What effect, if any, does female representation have on board performance? Previous research says none. Our research says otherwise.

Growing concern about gender equality has led to increased regulations concerning female representation in corporate settings worldwide, including gender quotas on corporate boards. In the United States and the European Union the number of women in large firms has increased dramatically, but women still lack representation in the boardroom. Proponents of board gender diversity claim that female directors are good for firm governance and performance. But some recent studies suggest that gender diversity has no effect on corporate board performance; others even suggest the effect is negative. Taking a more careful look at the data, we come to a different conclusion.

Existing research is based on cases where female representation is binary -- that is, on or off.  Results from such studies are misleading if the women involved don’t actually have decision-making influence. The literature ignores an important distinction between representation and integration: are these women actually in a position to affect firm productivity? Or is their presence merely an attempt to relieve social and political pressure regarding token representation?

Boards do most of their governing through committees, so female representation on committees is a more effective measure of board gender diversity and will have more direct effect on firm performance.  Because female board integration is highest in European countries, we study EU sample firms to examine the impact of female directors in positions of governance.  

Ultimately, our research demonstrates modest but economically meaningful effects of female board representation on firm performance. These effects are markedly larger for committee membership. Together, this provides evidence that greater female representation, especially when actively involved in the governance mechanism, increases firm profitability. Our results are important because they provide an economic basis for increased gender diversity on corporate boards. They also provide the key to unlocking the full benefits of gender representation: integration.

We also adopt a new identification strategy that provides a fascinating contribution to the current literature. Other studies suggest that a parent’s preferences are influenced by the gender of their children. With this in mind, we introduce an innovative source of exogenous variation: does the CEO have a daughter? We demonstrate that the daughter-effect has a measurable impact on board gender diversity.

For futher reading, you can find our paper online here.