An organization with a gender-diverse board of directors is translated as uncovering a preference for diversity and a weaker commitment to shareholder value, as per new research in the INFORMS journal Organization Science.
The study analyzes investor responses to board diversity and finds that one extra lady on the board brings about a 2.3% decline in the organization’s market value on average, which could amount to a huge number of dollars.
Authors Isabelle Solal and Kaisa Snellman, both of INSEAD, looked at 14 years of panel information from U.S. public firms and saw that firms with more female directors were punished.
“Firms that increase board diversity suffer a decrease in market value and the effect is amplified for firms that have received higher ratings for their diversity practices across the organization,” said Solal.
The paper, “Women Don’t Mean Business? Gender Penalty in Board Composition,” recommends that investors react to the presence of female leaders not just all alone merit, yet as more extensive cues of firm preferences.
“If investors believe that female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, a firm unintentionally signals a weaker commitment to shareholder value than a firm with a nondiverse board,” said Snellman.
A few reports by counseling firms and financial institutions have demonstrated a positive relationship between’s firm value and gender-diverse boards, yet recent studies dependent on long term information show a negative impact on female board representation. The clarification is found in how investors decipher the decision.
“Our results imply that when additional information on the firm’s preferences is available, the market relies on that information in order to lessen the uncertainty surrounding the board diversity cue. Additional information may come from observing other choices the firm makes, notably in terms of diversity policies,” continued Snellman.
The analysts contend that encouraging awareness is the first step in addressing and dispensing with harming suspicions. They recommend firms ought to carefully frame female appointments and reassure shareholders of corporate goals.
The paper proposes that after some time, similarly as greater exposure to female leaders has been appeared to lessen stereotype bias, the expansion in female board appointments ought to in like manner decline the observation that organizations select directors for any reason other than their qualifications.
“There is strong evidence that diverse and inclusive teams make better decisions, faster, leading to improved outcomes. Society and businesses are making slow but steady progress in breaking down barriers and embracing the rich value that comes with greater diversity and inclusion, but this important research is another reminder that we still have a long way to go,” said Pinar Keskinocak, INFORMS 2020 president.
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