Some surprising bad news about women on boards

Study finds businesses that put woman on the board suffer decline in market value

It might be sensible for companies to showcase the expertise of a new female board member rather than her gender

Not that long ago the FT held a business conference in a swish hotel in London where a man on the stage asked the mostly female audience to do something I was not expecting.

Raise your hand if you support quotas for women on boards, he said, and in a flash most did. Ten or even two years ago I doubt so many hands would have shot up so quickly in a room like that, full of women from the City of London.

Laws forcing companies to put women on the board were something you saw in places such as Norway or California. The idea of being a quota appointment made a lot of women uneasy, including me. But change at the top has been sluggish.

The share of women on the UK’s top 350 company boards might have hit 30 per cent this year, but as of last month just 4 per cent of chief executives and 7 per cent of chairs were female. The numbers are similar in many other countries. No wonder women are growing impatient, especially when so many diversity advocates argue there is a sound business case for more female leaders.


As Christine Lagarde, the head of the European Central Bank, said in the wake of the 2008 global financial crisis, "if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today".

Yet a new study from two academics at the Insead business school suggests things are not so simple. When Isabelle Solal and Kaisa Snellman looked at 14 years' worth of data from more than 1,600 US public companies, they made a disturbing discovery: businesses that put a woman on the board then suffered a two-year decline in their market value.

Worse, the penalty was greater for companies that had splashed out on measures to boost diversity, such as better work-life balance policies. Their market value fell by nearly 6 per cent after a woman joined the board.


“It’s surprising and discouraging,” Snellman told me last week, adding she personally believed promoting diversity was the right thing to do. “We should not deny opportunities for equally-qualified people based on their gender.”

So what explained the negative market reaction in her study? It seemed unlikely that investors thought one new female director could perform so poorly that the company’s bottom line would suffer.

Perhaps it was the so-called glass cliff theory that says women become leaders when a company, or government, is in trouble. But in that case there should have been a drop in profitability after women joined the board and the data did not show that.

Rather it showed companies’ profitability were unaffected by the extra women, a finding that echoes many other studies that have found scant or zero evidence linking board diversity to financial performance. Top performing companies may have female directors, but that does not mean women caused the performance.

Board diversity

The researchers had a hunch that investors think boosting board diversity is a sign that a company is more interested in social goals than maximising shareholder value. To test the idea they did an experiment on nearly 200 students and alumni from an international business school.

Each was given a press release from a fictional company announcing a new board member. The releases were identical, except some said the new director was Jack Smith and others Marilyn Clark, both of whom had the same biographies. The participants rated the competence of each director equally, but alarmingly, they also thought the company appointing Marilyn cared less about maximising shareholder value compared with the one that appointed Jack. In other words there is a big perception problem.

What does this mean in the real world? Snellman thinks it might be sensible for companies to showcase the expertise of a new female board member rather than her gender.

Of course that is easier said than done when such women are still so scarce that their appointments inevitably attract headlines. Ultimately it boils down to numbers. One day there may be so many female directors that nobody notices a new one. Until then it is best to have a clear idea of what diversity really does and does not achieve, even when that understanding makes for uncomfortable reading. ]

– Copyright The Financial Times Limited 2019