Gender Diversity in the Boardroom and Firm Financial Performance
Kevin Campbell Antonio Mı´nguez-Vera
ABSTRACT.The monitoring role performed by the board of directors is an important corporate governance control mechanism,especially in countries where external mechanisms are less well developed.The gender com-position of the board can affect the quality of this mon-itoring role and thus the financial performance of the firm.This is part of the‘‘business case’’for female par-ticipation on boards,though arguments may also be framed in terms of ethical considerations.While the issue of board gender diversity has attracted growing research interest in recent years,most empirical results are based on U.S.data.This article adds to a growing number of non-U.S.studies by investigating the link between the gender diversity of the board and firm financial performance in Spain,a country which historically has had minimal fe-male participation in the workforce,but which has now introduced legislation to improve equality of opportuni-ties.We investigate the topic using panel data analysis and find that gender diversity–as measured by the percentage of women on the board and by the Blau and Shannon indices–has a positive effect on firm value and that the opposite causal relationship is not significant.Our study suggests that investors in Spain do not penalise firms which increase their female board membership and that greater gender diversity may generate economic gains. KEY WORDS:boar
d of directors,corporate gover-nance,endogeneity,firm value,women Introduction
The effectiveness of the board of directors as monitors depends upon various factors,among them the qualifications and experience of board members,their possible involvement in multiple directorships,their level of share ownership and the type of remuneration scheme employed.This monitoring role has at-tracted increased attention in recent years as a result of the high-profile failures of companies such as Enron and WorldCom and subsequent corporate governance reforms.An emerging strand of research, based largely on U.S.data,has investigated whether the gender of board members also plays a role in board effectiveness.The presence of women on company boards may enhance shareholder value if women bring an additional perspective to board decision-making;alternatively,women may have a negative impact if the decision to appoint female board members is motivated by societal pressure for greater equality of the sexes.In the U.S.,female boardroom appointments have increased in recent years,in contrast to the situation observed in many other countries.
The objective of this article is to examine the impact onfirm performance of the presence of women on the board of directors.We study the relationship betweenfirm value and four measures of the extent of female board membership:a dummy measure indicating the existence of one or more femal
e directors,the percentage of female directors and two indices of gender diversity(the Blau index and the Shannon index).We measurefirm value using an approximation of Tobin’s Q.
This work makes a number of contributions to the literature.First,it adds to the scarce empirical evidence on the topic.Most articles that examine the effect of board gender onfirm value use data from Anglo-Saxon countries with legal systems based on common law.This article provides evidence from Spain,which has a civil law system,also common in most other European countries.Second,an increased role for women on company boards has been the subject of intense political debate in Spain and is now positively advocated for ethical reasons,to redress what is perceived to be an under-representation of women in business,and in society more generally;in this context it is interesting to
Journal of Business Ethics(2008)83:435–451ÓSpringer2007 DOI10.1007/s10551-007-9630-y
ascertain whether such a policy passes the‘‘market test’’–that is,whether thefinancial markets encourage or punish gender diversity,and thus whether there is also a‘‘business case’’for greater female participation in the boardroom.
Third,our analysis makes use of panel data methodology,which is more powerful in controlling for un
observable heterogeneity,a factor which is ignored by the majority of published studies.Fourth, unlike most existing studies,we also take account of the possible endogeneity of the relationship between gender diversity andfirm performance.We employ a causality test to assess whether female board membership really affectsfirm performance or whether,in fact,better performingfirms are simply more likely to hire women.Wefind that the posi-tive relationship observed between gender diversity andfirm value is due to the presence of female directors affectingfirm performance rather than the opposite.Finally,this is thefirst study to examine the effect of board gender onfirm performance in the Spanish market.
Our results show that the presence of one or more women on the board has an insignificant effect on firm value,as measured by our proxy for Tobin’s Q. However,wefind that the ratio of women to men on the board and diversity indices have a positive influence onfirm value.We alsofind thatfirm value does not affect the ratio of women to men on the board and diversity indices.The direction of cau-sality is thus from board gender tofirm performance and not the other way round.
The remainder of the article is organised as fol-lows.The following explains why the issue of gen-der diversity is particularly worthy of study in the context of corporate governance,and its significance in the Spanish context,while section‘‘Gender diversity in the boardroom andfirm value’’reviews the litera
ture on the corporate impact of board gender diversity.Section‘‘Data and variables’’de-scribes the data selection process and the character-istics of the sample,while Methodology,Results and Conclusions are explained in the following sections. Gender diversity in the boardroom and corporate governance
The term corporate governance refers to‘‘the system by which companies are directed and controlled’’(Cadbury Report,1992).It comprises a series of mechanisms through which the interests of man-agement,the board of directors,controlling share-holders,minority shareholders and other stakeholders may be aligned.The board of directors is an important governance mechanism,although the nature of the alignment between different interest groups is also partly determined by the legal environment.In a series of articles,La Porta et al. (1997,1998,2002)conclude that countries whose legal rules originate in the‘‘common law’’tradition –found in the Anglo-Saxon countries–tend to protect investors more than those countries whose laws originate in the‘‘civil law’’system.governance
Table I illustrates the differences in share owner-ship between selected civil law countries,Japan,and the two main Anglo-Saxon countries,the U.S.and the U.K.It is evident that the U.S.and the U.K have
TABLE I
Comparative ownership structure by country
Country Individual share ownership(%)Institutional ownership(%) France36.5a8.0b Germany36.8a30.3b
Japan25.1a35.8b
Spain47.2c  6.2c
U.K.24.5a50.1b
U.S.20.5a44.5b
a Source:La Porta et al.(2002)for years1995,1996and1997.
b Source:Gerke et al.(2003)for1995.
c Source:Authors’research for years1995to2000.
436Kevin Campbell and Antonio Mı´nguez-Vera
the lowest levels of individual share ownership and the highest levels of institutional share ownership.Of the civil law countries in Table I,Spain has the highest level of share ownership by individuals, reflecting the importance of family ownership,and the lowest level of institutional share ownership. Family businesses are a significant feature of the Spanish economy.Citing Soria(2002),Jaskiewicz et al.(2005)note that family businesses contribute about60–65%to GDP,represent more than 1.5millionfirms and generate over80%of private employment.Cabrera-Sua´rez and Santana-Martı´n (2004)report that more than two-thirds of board members in their sample of112large Spanishfirms are family members,while Bocatto(2006)provides evidence that most family-ownedfirms in Spain have a strong desire for continuity and achieve this goal by nominating family members to top senior positions. Share ownership in Spain is also more concen-trated than in the U.S.and the U.K.According to La Porta et al.(1998),the three largest shareholders in Spain held51%of the total shares,while in the U.S. and the U.K.this proportion was20%and19%, respectively.Most Spanish companies are organised as pyramidal groups,with a holding company at the apex controlling one or more subsidiaries(Ballesta and Garcia-Meca,2005).Consequently,indirect ownership through pyramids gives controlling shareholders,typically wealthy families,control rights that exceed their direct ownership. Although Spain,unlike other European civil law countries,has a single-tier board of directors,there is a significant difference in the balance between executive directo
rs and independent non-executive directors.In their latest European survey,Heidrick and Struggles(2007)report that the proportion of independent non-executive directors on the boards of Spanish-listed companies is40%,compared to a European average of54%and a U.K.figure of91%. Spain also has the highest proportion of so-called ‘‘reference shareholders’’(shareholder representa-tives)on the board of directors in Europe(41%) reflecting the importance of controlling sharehold-ers.Spanish corporate governance thus has different characteristics to that typically investigated in Anglo-Saxon countries.
The board of directors functions as an internal governance mechanism via its appointment,super-vision and remuneration of senior managers,as well as its collective determination of overall corporate strategy.A large number of studies have investigated the influence of board composition on the value of thefirm.These have examined,among others,the percentage of insiders on the board(Agrawal and Knoeber,1996),the tenure of directors and man-agers(Hermalin and Weisbach,1991),the share ownership of board members(Weisbach,1988)and the size of the board of directors(Kini et al.,1995). More recently,researchers have begun to investigate the influence of board diversity,which may be defined as the variety inherent in the board’s com-position.This variety can be measured on a number of dimensions:gender,age,ethnicity,nationality, educational background,industrial experience and organisational membership,among others.
In this study we focus on gender,which is argu-ably the most debated diversity issue,not only in terms of Board diversity,but also in terms of female participation in economic activity and in society in general.We do not consider the ethnic dimension of Board diversity as it is not an important issue in Spain.While Spain has three peripheral ethnic groups in addition to its Castilian ethnic core–Catalans,Galicians and Basques–White people constitute around98%of the Spanish population (Aja et al.,2000).This situation contrasts with the racial diversity of the United States where,according to the Cervantes Institute(1999),White people constituted71.8%of the population in the year 2000,compared to Blacks(12.2%),Hispanics (11.4%),Asians(3.9%)and others(0.7%).
During the1980s and1990s female participation in labour markets worldwide grew substantially, although this was not always matched by improve-ments in job quality(ILO,2007).In most European countries,the labour force participation rate of women is lower than that of men(Curdova´,2005). Spain is no exception.In comparison to other OECD countries,the proportion of women in the Spanish workforce is low.In2005,46.4%of Spanish women participated in the workforce compared to an OECD average of50.3%,giving Spain a ranking of24out of30OECD countries(OECD,2006a). Unemployment is also higher for women in Spain than for their male counterparts and higher than the OECD average among women(OECD,2006b). However,the unemployment gender gap in Spain is smallest for those women attaining advanced tertiary
Gender Diversity in the Boardroom and Firm Financial Performance437
qualifications.Spanish women achieving this level of education had an unemployment rate of8.8%in 2005(OECD average4.3%)compared to5.3%of males(OECD average3.5%).
Attracting more women to serve on company boards requires that they have the educational opportunities and skills necessary to compete with male counterparts.In the U.S.,there is no gender gap in tertiary education:women earned more than one-half of all bachelor’s and master’s degrees(57.3% and58.5%)and nearly one-half of all doctorates and law degrees(44.9%and47.3%)awarded in2002 (Catalyst,2004).This perhaps explains why the number of women board directors serving on U.S. boards has increased over the past10years or so. Catalyst–a research and advisory services organi-sation working to expand opportunities for women at work–has monitored the progress of women in U.S.board positions since1995.In its2005Census of Women Board Directors of the Fortune500,it reported that women held14.7%of all Fortune500Board seats,up from13.6%in2003and9.6%in1995 (Catalyst,2006).The rate of growth over this ten-year period was,on average,one-half of one per-centage point per year–a rate characterised by Catalyst as‘‘sluggish’’.The2006Census revealed a ‘‘stagnant’’situation,with women holding14.6%of
all Fortune500board seats,a decline of0.1%com-pared to the previous year(Catalyst,2007).Based on interviews with CEOs,female directors and com-pany secretaries at Fortune1000companies,Konrad and Kramer(2006)contend that women tend to have a greater impact on board decision-making if Boards possess three or more female members. However,in2006only84of the Fortune500 companies had achieved this critical mass of women on their boards,although this represented a slight increase from76in2005(Catalyst,2007).
In Europe,the average number of women in European boardrooms has increased in recent years, from5.0%in2001to8.4%in2007(Heidrick and Struggles,2007)as shown in Table II.However,this is still a low level of representation in comparison to the U.S.and hides a wide degree of variation across countries.Sweden had the highest number of female directors(21.0%)while Portugal has the lowest number(0.7%).Spanish boards had an average of only3.1%female directors.
This study focuses on the relationship between gender diversity andfirmfinancial performance in Spain,where the issue of gender equality has risen up the political agenda in recent years.Women have traditionally been poorly represented in the Spanish workforce,reflecting deep-rooted societal attitudes towards the role of women.While the womens’rights movement made major advances in Europe and the U.S.in the1960s,this was not true for Spain,then ruled by a conservative military dict
a-torship.When General Franco died in1975,after almost four decades in power,it was illegal for women to work,own property,open a bank ac-count or even travel without their husband’s per-mission(Catan,2006).The gender ideology of the dictatorship was summarised in Article47of the Spanish Civil Code,which stated that‘‘husbands must protect their wives and wives must obey their husbands’’(Carrera et al.,2001).
Franco’s death led to growing female emanci-pation,known in Spain as the‘‘destape’’–literally
TABLE II
Women in the boardroom by
country Source:Heidrick and Struggles(2007).
438Kevin Campbell and Antonio Mı´nguez-Vera
‘‘taking the lid off’’.For thefirst time,women began to leave the home and entered the workforce in large numbers.The womens’rights agenda received a boost in2004when a new Socialist Prime Minister Jose´Luis Rodrı´guez Zapatero promised to make gender equality one of his Government’s top priorities.He appointed women to half of the positions in his16-member Cabinet and unveiled a succession of initiatives to change ‘‘machista’’behaviour.Women constituted about 48%of the workforce in2006,up from28%in 1980,and the majority of graduates from Spanish universities are now female(Catan,2006).Despite catching up with the U.S.in terms of the propor-tion of female graduates,women are rarely repre-sented at senior levels in the business world.To address this situation,and also to provide more opportunities for Spanish women to achieve elected office,the Spanish Parliament approved a new,so-called‘‘Law of Equality’’in March2007.The law specifies that40%of candidatesfiled on party ballots must be female and it encourages greater employ-ment of women by giving companies with higher ratios of female to male employees preferential treatment when bidding for government contracts, among other measures(Wools,2007).
The drive to promote women as members of the board of directors also features in Spain’s code of corporate governance.Like companies listed on most European stock markets,Spanish-listed com-panies are required to report the extent to which they‘‘comply or explain’’with good corporate governance practice.Best practice is embodied in Spain’s Unified Good Governance Code,approved in May2006by the Spanish Securities&Exchange Commission,the Comisio´n Nacional del Mercado de Valores(CNMV).This unified code merged and updated previous Spanish guidelines on corporate governance–the1998Olivencia Report and the 2003Aldama Report–as well as incorporating recommendations made by the European Commis-sion and the OECD.It was used for thefirst time by Spanish companies publishing their2007Annual Governance Reports.
A unique aspect of Spain’s2006Unified Good Governance Code is that it recommends positive dis-crimination in favour of female boardroom appoint-ments for thosefirms with low-or zero-female representation.Principle15of the code states that:
When women directors are few or non existent,the Board should state the reasons for this situation and the initiatives taken to correct it;in particular,the Nom-ination Committee should take steps to ensure that:
(a)The process offilling board vacancies has no hidden
bias against women candidates;
(b)The company makes a conscious effort to include
women with the target profile among the candidates for board places.
In its justification for this new requirement,the CNMV argues that a good gender balance on boards of directors is not only a matter of ethics or social justice,but is also‘‘an efficiency objective’’and represents‘‘economically rational conduct’’,thus appealing to the business case for female boardroom appointments(CVMV,2006).
Gender diversity in the boardroom
and firm value
Arguments for greater female boardroom represen-tation can be split into two categories:ethical and economic.The former argues that it is immoral for women to be excluded from corporate boards on the grounds of gender and thatfirms should increase gender diversity to achieve a more equitable out-come for society.Accordingly,these arguments suggest thatfirms should regard greater female rep-resentation not as a means to an end but as a desir-able end in itself(Brammer et al.,2007).Econ
omic arguments,on the other hand,are based on the proposition thatfirms which fail to select the most able candidates for the board of directors damage theirfinancial performance.We now consider the theory that lies behind this‘‘business case’’for greater gender diversity on the board.
It can be argued that greater board diversity in-creases afirm’s competitive advantage relative to firms with less diversity.The arguments that lie behind this are based largely on intuitive reasoning and are articulated by Robinson and Dechant (1997).While they focus on workplace diversity in general and consider diversity in terms of age and race as well as gender,we consider their arguments as they apply to the gender diversity of the board. First,it is argued that greater diversity promotes a better understanding of the marketplace by matching
Gender Diversity in the Boardroom and Firm Financial Performance439

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