Determinants of Gender Diversity in Boardroom - Paper Example

Introduction and Background

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Gender diversity refers to equal representation of both genders in companies and other organizations. Diversity should not just be bringing different people together for the sake of it, rather, it should be about bringing different people together with the aim of providing different thinking and views in the firms decision making. Bringing in different diverse people without taking into consideration their contributions and takes on issues will beat the purpose of diversity. Better decisions are made in diverse boards because people from different backgrounds bring in new information. Also, gender diversity offers the probability of social and economic equality (Halliday, 2016).

This study looks to bring to attention the glaring gender disparities in Australian corporate boardrooms. According to Diversity Council of Australia (2016), in Australia, 46% of all employees are women, yet they hold just 14% of chair positions, 15% of CEO positions and just under 27% of key management personnel positions. DCA further reports that a good number of companies have no women in their top management personnel. During appointments, the selection of board of directors is dependent on tough conservative of boardroom and corresponding male networking. For all the talking about gender equality, these numbers do not reflect very well with Australian firms.

There are many explanations on why women remain underrepresented in top corporations and companies in Australia. Halliday (2016) explains that women are unconsciously biased against in work. Many qualified women are not promoted to senior level management and corporate boards because they are expected to invest majority of their time in parenting, seen as threat to harmony in the boards, too risk aversive and not confident enough.

More expectations on parenting are placed more on women than men in Australia. Women are expected to take care of their families thus they are overlooked in promotions to the top management personnel and corporate roles. Men on the hand are given a leeway; they dont have to spend as much time with their families as women have to, and consequently are advantaged over women in getting to top level management.

Writing about practices to advancing womens leadership development, Hopkins et al. (2008) notes that in junior employees level, more male junior employees are given leadership opportunities than women in similar employment class. This fast tracks mens qualification for senior level roles, in contrast to women who have to work harder to prove themselves. If firms are serious about implementing gender equality, they should apply opportunities and measures of success equally.

Arguments in favour of more women representation in corporate boardrooms emphasize on the ethical and economic benefits they would bring to a firm. Ethically, it is wrong to exclude an individual from corporate boards based on their gender, and under-representation of any gender would reflect badly on a firm (Sidro and Sobral, 2014).

Gender diversification brings economic benefits to a company since big female representation on corporate boards improves board monitoring (Carter et al., 2003). Women provide skills, information and experiences which are necessary in exercising effective monitoring. Effective board monitoring reduce the amounts of fund misallocated, thereby increasing shareholders value. According to Adams and Ferreira (2009), women put more effort in their monitoring roles, with better attendance records than their male counterparts.

Researchers have also measured corporate governance using board of directors, ownership structure, market mechanisms and the legal system. From the foregoing, corporate governance is presented as multidimensional variable where the board is distinctly a key construct. Berle & Means (1932) sought to explain the role of the board of publicly held companies precipitates conflicts of interest between principals (Board of directors) and agents. The notion that when ownership and control are separated, principals (Board of directors) employ governance mechanisms to reduce agency costs is well documented in literature. (Jensen and Meckling, 1976) claim that the board of directors is put in place to safeguard the interests of principals from agents bent on extracting private benefits from the organization.

Literature Review

The board of directors is one number of a number of internal governance mechanisms that is intended to ensure the interests of the stakeholders and managers are closely aligned, and to discipline or remove ineffective management teams (Kang, Cheng, and Gray, 2007). In order to effectively perform its role, corporate boards of directors need to be diversified to avoid groupthink decision making (Janis, 1972). It is widely argued that diversity in the board room can be used to strengthen overall corporate governance. While diversity relates to a range of innate and assumed characteristics and traits, this paper only seeks to address diversity in so far as it relates to the objective gender of the board member. Due to corporate boards historically being male dominated; the increasing female participation at board level is a topic of intense deliberation.

Although universally recognized norms and principles of international law state that every human being has an equal right to employment regardless of sex and despite significant improvements in education and political participation, representation of women in decision making positions is still a challenge in Australia (Beridze 2016).

There is a significant amount of literature about gender diversity and whether diverse boards perform better than single gender dominated boards. Some of the studies suggest that corporate boards benefit from greater gender diversity, while others have an opposing view. McKinsey and Catalyst show gender diversity give better performances positive effects. Catalyst has shown that Fortune 500 companies with more women on their boards tend to be more profitable. McKinsey showed similar results as well: companies with a higher proportion of women at board of directors usually show a better degree of organization, above-average operating margins and higher valuations. Other studies, which were conducted by Adams and Ferreira (2009) or Rose (2007), have shown that there is no relationship between greater gender diversity and improved profitability.

There are several economic arguments for greater gender diversity. The first is that boardroom diversity can increase the competitive advantage of diversified firms compared to non-diversified ones (Campbell and Minguez-Vera, 2008). This argument is based on empirical works developed by Robinson and Dechant (1997). In addition, markets are becoming more and more diverse and a similarly diversified board can have a better understanding of what customers and suppliers need. As a result, the firm can enjoy benefits from higher market penetration. Furthermore, based on their personal experience female directors may suggest new ways of introducing products to the market. Having women on their boardrooms can be especially critical for firms which operate in markets with high concentration of female buyers (Daily, Certo, and Dalton, 1999).

A study by Campbell and Minguez-Vera (2008) revealed that companies with higher women representation in their board of directors record better financial performance than companies with the least female representation. On return on equity (ROE), companies with higher gender diversity outperformed those with less by 53 percent. Companies with low female representation on their board of directors were outperformed by 42 percent by companies with high gender diversity. Return on invested capital shows the same picture, with the companies where women had more say on the corporate board outperforming their counterparts by 66 percent (Campbell and Minguez-Vera, 2008). Better financial performance couple with better governance, fewer related party concerns and better remuneration structures makes attaining gender diversity a priority for many firms in Australia.

The second argument is that diversity increases creativity and innovation in the company. Like attitudes, beliefs and other characteristics are not randomly distributed in the population, but they tend to vary systematically by demographic variables such as gender, age or race (Robinson and Dechant, 1997). The third argument is effective decision making. Different ranges of experience and opinions can lead to better corporate governance (Fondas and Sassalos, 2000) and female directors are one of the sources who bring a different voice into the debates and decision making of the board (Zelechowski and Bilimoria, 2004).

Board meetings serve an important monitoring function (Vafeas, 1999). Carter (2003) finds evidence that firms that have more women on the board tend to have more board meetings in a year. Moreover, Singh (2008), who examined gendered boardroom culture in engineering, high technology and scientific organizations, reports that diversity leads to more effective and less macho working environment. He adds that uniform groups like all male or all female groups dont understand what they are missing and have a narrower view, and more likely to groupthink. The number of women on the board can make a difference. Konrad et al. (2006) reports, based on interviews with several CEOs and directors from Fortune 1000 companies, that when there are 3 or more female representatives on the board women are no longer considered outsiders and they influence the content and process of board discussions extensively. Tarr-Whelan (2009) makes a strong case for increasing the numbers of women in senior executive and key decision-making roles in organizations. The key point is using the talents of half the population that previously have been ignored. She suggests that having 30 percent of these leadership positions filled by qualified women represent a tipping point that puts the influence on business issues and off gender. Konrad, Kramer and Erkut (2008) also suggest that having three or more women on a corporate board of directors serves as a similar critical mass or tipping point

Companies with more women representation on their corporate boards achieved higher revenue growth, profitability and shareholder returns than those without. Research conducted by Catalyst show that companies with more women generally demonstrate higher returns on assets, higher return on sales and higher return on invested capital. These companies also exhibit lower risk of insolvency and higher dividend payouts.

Kanter (1977) says that when other, more objective, mechanisms of control are not easily available, trust is a more important mechanism of team governance. As a result, she argues that when uncertainty is high, firms rely more on the homogeneity of the managerial team than on formal governance mechanisms as a means of providing incentives. Kanters insight is that when uncertainty is high, open pay performance pacts are too costly; therefore group homogeneity is more valuable. In the context of boards, which are traditionally composed primarily of men, high uncertainty will lead the board to elect a higher proportion of male directors than female directors.

There are other studies that found high gender diversity may not be the guarantee for a firm to perform better and function effectively. A different perspective coming from more diverse boards does not necessarily mean more effective monitoring because there is simply a risk that board members may be marginalized (Carter et al., 2003). Highly...