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Does board diversity really matter to shareholders?

La diversité du conseil d’administration importe-t-elle réellement aux actionnaires ?
Magnus BLOMKVIST et Etienne REDOR
Cet article est une traduction de :
La diversité du conseil d’administration importe-t-elle réellement aux actionnaires ? [fr]

Résumés

La diversité du conseil d’administration importe-t-elle réellement aux actionnaires ? Pour répondre à cette question, nous avons écarté l’approche traditionnelle reposant sur l’analyse du lien entre diversité du conseil d’administration et valeur d’entreprise afin de nous concentrer sur les résultats des élections annuelles des administrateurs par les actionnaires. A l’aide d’un échantillon de données collecté manuellement, nous concluons que la diversité importe aux actionnaires. Nous montrons que le soutien des actionnaires envers les administrateurs issus de la diversité s’explique principalement par les votes pour les administrateurs issus des minorités, ce qui constitue une nouveauté dans la littérature. Notamment, nous montrons que le vote en faveur des administratrices non caucasiennes peut pleinement expliquer le soutien des actionnaires pour les administratrices. Notre étude a des implications sur la sélection des administrateurs et montre que la diversité du conseil d’administration est précieuse pour les actionnaires.

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Notes de l’auteur

This article is published as part of the Special Issue of CIG 2022 - International Governance Conference, University Toulouse 1 Capitole, France, May 2022. This special issue is the object of a partnership with the AAIG - International Academic Governance Association, and will be published in the issues of FCS as they are accepted.

Texte intégral

1. Introduction

1A recent report by the Deloitte Alliance for Board Diversity (2022) highlighted that women alone held 26.5% and ethnic minority directors 17.5% of board seats at Fortune 500 firms in 2021. Despite increased pressure from institutional owners (Van der Walt et al., 2006), female and minority representation on corporate boards remains low (Field et al., 2020).1 However, regulators have started to change the legal landscape by adopting gender quotas (e.g. California in 2018, and a proposal has been made in Hawaii in 2023). To study shareholders’ views on board diversity, we analyse the voting outcomes for diverse directors (women and minorities) at annual general meetings (AGMs). As a secondary objective, we examine the shareholder support given to directors of different gender and ethnicity and the intersection between these characteristics.

2 The mechanisms through which diverse directors are valuable to shareholders stems from a director’s dual role within a firm to (1) monitor and assess the management team’s performance, including that of the CEO, and (2) advise the management team regarding the business’s strategic objectives and to develop relationships with outside organisations and individuals. Therefore, since organisations operate in an increasingly multinational and multicultural context, it is crucial that board members possess a variety of skills, experiences and backgrounds that are relevant to emerging dimensions of their businesses (Daily et al., 1999; Stiles, 2001). Consequently, the main hypothesis we pursue is that diverse directors are more valuable to shareholders, which results in greater shareholder support. Tests of our main hypothesis are not novel in the literature, with Field et al. (2020) exploring the link between board diversity and shareholder support. While prior studies have analysed diversity effects independently (see e.g. Field et al., 2020), we contribute to the literature by showing the heterogenous effects between and within different diversity categories. First, we show that the diversity effect is mainly driven by minority and not female directors. Second, we show that the greater popularity among female directors can be explained by minority female directors alone.

3 Prior studies that analysed if board diversity matters to shareholders used different outcome variables and found contradictory results. Most studies have tested the hypothesis by studying the impact of board diversity on firm value. Carter et al. (2003) found a positive relationship between the presence of female or minority directors on the board and Tobin’s Q, and Erhardt et al. (2003) documented a positive impact on ROI and ROA. Carter et al. (2010) failed to find a significant relationship between board diversity (women or minorities) and Tobin’s Q but a positive relationship with ROA. Some studies have even shown a negative impact of board gender diversity on Tobin’s Q (Adams & Ferreira, 2009; Rose, 2007). Closest to our study is that of Field et al. (2020), whose auxiliary tests found a positive relationship between diverse directors and voting outcomes.

4 To study shareholder support at the director level offers several advantages over traditional firm-level measures such as Tobin’s-Q or ROA. However, it is difficult to identify the direct impact of board diversity on valuation or performance due to the large number of confounding factors. Prior studies have acknowledged this problem by analysing event returns around board appointments (see e.g. Campbell & Minguez-Vera, 2010; Farrell & Hersch, 2005; Kang et al., 2010). However, this method is also problematic, since it is likely to be contaminated by other information disclosed at an AGM or in a proxy statement (Adams et al., 2011). Our research design and outcome variable allow us to overcome several of these problems. First, we use a director-level measure (voting outcome) that captures shareholder support for an individual director. Second, by using this measure, we can compare directors within the same firm and year. By applying firm-year fixed effects, we effectively control for all observable and unobservable firm-level factors that are likely to influence a director’s shareholder support.

5Using a hand-collected sample of 28,084 director elections at S&P 500 firms from 2010 to 2016, we show that board diversity matters to shareholders. Diverse directors receive more votes in elections than their non-diverse counterparts. In the baseline model, this result is valid for both female and minority directors. Furthermore, when jointly studying the gender and ethnicity effects, we find that the diversity effect is mainly driven by minority directors. By studying the intersection between gender and diversity, we also report that the gender diversity findings are mainly driven by non-Caucasian females. Next, we analyse the importance of having a critical mass of diverse directors. While shareholders value the presence of minority directors as soon as the first such director is seated, women must occupy three seats before they are viewed as valuable. Even though our research design allows us to control for all firm-specific unobservable characteristics, we cannot fully exclude the presence of endogeneity at the director level. To account for endogenous director selection, we conduct entropy balancing to create a synthetic control group of non-diverse directors. The outcome of our regressions following the matching procedure does not alter our interpretation—especially of minority directors gaining greater shareholder support.

6Our study contributes to two strands of literature. First, it adds to the understanding of board diversity and, more specifically, to how board diversity can be valuable to shareholders. Showing that diverse directors gain greater shareholder support is not new to the literature, and Field et al. (2020) found similar results. However, they used firm, year and committee fixed effects; hence, they did not effectively control for all firm-year-specific variation. Hence, our findings better account for possible endogeneity problems at the firm level. Furthermore, new to the literature, we show that the diversity effect is mainly driven by ethnicity and the gender effect by minority female directors.

7Second, our study offers insight into which director characteristics have an impact on director election results. Surprisingly, relatively few studies have investigated whether director characteristics influence shareholder votes during director elections. Cai et al. (2009), Ertimur et al. (2018) and Hillman et al. (2011) documented that director attendance (at a minimum of 75% of meetings), busyness level (the number of other outside board seats that the director holds), tenure, age, independence and ownership influence director election results. Interestingly, with the exception of the auxiliary test in Field et al. (2020), none of these studies found any association between gender and shareholder votes.

8The rest of this article is organised as follows. The following section describes the benefits and drawbacks of diverse board representation. Section 3 describes the study’s data and methodology, while Section 4 presents and discusses the results. Section 5 concludes the paper.

2. Literature review

9In this section, we review the arguments in favour of and against the presence of diverse directors in the boardroom.

2.1. The benefits associated with diversity

10Arguments derived from several different fields, including finance, economics, law, ethics, organisational behaviour and social psychology, have been advanced to explain why investors should be interested in board diversity (Simpson et al., 2010). Resource dependence theory suggests that diverse directors are in a unique position to provide access to valuable resources and connections. Additionally, diverse directors are capable of serving as role models or mentors for talented young people and promoting diversity in the firm, thereby improving the firm’s legitimacy and reputation. Following a separate line of thought, agency theory suggests that the benefits of diversity include not just creativity and innovation but also independence of thought in the boardroom. The presence of diverse directors is also assumed to generate positive impacts on all board members by increasing awareness of issues historically overlooked by Caucasian men and causing them to behave in a more professional manner.

2.1.1. Access to valuable resources and connections

11Building on sociology and organisational science principles, the resource dependence theory suggests that directors, regardless of their gender or ethnicity, can facilitate access to valuable resources such as capital, customers and suppliers (Pfeffer, 1981; Pfeffer & Salancik, 1978). In particular, Stiles (2001) argued that boardroom diversity can help secure access to critical resources, and Daily et al. (1999) suggested that board diversity may be important in highly segmented markets characterised by high concentrations of non-white, male buyers (e.g. consumer product companies), since diverse board members are likely to have a more nuanced understanding of that market. Consistent with this view, Harrigan (1981) showed there to be a higher proportion of female directors in service-orientated, labour-intensive industries and industries that manufacture products for women than in manufacturing and other diversified industries. Mattis (2000) supported this, arguing that board composition should reflect the diversity of both the firm’s customer base and the labour pool.

12Additionally, resource dependence theory suggests that all directors interact with actors outside the business itself in such a way as to increase access to information, promote corporate interests and reduce uncertainty. Since the networks established by women and minorities are generally more diverse than those established by Caucasian men (Ibarra, 1992, 1993), women and minorities can provide more information, thereby improving the quality of decisions.

2.1.2. Mentoring and promoting young talent

13Diverse directors also provide, in and of themselves, a valuable corporate resource, since they can serve as role models and mentors for younger talent with high potential (Bilimoria & Huse, 1997; Bilimoria & Piderit, 1994). The presence of diverse directors can also function as a signal to women and minorities, both inside and outside the organisation, that the company is inclined towards allowing diverse personnel to fully develop their careers. This would provide a comparative advantage for businesses to attract, retain and promote diverse personnel (Robinson & Dechant, 1997). Competition within a business’s internal labour market also increases because diverse employees believe that they are not excluded from director positions (Rose, 2007). Therefore, all high-level employees may work harder to show that they have the skills and qualifications to become insider directors.

2.1.3. Creativity and innovation

14It is very often assumed that diversity increases creativity and innovation, since these characteristics are not distributed randomly in the population but tend to vary systematically with demographic variables (Campbell & Minguez-Vera, 2008). Hoffman and Maier (1961) suggested that heterogeneous backgrounds and experiences can enable more effective problem-solving. According to Watson et al. (1993) and Wiersema and Bantel (1992), group diversity encourages creativity and brings a greater breadth of perspectives and more innovative solutions to problems. Miller and Del Carmen Triana (2009) highlighted the positive relationship between diversity and innovation. For example, research shows that diverse directors have experiences that differ from their Caucasian, male counterparts (Guest, 2019; Hillman et al., 2007) and that these experiences may enrich board discussions and improve their decisions. Furthermore, since female board members tend to be younger than their male counterparts, it is possible that they will introduce more current trends and emerging ideas into the boardroom (Burke, 1994).

2.1.4. Independence and monitoring

15Agency theory suggests that conflicts of interest between shareholders and management can be mitigated by increasing a board’s independence (Rosenstein & Wyatt, 1990). Inside directors are also corporate officers, whereas outside directors are non-management directors. In other words, because inside directors often have management positions that are subordinate to the CEO, it is reasonable to believe that they are less independent of the CEO when serving on the board. However, outside directors are not accountable to the CEO and thus might be more willing to challenge a CEO’s position. In addition, it is reasonable to conclude that outside directors who are concerned about their reputations will be disinclined to collude with corporate management (Carter et al., 2003).

16Interestingly, female directors are more likely to be outside directors (Adams & Ferreira, 2009), and minorities are more likely to be recruited from outside the executive ranks (Guest, 2019). Thus, diverse directors may have more freedom than Caucasian, male directors to ask questions (Bilimoria & Wheeler, 2000) and be less afraid to ask probing and sometimes difficult ones (Bilimoria & Huse, 1997), facilitating effective debate on governance issues (Van der Walt & Ingley, 2003). Thus, boards with a higher proportion of diverse directors are less inclined to allow CEOs to dominate debates, are more activist and exert more influence over management decisions (Fondas, 2000).

2.1.5. Positive impact on board members’ behaviour

17Huse and Solberg (2006) reported that women alter the boardroom atmosphere, and Singh (2008) found that the presence of women tempers the political gamesmanship of men, since women prefer to focus on the matter at hand rather than score political points against other board members. Furthermore, when women are present, men tend to conduct themselves more professionally, changing their language, becoming more civilized and moderating their masculinity. Nielsen and Huse (2010) showed that female directors influence important board processes by increasing board development activities (board work instructions, evaluations and development programs) and decreasing the level of board conflict.

18Another way in which female board members raise standards for their male counterparts is through their level of preparedness when attending meetings. Since female board members must generally work harder than their male colleagues to establish their credibility, they usually arrive at board meetings better prepared (Pathan & Faff, 2013). Similarly, female directors are significantly more likely to attend scheduled board meeting, and their presence has a positive influence on the attendance of male directors (Adams & Ferreira, 2009). Huse and Solberg (2006) indicated that female directors consider themselves as being better prepared than male directors. This failure on the part of male directors to execute their functions professionally is often perceived by women as very arrogant, selfish and wasteful. It allows management to exert more influence over board decisions; however, it also provides women with a unique opportunity to influence decision-making and to quickly improve their status as directors. Over time, in response to the increasing influence of female board members, male board members may increase their own efforts to participate more meaningfully in board meetings.

19Another interesting dimension of this issue is the fact that men are generally perceived as being more overconfident than women (Lundeberg et al., 1994); thus, the presence of women in the boardroom could lower excessive risk-taking. Gul et al. (2010) consistently documented a significantly lower level of cost of capital in firms that have at least one female director on the board, suggesting that the market attributes lower risk to firms with female directors. Moreover, large mergers and acquisitions constitute important milestones in a firm’s life, and CEO overconfidence is often put forward to explain poor performance after a takeover (Malmendier & Tate, 2005, 2008). Dowling and Ali Aribi (2012) and Levi et al. (2012) consistently showed that the presence of female directors reduces the acquisitiveness of a company. Moreover, Levi et al. (2012) demonstrated that the higher presence of women on a bidder board lowers the premium and concluded that ‘women are less overconfident than men when facing difficult tasks lacking fast, clear feedback’. However, if we consider only the population of female directors, they are more prone to take risks than their male counterparts (Adams & Funk, 2012).

2.1.6. Legitimacy and social responsibility

20Beyond economic arguments, the presence of diverse directors on boards can also be justified through legitimacy (Tremblay et al., 2016), social responsibility (Harjoto et al., 2015) and fairness (Seierstad, 2016).

21Both gender and racial diversity are highly visible to the public (Tsui et al., 1992), and corporations understand that publicising their diversity can be beneficial. For instance, it is common to see corporations advertise their diversity by including pictures of their boards in their annual reports (Bernardi et al., 2002). Businesses that have a significant brand image, that sell products or services directly to retail customers or to the government or that have large institutional investors generally want to cultivate an image of social responsibility (Ferreira, 2010). Moreover, board diversity is associated positively with corporate giving and is consistent with the view that diverse directors are generally ‘less business-oriented’ and more committed to corporate social responsibility (CSR) (Wang & Coffey, 1992). Similarly, Williams (2003) showed that businesses with a larger proportion of women serving on their boards engage in charitable giving to a greater extent than businesses with a smaller proportion of female directors. Bear et al. (2010) studied how professional and gender diversity among directors affect corporate reputations (both directly and indirectly) through improved CSR. They found that the number of women on the board enhances CSR ratings and that CSR ratings positively impact a business’s reputation and mediate the relationship between the number of women on the board and corporate reputation. Finally, Huse et al. (2009) showed that women and employee-elected board members may make particular contributions to CSR controls, such as evaluations of health, environment and safety; concerns for the natural environment and CSR; and contributions to charities and strategic controls, such as assessments of the politics of resources, products and markets.

22The argument concerning fairness is essentially an ethical one, positing that it is immoral to deny boardroom access to diverse directors simply because of their gender or ethnicity. Giving priority to diverse directors is a way to compensate for the historical record of discrimination and exclusion from top management positions at firms (Valsan, 2015).

2.2. The costs involved in diversity

23While the literature articulates several positive benefits of diversity on corporate boards, the same literature also documents the negative effects of board diversity on firm performance. Indeed, higher diversity is often associated with higher integration and communication problems leading to conflicts inside the boardroom. Moreover, focusing on gender or ethnicity to the exclusion of other characteristics may cause boards to overlook certain candidates. Also, it is important to observe that efforts to promote diversity at the board level may be motivated by nothing more than the desire to create an illusion of inclusiveness and legitimacy. Finally, the presence of diverse directors can slow down the decision-making process and increase the implementation of risky strategies.

2.2.1. Integration problems

24Many of the benefits of board diversity mentioned above can fail to materialise where diverse board members are not fully integrated into the board decision-making process. This could happen for several reasons. According to Westphal and Milton (2000), it is common for majority group members to dismiss or devalue the input of minority directors. This bias is likely to reduce the contribution of minority directors in the decision-making process. Milliken and Martins (1996) suggested that diverse board members may experience difficulties to such a degree that it leads to a higher turnover rate among people from diverse groups. Cox and Blake (1991) pointed out that the expenses associated with high turnover and absenteeism are higher among women than men.

25Thus, even if diversity introduces fresh ideas and initiates new discussions, diverse points of view will have no impact if other directors do not take them seriously. Rose (2007) argued that diverse board members ‘are socialised unconsciously [to adopt] the ideas of the majority of conventional board members’. As a consequence, the positive effect of having diverse directors may never be realised.

2.2.2. Conflicts and communication problems

26Forbes and Milliken (1999) acknowledged that while diverse groups more easily obtain information and perspectives drawn from outside the dominant group, the pooling and processing of this information may create conflicts between directors.

27Additionally, Adams and Ferreira (2007) demonstrated that CEOs are conflicted about whether to share firm-specific information with outside directors to receive better advice or not to share such information because it could be used to monitor them more intensively. Nevertheless, diverse directors are more likely to be outside directors, and thus CEOs may be reluctant to share firm-specific information with them. This lack of cooperation between CEOs and diverse directors could reduce board effectiveness (Ferreira, 2010).

2.2.3. Focusing on gender to the detriment of other characteristics

28According to business arguments, diversity is not a goal in itself and board nomination should be based on merit. Thus, diverse candidates should only be appointed when they merit it. Since female directors are generally younger than their male counterparts (Burke, 1994), they may be less experienced or not possess the adequate skills to participate in board functions effectively. Furthermore, according to Terjesen et al. (2008), women have developed human capital that is not the ‘right’ kind to be a director of a firm. In particular, even if they are as well qualified as men, they are less likely to have experience as business experts. Moreover, since the number of experienced women directors is low, the risk could be to overuse the few qualified women directors.

2.2.4. Slow decision-making

29Since diversity tends to promote a diversity of perspectives, and diverse directors are more willing to ask critical questions, it reasonable to conclude that a heterogeneous board would be less efficient, since it could find it more difficult and time consuming to reach a consensus (Lau & Murnighan, 1998; Smith et al., 2006). While this loss of efficiency is probably not critical in all industries, for firms in highly competitive ones that require quick, responsive decision-making, the negative effects of a slower decision-making process may be difficult to justify (Hambrick et al., 1996).

2.2.5. Illusion of legitimacy and compliance

30Efforts to address discrimination could have a positive impact on firms’ ability to attract customers and high-quality employees. It is possible, however, to imagine that, in some cases, women or minorities are appointed to positions in order to create an illusion of inclusiveness, legitimacy and compliance. According to the tokenism theory (Kanter, 1977), firms appoint diverse directors for purely symbolic reasons and such directors are not expected to participate as full members of the board.

31According to Torchia et al. (2011), it is important for there to be a critical mass of at least three diverse directors on a board in order to promote innovation. If only one diverse director is appointed, according to the tokenism theory, the director would be ineffective because the majority members will ignore them. A lone diverse board member would have to conform to the majority perspectives and be unable to make a valuable contribution.

32Bilimoria and Piderit (1994) indicated that men are more likely than women to sit on key committees (executive, compensation and finance committees) and that women are more likely than men to sit on a committee of lesser importance (public affairs committee), once tenure and experience are controlled. Peterson and Philpot (2007) came to the opposite conclusion, finding weak evidence of a gender impact for placement on audit, compensation, finance and nominating committees and suggesting that, as time goes by, women are gaining importance in the boardroom. Nonetheless, Simpson et al. (2010) showed that women are less likely than men to be the CEO, the board chairperson or to serve as a board committee chair in companies in which they serve as a director.

2.3 Summary of previous research and link to our research question

33The primary aim of our analysis is to test if diversity affects shareholder approval. However, we are also interested in testing how different forms of diversity influence the voting behaviour of shareholders, which will be new to the literature. We summarise in Table 1 and Figure 1 the prior research along with how the theoretical claims are linked to the expected outcomes of our analysis. It is difficult from prior research to ex ante make heterogenous expectations concerning diversity stemming from gender or ethnicity. Table 1 shows six arguments on how diversity can be valuable for shareholders, along with four counter arguments and one that should not theoretically affect voting outcomes. Only one out of a total of 11 arguments for or against diversity offers different expectations for gender and ethnic diversity. Hence, to test for a shareholder approval differential between minority and female directors becomes a purely empirical question.

Table 1: Summary of the prior research and expectations on election outcomes.

Table 1: Summary of the prior research and expectations on election outcomes.
Figure 1: Graphical summary of the theories.

3. Data and methodology

34In this study, we analyse the results from director elections at S&P 500 firms between 2010 and 2016, including 28,084 director elections from 3193 different shareholder meetings at 488 firms. The director election results are obtained from the SEC Form 8-K, which is available from the Securities and Exchange Commission’s website.2 In particular, Item 5.07 on this form specifies the number of ‘for’, ‘against’ and ‘abstained’ votes at each director election. Following Cai et al. (2009), we define the percentage of ‘for’ votes that a director gets as the number of ‘for’ votes divided by the total number of votes cast (the sum of ‘for’, ‘against’ and ‘abstained’ votes). Consistent with previous studies, our results indicate that directors who run for board seats are elected very easily. In our sample, directors received 96.5% ‘for’ votes on average.

35We construct three measures to assess diversity. First, Diversity is a dummy variable that equals 1 if the director is a diverse director (a woman or minority) and 0 otherwise. We then use two other dummy variables to distinguish between gender and ethnic diversity (respectively, Gender and Ethnicity). Table 2 shows that our final sample contains 29.8% diverse directors, including 19.0% women and 14.6% minorities. Information regarding board diversity is collected from firms’ annual reports, which are available from the SEC website.3

36We also include nine control variables. Independent directors often are viewed as being valuable to shareholders because they are better than affiliated directors at monitoring management (Weisbach, 1988). Therefore, we introduce Independence into our regressions, a dummy variable that equals 1 if the director is an independent director and 0 otherwise.

37Newly elected directors may lack experience and information regarding the specificities of their firm and its industry, but according to entrenchment theory, long-tenure directors may have a reduced ability to be effective monitors (Vafeas, 2003). Shareholders may be more inclined to vote for incumbent directors but against directors with long tenures. We define Incumbent director as a dummy variable that equals 1 if the director was on the board in the previous year and 0 otherwise. Director tenure measures the number of years that the director has served on the board.

38Under the over-commitment hypothesis (Fich & Shivdasani, 2006), busy directors may have difficulty in effectively exercising their advisory and monitoring roles. Attend less than 75% of meetings is a dummy variable that equals 1 if a director has failed to attend more than a quarter of the board and committee meetings that they should have attended during the past year. Other public board seats is defined as the number of other outside public board seats that a given director holds.

39According to agency theory, directors with large ownership stakes have an interest in monitoring and oversee management on behalf of the shareholders. Thus, it is possible that shareholders cast more votes for directors with significant shareholding interests. We define Stock ownership as the number of shares that a director holds divided by the number of shares outstanding.

40Director age can also influence director performance. On the one hand, a young director may be more innovative in finding solutions and familiar with new technologies. On the other hand, older directors may be more experienced and have better connections. Therefore, following Cai et al. (2009), we use Above age 65 as a dummy variable that equals 1 if a director is over age 65 and 0 otherwise.

Table 2: Descriptive statistics of the variables.

Table 2: Descriptive statistics of the variables.

This table shows summary statistics at the director level for the dependent and main explanatory variables used in the study.

41Figures 1 to 3 show the evolution of the proportion of diverse directors over time in our sample. Figure 1 shows that the proportion of diverse directors steadily increased from 26.7% in 2010 to 33.0% in 2016. As shown in Figures 2 and 3, the increase is mainly driven by a rise in the appointments of female directors. Female directors increased from 16.3% in 2010 to 21.7% in 2016, while minority directors only increased from 14.0% to 15.3%.

Figure 1: Proportion of diverse directors over time.

Figure 1: Proportion of diverse directors over time.

Figure 2: Proportion of female directors over time.

Figure 2: Proportion of female directors over time.

Figure 3: Proportion of minority directors over time.

Figure 3: Proportion of minority directors over time.

3.1. Research method

42 Our research design uses firm-year fixed effects, which offers us several advantages. First, our dependent variable is measured at the director level and captures shareholder support. The research design allows us to overcome standard problems in the corporate governance literature that often includes firm-level outcome variables. Second, our research setting that includes firm-year fixed effects enables us to overcome several identification issues. The within firm-year setting allows us to control for all observable and unobservable firm-level characteristics that could affect a director’s shareholder support (e.g. firm quality or firm performance). Prior work has used event studies around director appointments (see e.g. Campbell & Minguez-Vera, 2010; Farrell & Hersch, 2005; Kang et al., 2010), firm value (Tobin’s-Q, M/B) or accounting performance measures (ROA, ROE) as the dependent variables (see e.g. Adams & Ferreira, 2009; Carter et al., 2003; Carter et al., 2010; Rose, 2007). These studies are potentially plagued by endogeneity stemming from unobserved firm-level factors affecting the outcome variable and are unrelated to directors’ performance. Furthermore, event studies are often conducted at the time of the appointment of a director (at an AGM or in a proxy statement). Adams et al. (2011) argued that event returns are contaminated by other disclosures during an AGM or by other information available in a proxy statement. Third, annual voting at AGMs allows us to capture shareholders’ director support at higher frequency relative to the event studies that focus on appointments.

43To capture the within firm-year heterogeneity in director satisfaction, we estimate the following model:

44where Vote%(i,j,t) is the percentage of supporting votes for director i in firm j during year t, α(j,t) is a firm-year fixed effect, Diversity is an indicator taking the value of 1 if the director is either a female or a minority director and 0 otherwise and Z is a matrix of control variables. Hence, our setting allows us to control for all observable and unobservable firm-level characteristics in addition to our director-level controls in the Z matrix. We use different diversity variables throughout the paper. In our main specifications, we use Diversity (female and/or minority director), Gender and Ethnicity as the main explanatory variables. In further tests, we partition the variables to account for minority types and to study the intersection between gender and different minority types.

4. Results

4.1. Baseline findings

45This section presents our baseline findings. Our first set of tests replicates the analysis of Field et al. (2020) by analysing if diverse directors gain greater shareholder support. However, contrary to Field et al. (2020), we include firm-year fixed effects to effectively control for all observable and unobservable firm characteristics. We study the impact on shareholder support for all diverse directors and also the specific effects of female and minority directors.

Table 3: Analysis of board diversity on the percentage of ‘for’ votes.

Table 3: Analysis of board diversity on the percentage of ‘for’ votes.

This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at annual general meetings. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

46Table 3 presents the results from the baseline analysis. Column (1) shows that Diversity is positive and significant at the 1% level in explaining the percentage of ‘for’ votes. Our findings suggest that board diversity matters to shareholders. Diverse directors receive more ‘for’ votes during director elections than their non-diverse counterparts4. That diverse directors only obtain 0.2 pp more votes during a given year compared to other candidates might appear trivial; however, it is larger than the effect of independent directors (0.16 pp) but weaker than that of busy directors and director attendance. Furthermore, our coefficient estimates are to some extent in line with the estimates in other studies using voting outcomes as the dependent variable. Field et al. (2020) reported a 0.36 pp coefficient of diversity on the percentage of ‘for’ votes, while Chen and Guay (2020) identified a 0.67 pp effect of busy directors. That our findings differ from those of Field et al. (2020) is potentially due to our use of the more restrictive firm-year fixed effects and not firm, year and committee, as did Field et al. (2020).

47Column (2) of Table 3 shows that the impact of Gender on the voting outcome is positive and statistically significant at the 5% level. Column (3) shows that the presence of minorities is valuable to shareholders, which they express through their votes during director elections. The third regression shows that Ethnicity is statistically significant at the 1% level in explaining director election results. Female directors tend to receive more ‘for’ votes than male directors. Column (4) includes both components of diversity (Gender and Ethnicity) in the regression models. Our findings show that Ethnicity is still significant at the 1% level but that Gender is only significant at the 5% level when both variables are included simultaneously in the regression. To test if ethnic diversity has greater value to shareholders than gender diversity, we conduct an F-test on the coefficient difference between Gender and Ethnicity. The coefficient difference (0.0028–0.0012) provides an F-stat of 3.54, which corresponds to a p-value of 0.06. Hence, our findings indicate that ethnic diversity appears to exert a greater marginal impact than gender diversity on director election results.

48Our findings contradict those of Cai et al. (2009), Ertimur et al. (2018) and Hillman et al. (2011), who failed to find a significant relationship between gender diversity and director election results for pre-2010 samples. However, our results are consistent with those of Field et al. (2020), who documented in a more recent sample (2006–2017) a positive relationship between the percentage of votes cast in favour of a director at an annual meeting and gender or ethnic diversity and emphasised that voting support for diverse directors increased over their sample period. Therefore, the time period could explain the lack of significant results in previous studies.

49Our baseline findings generally confirm those of Field et al. (2020); however, we use a different research design (firm × year fixed effects) and find heterogenous shareholder approval depending on the type of diversity. We find that shareholders value ethnic diversity to a greater extent than gender diversity, which is new to the literature. Data show that the numerous positive aspects of diversity outweigh the few negative ones. However, our data do not directly allow us to identify which of the theoretical aspects drive our findings, since it is difficult to empirically quantify personal traits such as mentoring abilities and creativity.

4.2. Further analysis

50 The next part of our analysis partitions the diversity variable into four new indicator variables (Non-Caucasian women, Non-Caucasian men, Caucasian women and Caucasian men) to analyse the impact of different forms of diversity on director election outcomes. Our findings in Table 4 reveal that the entire gender effect on voting outcomes is driven by non-Caucasian women. The insignificant effect of Caucasian women in Column (3) of Table 4 and the positive and statistically significant effect of Non-Caucasian women (Column [1] of Table 4) highlight that shareholders place greater value on ethnically diverse women than on Caucasian women. Furthermore, Caucasian men receive significantly fewer ‘for’ votes at the 1% level (Column [4] of Table 4), whereas non-Caucasian men receive significantly more ‘for’ votes (Column [2] of Table 4) during director elections.

Table 4: Analysis of the impact of the different types of diversity on the percentage of ‘for’ votes.

Table 4: Analysis of the impact of the different types of diversity on the percentage of ‘for’ votes.

This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at annual general meetings. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

51Our findings highlight the importance of incorporating different forms of diversity when studying the effects of board gender diversity, which was rarely done in previous studies and may be an explanation for their conflicting results. Differing from the prior literature, we show that the gender effect on voting outcomes is solely driven by non-Caucasian female directors. Importantly, we document that male Caucasians are seen negatively by investors, which may be due to increased external pressure to increase board diversity. When restructuring a board, it is possible that one is replacing the least popular Caucasian male directors due to factors such as entrenchment or because they hold executive positions. Hence, this might potentially drive our findings. Furthermore, an alternative explanation stems from the fact that the previous hurdle to electing male directors was low. Consequently, female directors have needed to be of higher quality relative to their Caucasian male peers to be elected on a board. Both these effects should manifest through lower voting outcomes among Caucasian males.

52To learn more about the impact of ethnic diversity on director election results, we define five new variables (Caucasian, Black, Hispanic, Asian and Middle Eastern) to analyse the impact of ethnicity (regardless of gender) on director election outcomes.

53Following previous results, Table 5 shows that Caucasian directors receive significantly fewer ‘for’ votes at the 1% level during director elections (Column [1] of Table 5). Interestingly, the two largest ethnic minorities in the US, namely the Black and Hispanic minority groups, have a positive and significant impact (at the 1% level) on the percentage of ‘for’ votes (Columns [2] and [3] of Table 5). In contrast, Asian and Middle Eastern minority groups do not have any significant impact (Columns [2] and [3] of Table 5) on director election outcomes. Hence, we observe that the Non-Caucasian impact on the Vote% is mainly driven by Black and Hispanic directors.

Table 5: Analysis of the impact of ethnic diversity on the percentage of ‘for’ votes.

Table 5: Analysis of the impact of ethnic diversity on the percentage of ‘for’ votes.

This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at annual general meetings. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

4.3. Impact of added diversity

54The next part of our analysis aims to study if the number of women siting on a board influences the effect of gender diversity on the voting outcome. According to critical mass theory (Torchia et al., 2011), if female directors are underrepresented on a board, they may be marginalised in deliberations, which will hinder their ability to perform optimally. Shareholders may see no point in voting for a female director if there are few female directors on the board (see Figure 1). Interest in gender diversity may exist only for shareholders if the presence of women is sufficient to influence board decisions.

55We define three dummy variables to account for the number of female directors sitting on a board. Women on board=1 is a dummy variable that equals 1 if only one female director is on the board, Women on board=2 is a dummy variable that equals 1 if two female directors are on the board and Critical mass of women is a dummy variable that equals 1 if at least three female directors are on the board. We go on to test for the marginally added diversity from one director by interacting gender diversity with the proportion of females at the board.

56To test for the impact of board gender diversity on shareholder support conditional on the number of female directors sitting on a board, we regress the interaction of the term gender × the dummy variables. This allows us to examine the effect of the number of women on the board and its impact on voting outcomes. Since we use firm × year fixed effects, the main effect of the number of female directors as well as the percentage of female directors are fully absorbed by the fixed effects. In the first two regressions of Table 6, the interaction terms’ coefficients are insignificant, suggesting that when only one or two females hold board seats, they do not receive significantly more ‘for’ votes. However, in the third regression, the interaction term is significant at the 1% level, which shows that women receive more ‘for’ votes when at least three women hold seats on the board. Our findings in Column (4) show that a larger percentage of female directors has a positive impact on the Vote% of female directors. Our findings are in line with the critical mass theory and show that shareholders value gender diversity on the board only when a critical mass of three women has been reached. In line with Torchia et al. (2011), our findings highlight the moderating effect of the number of incumbent female directors on a board.

Table 6: Analysis of the existence of a critical mass of female directors on the percentage of ‘for’ votes.

Table 6: Analysis of the existence of a critical mass of female directors on the percentage of ‘for’ votes.

This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at the annual general meeting. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

57In our next set of tests, we explore if there is a similar pattern for underrepresented minority directors on boards. Shareholders may value ethnic diversity on a board only if the presence of minority directors is sufficiently high to improve board efficiency. To test this hypothesis, we define the following three dummy variables: Minority on the board=1, a dummy variable that equals 1 if only one minority director sits on the board; Minority on the board=2, a dummy variable that equals 1 if two minority directors sit on the board; and Critical mass of minority directors, a dummy variable that equals 1 if at least three minority directors sit on the board. We go on to create a measure for the proportion of minority directors on the board.

58Table 7 presents the regression results regarding the importance to shareholders of there being a critical mass of minority directors. The results are different to those obtained concerning the impact of gender diversity on the board. In the four regressions, none of the interaction terms between ethnicity and the number of minority directors are statistically different from zero. However, the main effect of ethnic diversity is statistically significant in all four regressions, suggesting that minority directors gain greater shareholder support regardless of a critical mass. Hence, we show that the critical mass theory is only verified for female directors but not for minority directors.

Table 7: Analysis of the existence of a critical mass of minority directors on the percentage of ‘for’ votes.

Table 7: Analysis of the existence of a critical mass of minority directors on the percentage of ‘for’ votes.

This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at the annual general meeting. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.

4.4. Endogeneity concerns

59Using shareholder satisfaction as a dependent variable has advantages over studying stock market reactions (i.e. director appointments can be contaminated by other information) and firm value (i.e. it is difficult to disprove reverse-causality and identify the exact director impact). The advantage stems from us using a director-level measure that we can demean by firm-year (using firm-year fixed effects). This effectively excludes all firm-level observables and unobservables from our measure. However, it is possible that we do not capture all director-level unobservables that can affect the voting outcome for a given director.

60 To solve potential selection issues, we implement entropy balancing (Hainmueller, 2012), which weighs the covariates in the control group so that they have the same means and variances as those in the treatment group. Entropy balancing also provides advantages over other data pre-processing methods. First, unlike nearest neighbour matching, it reweighs all units to prevent a loss of information. Second, Harvey et al. (2017) reported that entropy balancing achieves higher estimation accuracy and effectively mitigates selection bias. We create synthetic control groups for Diverse, Gender and Ethnic directors (treated groups) by weighting the means and variances of the control groups to match those of the treated groups. To create a synthetic control group, we use all covariates from the previous analysis in addition to adding education; if the director is the CEO in the company, chairman of the board, CEO and chairman of the board or the CEO of another company; and if the director is the lead independent director. Appendix B shows the differences between the treatment and control groups after entropy balancing. Indeed, none of the covariates exhibits differences between the control and the treatment group after the balancing.

61 Our findings in Appendix C differ slightly from those in the non-weighted sample. Both the general diversity effect in Column (1) and the ethnic diversity effect in Column (3) remain positive and statistically significant. However, the gender effect in Column (2) fails to reach statistical significance at conventional levels. This finding suggests that the impact of female directors disappears after we match the characteristics of female directors with those of male directors.

5. Conclusion

62The issue of the value of board diversity to shareholders is a widely debated matter in corporate governance, but few studies have attempted to address it directly. Most previous work focused on the impact of board diversity on firm performance, arguing that board diversity is valuable for shareholders if the presence of female or minority directors has an impact on firm performance. In this paper, we instead emphasise that shareholders’ interest in board diversity can be gauged from director election results. We contend that diverse directors should receive significantly more ‘for’ votes than non-diverse directors if board diversity really matters to shareholders.

63Even though Field et al. (2020) explored in auxiliary tests the link between board diversity and shareholder approval, we offer additional insights on the matter. First, we use firm-year fixed effects, allowing us to efficiently control for all unobservable and observable firm-level characteristics. Second, we show that the higher percentage of ‘for’ votes for female directors is driven by non-Caucasian female directors. Third, we show that the entire diversity effect is driven by directors from ethnic minorities.

64An explanation for this difference in effects between gender and ethnic diversity is provided with the analysis of the impact of board diversity on shareholder support, based on the number of diverse directors sitting on a board. While minority directors receive significantly more ‘for’ votes independent of the number of minority directors on the board, at least three female directors must be sitting on the board before they significantly affect the percentage of ‘for’ votes. This result seems to indicate that, in shareholders’ minds, women must reach a critical mass of three directors before being able to influence board decisions and that shareholders value ethnic directors regardless of there being a critical mass. All in all, our findings suggest that shareholders value diversity in various forms, which has implications for board selection.

1 The underrepresentation of diverse directors on US boards can be explained using Kanter’s (1977) homosocial reproduction theory, which concerns the tendency for ‘like’ to promote ‘like’. In other words, according to Westphal and Zajac (1995), when CEOs are able to influence the director-nomination process, they will choose demographically similar directors (i.e. other white, male CEOs).

2 https://www.sec.gov/​

3 Using ethnic statistics is illegal in France but not in the United States.

4 Here, it is important to notice that shareholders’ votes are influenced by a broader context. Even if the shareholders are eventually those who votes ‘for’ or ‘against’ a director at general meetings, their votes are influenced by the soft laws or/and mimetism.

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Table des illustrations

Titre Table 1: Summary of the prior research and expectations on election outcomes.
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Titre Table 2: Descriptive statistics of the variables.
Légende This table shows summary statistics at the director level for the dependent and main explanatory variables used in the study.
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Titre Figure 1: Proportion of diverse directors over time.
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Titre Figure 2: Proportion of female directors over time.
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Titre Figure 3: Proportion of minority directors over time.
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Titre Table 3: Analysis of board diversity on the percentage of ‘for’ votes.
Légende This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at annual general meetings. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
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Titre Table 4: Analysis of the impact of the different types of diversity on the percentage of ‘for’ votes.
Légende This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at annual general meetings. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
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Titre Table 5: Analysis of the impact of ethnic diversity on the percentage of ‘for’ votes.
Légende This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at annual general meetings. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
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Titre Table 6: Analysis of the existence of a critical mass of female directors on the percentage of ‘for’ votes.
Légende This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at the annual general meeting. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
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Titre Table 7: Analysis of the existence of a critical mass of minority directors on the percentage of ‘for’ votes.
Légende This table shows regressions on a director’s percentage of ‘for’ votes (Vote%) at the annual general meeting. All variable definitions are provided in Appendix A. All models include firm × year fixed effects. Heteroskedasticity-robust t-stats based on standard errors clustered by firm × year are provided in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
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Magnus BLOMKVIST et Etienne REDOR, « Does board diversity really matter to shareholders? »Finance Contrôle Stratégie [En ligne], 26-2 | 2023, mis en ligne le 01 juin 2023, consulté le 30 novembre 2023. URL : http://journals.openedition.org/fcs/10954 ; DOI : https://doi.org/10.4000/fcs.10954

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Auteurs

Magnus BLOMKVIST

EDHEC Business School, Department of Data Science, Economics and Finance, 24 Avenue Gustave Delory, 59100 Roubaix, France. E-mail: magnus.blomkvist@edhec.edu.

Etienne REDOR

Audencia Business School, 8 route de la Jonelière, 44312 Nantes Cedex 3. France. Email: eredor@audencia.com.Corresponding author

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