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Review of Accounting Studies
Published in: Review of Accounting Studies 1/2024

24-08-2022

Boardroom gender diversity reforms and institutional monitoring: global evidence

Authors: Larry Fauver, Mingyi Hung, Alvaro G. Taboada, Emily Jing Wang

Published in: Review of Accounting Studies | Issue 1/2024

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Abstract

We examine how boardroom gender diversity reforms impact the monitoring role of institutional investors. Using reforms from 25 countries that aim to improve gender diversity on boards, we find that the reforms increase the association between institutional ownership and subsequent female directorships for foreign investors, but not for domestic investors. This result is driven by foreign institutional investors from countries with a high social equity norm and by foreign pension funds and independent institutions. Furthermore, firms experience improved valuation and profitability following reform compliance. Overall, our findings suggest that boardroom gender diversity reforms empower socially conscious foreign institutional investors to drive value-enhancing governance change.
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Appendix
Available only for authorised users
Footnotes
1
Since Norway pioneered a law requiring a 40% female director representation in 2003, many countries have taken initiatives to amend governance codes to recommend boardroom gender diversity. In 2012, the European Commission launched the “Women on the Board Pledge for Europe” (EC 2012).
 
2
According to the Forum for Sustainable and Responsible Investment (SRI), sustainable investing assets account for $17.1 trillion out of $51.4 trillion US professionally managed assets as of 2019. Boardroom diversity is among the top ten ESG-related shareholder proposals filed in 2018–2020 (SIF 2020).
 
3
For example, Schedule C of the 2010 UK Corporate Governance Code discusses engagement principles for institutional shareholders. The principles include “When evaluating companies’ governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention,” and “Institutional shareholders should consider carefully explanations given for departure from the UK Corporate Governance Code.”
 
4
See reviews by Gillan and Starks (2003) and Franks (2020).
 
5
We exclude US firms from our primary analyses because these firms dominate our global sample. Our inference is robust to including US firms.
 
6
Most countries, such as Japan and the UK, amend comply-or-explain governance codes that recommend consideration of gender when appointing directors. Some countries, such as France and Italy, further enact quota-based legislation and impose sanctions to speed up the progress.
 
7
Our inferences are similar using both measures. We use percentage of female directors as our main measure because this is the focus of quota-based legislation.
 
8
For governance reforms related to board independence, see Fauver et al. (2017), Hu et al. (2020), and Bae et al. (2021). A large literature examines disclosure reforms related to mandatory IFRS adoption; see the review by De George et al. (2016). While this research also finds that mandatory IFRS adoption increases foreign institutional ownership (DeFond et al. 2011; Florou and Pope 2012; Yu and Wahid 2014), it focuses on the portfolio choices of foreign investors.
 
9
Focusing on the 2003 gender quota law in Norway, Ahern and Dittmar (2012) and Matsa and Miller (2013) document a negative impact on firm value and financial performance, while Eckbo et al. (2021) find no effect. In addition, Hwang et al. (2019) and Meyerinck et al. (2019) suggest a negative effect on shareholder returns for the 2018 California quota law in the US, while Ferrari et al. (2021) suggest a non-negative effect for the 2011 quota law in Italy.
 
10
A related stream of literature examines the association between gender-diverse boards and firm performance. This research finds that female directorship is positively associated with board monitoring but has a mixed relation with firm performance (Adams and Ferreira 2009; Campbell and Mínguez-Vera 2008; Conyon and He 2017; Gul et al. 2011; Post and Byron 2015; Srinidhi et al. 2011).
 
11
“Breaking the glass ceiling: Women in the boardroom,” Paul Hastings LLP.
 
12
Corporate governance codes generally have the backing of the government, such as the UK’s Financial Reporting Council. While codes are basically suggestions, they carry the threat that more regulations will follow if firms do not comply without a clear explanation (Fauver et al. 2017). The US is a key exception, as several governance codes are promoted by different coalitions of asset managers and business groups. We focus on the Corporate Governance Policies from the United States’ Council of Institutional Investors, who first recommended consideration of gender in 2013.
 
13
These reforms differ from the governance reforms documented in Fauver et al. (2017), which were adopted between 1990 and 2007 and relate to recommendations concerning board independence and CEO-chairman duality.
 
14
See “Australian boards reach 30% women target without quotas,” Financial Times, January 30, 2019.
 
15
BoardEx and ISS are both commonly used databases for director characteristics, but their coverages differ in some countries and time periods. We use ISS data to supplement missing firm-year data in BoardEx.
 
16
As in Fauver et al. (2017), we do not require a firm to appear in both the pre-reform period and the post-reform period to avoid potential sample selection bias. As discussed in our robustness check in Section 4, our results are not sensitive to this restriction.
 
17
The 1.06% figure is calculated as 9.921% × 0.107, where 9.921% is the standard deviation of foreign institutional ownership of treatment firms (reported in Table 2, Panel A) and 0.107 is the coefficient on Post x Foreign IO in Model 3 of Table 3, Panel A.
 
18
The 0.15 figure is calculated as 9.921 × 0.015, where 9.921 is the standard deviation of foreign institutional ownership of treatment firms (reported in Table 2, Panel A) and 0.015 is the coefficient on Post x Foreign IO in Model 6 of Table 3, Panel A.
 
19
Entropy balancing is a data process method that identifies weights for each benchmark sample observation to achieve covariate balance. Relative to propensity-score-matching matching, entropy balancing has the advantage of ensuring that higher-order moments of the covariate distribution are similar across treatment and benchmark samples. It also allows us to minimize subjective design choices which could influence sample composition (Ge et al. 2020; Wilde 2017).
 
20
We note that the coefficient on Domestic IO becomes significantly positive after including US firms. This is consistent with a prior study’s finding that domestic institutions play a dominant role in US firms (Aggarwal et al. 2011).
 
21
We do not control for insider trading enforcement as in Fauver et al. (2017) because these reforms precede our sample period.
 
22
For the reform in Canada, see https://www.​catalyst.​org/​research/​gender-diversity-on-boards-in-canada-recommendations-for-accelerating-progress/.
 
23
We aggregate the responses from Wave 4 (1999–2004), Wave 5 (2005–2009), and Wave 6 (2010–2014) of the World Values Survey and Wave 3 (1999–2001) and Wave 4 (2008–2010) of the European Values Study to obtain the widest possible and most time-relevant country coverage. These data are commonly used in prior studies to capture social norms (e.g., Dyck et al. 2019). See also www.​worldvaluessurve​y.​org and www.​europeanvaluesst​udy.​eu.
 
24
It is possible that the high social norm group is dominated by US investors. To address the concern that our results may be driven by these investors, we rerun our social norm analysis after removing them (results untabulated). Our inference remains unchanged.
 
25
Italy implemented the quota in two stages during the [−5, 5] years: 20% of female directors by 2012 and 33% by 2015. We use the 20% cutoff to determine compliance for the first year of the reform 2011 till 2014, and use the 33% cutoff from 2015 onwards.
 
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Metadata
Title
Boardroom gender diversity reforms and institutional monitoring: global evidence
Authors
Larry Fauver
Mingyi Hung
Alvaro G. Taboada
Emily Jing Wang
Publication date
24-08-2022
Publisher
Springer US
Published in
Review of Accounting Studies / Issue 1/2024
Print ISSN: 1380-6653
Electronic ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-022-09710-3

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