3 Behaviouraltheory perspectives on Gender diversity BasedonBehaviouraltheory,adiversifiedboardhasmore comprehensive formation available to it and is quicker at decision making (Cyert at el, 1963). Amason (1996) finds that heterogeneous groups have better quality decision making than homogenous groups because of the breadth of information availability is higher with a heterogeneous group than a homogenous group. Miller et al. (2009) suggest that this relationship operates through two mediators: firm reputation and innovation. In the above context, Behavioural theory has been further extended by developing a Behavioral theory explanation of boards and corporate governance (Van Ees at el, 2009). 2.4 Evidence of empiricism on Gender diversity research Although the literature review will cover diversity management, it will focus on the link between diversity and performance of listed companies in UK. The literature review groups under two themes first one will examine impact of the gender diversity on the external measures of corporate performance and second one will look into internal measures. Cox Blake (1991) study suggested that managing diversity can create a competitive advantage. Their ideas were further explored by Robinson Dechant (1997), who listed various reasons including business growth and effective problem-solving. Based on Milliken and Martinsà ¢Ã¢â€š ¬Ã¢â€ž ¢s (1996) model on the à ¢Ã¢â€š ¬Ã‹Å"Effects of Diversity in Organizational Groupsà ¢Ã¢â€š ¬Ã¢â€ž ¢, it can be argued that gender diversity impacts organizational processes and, in particular, outcomes such as turnover and performance. Compared to the diversity of other demographic attributes, gender diversity appears to be the most widely addres sed in the literature. Erhardt et al (2003) indicates that gender diversity in the board diversity is positively associated with these financial indicators of firm performance such as return on equity and return on assets. Carter at el (2003), who examined the board diversity overall, has found a positive link between the presence of women or minorities and the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s value. Accordingly to Carter at el (2003), gender diversity has a positive impact on financial performance through the audit function. Women in the boardroom have been a hot topic in the UK media discussions in the past decade as well as governmental initiatives on the corporate governance reforms. Higgs report commissioned by DTI (Higgs Report, 2003) identified that diversity could increase the board effectiveness. This report shows a strong link between good corporate governance and gender diversity in the boardroom. The Higgs report followed by the Tyson report (Tyson report, 2003), which suggest ed looking into the wider pool of suitable candidates to the boardroom to promote diversity equal opportunities for diverse candidates. Catalyst study (2004-2008) presented the business case for attracting more women to the boardroom. Catalyst used the data of female board representation from 353 of Fortune 500 companies and three measures of financial return on sales (ROS), return on invested capital (ROIC), and return on equity (ROE) and established a positive link between gender diversity and financial performance. Claude Francoeurà ¢Ã¢â€š ¬Ã¢â€ž ¢s research (2007) further examines how the presence of women in the boardroom enhances firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s performance by taking Catalyst findings and information and adding into consideration the complexity of the firm and risk facing the company. He supports the positive effects of female board members and à ¢Ã¢â€š ¬Ã‹Å"à ¢Ã¢â€š ¬Ã¢â€ž ¢indicates that firms operating in complex environments that have a high proportion of wom en officers do experiment positive and significant monthly abnormal returns of 0.17%, which can intuitively be extrapolated to a 6% return over 3 years.à ¢Ã¢â€š ¬Ã¢â€ž ¢Ãƒ ¢Ã¢â€š ¬Ã¢â€ž ¢ Campbell and Minguez-Vera (2008) has looked into the impact of gender diversity on both: external and internal measures. They continue to explore previous researchersà ¢Ã¢â€š ¬Ã¢â€ž ¢ interest of the impact on the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s value and used Tobin Q to measure Firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s value (Tobins Q = Total Market Value of Firm / Total Asset Value of Firm), However a negative relationship between board gender diversity and ROA has been shown. They also have identified the following internal measures affected: the monitoring role of the board of directors, board increased creativity and innovation Krishnan Parsons (2008) study addresses the impact of the gender diversity on the external measures of firm performance such accounting earning quality. They have found a positive relat ion between gender diversity and an accounting earning quality. Adams Ferreira (2009) indicate that a gender diverse board able to monitor the firm performance better because female board members attend the board meeting more regularly. However they also point out that there is a negative effect of the gender diversity such as fewer takeover defences and variability of the stock return. Accordingly to Nielsen and Huse (2010), female board members have different professional experience and values. That is why women can bring a positive influence to decision-making and effectiveness of the board processes. If the board is a well-diversified one then it will enhance the firm performance by having more effective decision-making process and creating a positive corporate image of equality and inclusion (Rhode Packel 2010). Further study in this field indicated that increased levels of diversity could be harmful to company performance (Carter et al., 2010). UK government is looking into improving the gender balance in the boardroom by encouraging major companies to appoint women into the top jobs. Corporate Governance Code (2010) states that à ¢Ã¢â€š ¬Ã…“the search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including genderà ¢Ã¢â€š ¬Ã‚ . Further UK governmental support to the à ¢Ã¢â€š ¬Ã¢â€ž ¢business caseà ¢Ã¢â€š ¬Ã¢â€ž ¢ for Gender Diversity was established by Lord Davies of Abersochà ¢Ã¢â€š ¬Ã¢â€ž ¢s review in February 2011, which called for a target of 25 per cent of each FTSE 100 Board to be female by 2015 (Davies,2011). On 26 March 2014, two important reports were published on gender diversity à ¢Ã¢â€š ¬Ã¢â‚¬Å" the Davies Review Third Annual Report and Cranfieldà ¢Ã¢â€š ¬Ã¢â€ž ¢s Female FTSE Board Report 2014. Both contain data on the number of women on large company boards. The statistics given are as at 3 March 2014 an d show that women accounted for 20.7% of all FTSE 100 directorships (Davies et al, 2014 and Vinnicombe et al, 2014). 3.0 Conclusion It is evident that in the examined above empirical works, authors agree that Gender Diversity on Boards are important. At the same time, it is clear also that there is not conclusive evidence, which will show the Impact of Gender Diversity on Firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s Performance as well as its impact on external and measures because researchers use different approaches and different samples. One criticism of much of the literature on Gender Diversity is that researchersà ¢Ã¢â€š ¬Ã¢â€ž ¢ views differ on the subject of how the board can become a gender diverse one for example by attracting one woman or more or whether the board should have an equal representation of both genders. 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