Boards Pay Less for Other Companies when Members are Female

istock_000004780540xsmall1By Mai Browne

Do more women in top management mean better financial performance? The body of research on this subject is filled with compelling data, though some of it is conflicting. The 2011 Catalyst “Bottom Line” report revealed that Fortune 500 companies in the top quartile for female representation on boards had a 16 percent higher return on sales than companies with no women on boards. On the other side of the debate is the 2011 University of Michigan Ross School of Business study revealing that the stock price of Norway’s publicly-traded companies actually dropped when they began adding women for their boards to comply with the nation’s mandate that boards comprise 40 percent women.

The latest research, conducted by the University of British Columbia’s Sauder School of Business, suggests that women may have an advantage in one major area of corporate business strategy: mergers and acquisitions. The Sauder study, featured in the Journal of Corporate Finance last November, revealed that the more women a company has on its board, the less it pays for acquisitions.

The survey data shows how the cost of each successful acquisition was reduced by 15.4 percent with each woman added to a board. It also reveals that with each additional female, the number of attempted takeover bids falls by 7.6 percent. These results suggest that women are less inclined than men to make risky transactions, and more prone to emphasize return on investment. The study’s authors believe that this caution exercised by female board members has a positive effect on maintaining shareholder value.

“Female board members play a significant role in mitigating the empire-building tendency of CEOs through the acquisition of other companies,” noted Sauder finance professor Kai Li, one of the study co-authors. “On average, merger and acquisition transactions don’t create shareholder value, so women are having a real impact in protecting shareholder investment and overall firm performance.”

Pros & Cons
Li says their findings add to the debate on the pros and cons of diversity in corporate leadership.

“We show that at least in the setting of mergers and acquisitions, having more diversity as captured by female directors on corporate boards will help create shareholder value – their presence is associated with few deals and also paying less for a target firm. Both outcomes are good for their shareholders” Li said.

The survey examined a large sample of acquisition bids made by S&P 1500 companies between 1997 and 2009. To determine the cost of the acquisitions, the authors looked at the bid premium – the difference between the final offer price and the stock price of the targeted firm before the deal was signed. These figures were then correlated with the number of female directors on the various boards.

“Our findings show that the prudence exhibited by women directors in negotiating mergers and acquisitions has had a substantial positive effect on maintaining firm value,” Li said. “This finding adds fire and force to recent calls to mandate a minimum number of women on the boards of publicly traded companies.”

While the study builds a business case for adding women to corporate boards, Li is inclined to be wary of quotas and other legislation designed to achieve greater gender parity on boards. She is mindful that some legislated gender quotas, such as Norway’s decree, have led to untenable practices and unintended outcomes.

“I am not keen on direct policy intervention on how a company should form its board,” Li said. “Norway since 2004 introduced a mandated 40 percent female representation on their corporate boards for firms listed on Oslo. Due to lack of qualifying female directors, the results are not good. Post the mandate, Oslo listed firms are shown with worse performance.”

Fairness & Equality
Li wants her research to increase the awareness that diversity can be value enhancing.

“Corporations and the business world need to put effort in nurturing and bringing up talented people with diverse backgrounds to leadership positions,” the researcher said.

Women in senior management, as a question of superior performance, represent a major shift from how gender diversity has been debated in the past. A few decades ago, women’s advancement was viewed primarily as an issue of fairness and equality. Today, as companies around the world face tougher competition than ever, the data connecting gender diversity to high performance has led business leaders to find this trend increasingly worthy of consideration, regardless of mandates and directives.

But even with today’s emphasis on the bottom line, some gender-diversity advocates contend that focusing on financial performance is “asking the wrong question.” A recent New Yorker article on women on boards cited Hagen Lindstädt, a management professor at the Karlsruhe Institute of Technology in Germany, who urged champions of gender diversity to stop arguing that putting women on boards improves business performance. Not because it doesn’t, but because that is beside the point. The article underscored Lindstädt’s conviction that “there are plenty of reasons to improve women’s representation on boards that have nothing to do with financial performance – among them for diversity’s sake.” As Lindstädt’s said, “This is about equality in our society. And fairness for all women.”