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This article delves into the critical role of gender diversity on corporate boards and its impact on sustainability practices within European markets. It explores how the progressive incorporation of women into the labor force has contributed to a more balanced representation on corporate boards, highlighting the advantages and challenges of achieving gender diversity. The study examines the effectiveness of mandatory quotas in promoting gender diversity and their influence on ESG performance. It provides empirical evidence that female directors positively affect sustainability practices, particularly when appointed outside of quota systems. The research also investigates the moderating effects of quotas on the relationship between gender diversity and sustainability, revealing that while quotas increase the number of female directors, they may attenuate the positive impact on ESG scores. The article offers a detailed analysis of the theoretical frameworks and empirical methods used, including IV-2SLS and 3SLS regressions, to provide a comprehensive understanding of the dynamics at play. It concludes with robust findings that underscore the importance of gender diversity in fostering sustainable corporate practices, while also highlighting the complexities and potential limitations of quota-based approaches.
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Abstract
The ubiquitous debate on sustainability practices and the development of a uniform regulation on the use of gender quotas to be implemented in all EU countries by mid-2026 puts these matters in the spotlight. We link both topics by studying the effects board gender diversity and use of gender quota regulations on the firm’s adoption of sustainability practices. Using a panel of listed firms from 22 European countries over the period 2009–2018, we find that firms with gender diverse boards present higher Environmental, Social and Corporate Governance (ESG) scores while the use of quotas attenuates this positive role played by female directors. Our results are robust across econometric models that control for endogeneity. Contrarily to the notion of tokenism, we also find that that the positive effect of gender diversity is observable from the very first female board member. The positive effect of female directors on the firms’ ESG scores correspond to non-executives. Altogether, our results call for further debate on the implementation of positive gender diversity policies, specially concerning the use of quotas with sanctions for non-complaints.
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1 Introduction
The progressive incorporation of women into the labor force has been crucial in contributing to a more balanced representation of women on corporate boards of directors. Although boards of directors have traditionally been dominated by men, companies started to open their boardrooms to women during the 1990s (Farrell and Hersch 2005). The reforms and measures taken around the world to achieve a greater presence of women on boards are mainly based on the argument that gender diversity leads to better decision-making for stakeholders (Higgs 2003; Kamonjoh 2014). Despite the advantages of incorporating women and minorities into the decision-making structures of companies (Choudhury 2014), the gender gap in board representation persists and highlights social and cultural factors which hinder women's access to management positions (Grosvold et al. 2015).
Gender diversity on boards of directors and their delegated committees have attracted considerable interest from academics, researchers, employers, and policy makers. The arguments for increasing board diversity and the presence of women on boards are based on two different perspectives. The first has its origins in the concepts of equality and justice in a society that demands responsible business practices and the second, economic, is based on shareholders’ value creation and company performance (Vafaei et al. 2015). The appointment of women is justified because gender equality is a basic human right that must be recognized and supported at all levels, including in management positions (Brooke and Tyler 2010; McCann and Wheeler 2011). When we consider the financial objective based on value creation, numerous studies argue that board diversity provides a competitive advantage by contributing a new vision, more creativity and fresh perspectives to the board (Nguyen and Faff 2007; Gul et al. 2013).
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Following with the preceding economic and social justice arguments, the EU Member States have undertaken actions towards boards’ gender diversity, ranging from coercive “hard regulation” quotas to voluntary measures such as corporate governance recommendations or other incentivizing and supporting measures. There is an ongoing debate about the adequacy of the enforcement of hard regulations to increase the representation of women in senior management positions (e.g., Dale-Olsen et al. 2013). We contribute to this debate by examining the impact of the boards’ gender diversity on the adoption of sustainability practices by European listed companies with special emphasis on the role played by compulsory quotas imposed by some Member States.
During recent years, sustainability, social responsibility and good corporate governance practices have attracted investors’ attention. In the first quarter of 2020, sustainable funds registered a global inflow of $45.6 billion, in contrast to the outflow of $384.7 billion experienced by global funds overall (Morningstar 2020). In the same period, companies with solid sustainability practices have suffered less severe effects derived from the Covid-19 pandemic (Fernández-Méndez and Pathan 2022). While the trend towards sustainability was already in progress, the Covid-19 crisis has accelerated it with corporate governance and sustainability being strengthened by the pandemic (Folger-Laronde et al. 2022). Hale (2020) reported that 70% of sustainable equity funds finished in the top halves of their categories and that 24 out of 26 all ESG index funds outperformed similar conventional funds. In fact, there is increasing recognition that ESG funds are more resilient during the Covid-19 market downturn. Thus, when analyzing the companies that can be included in investment portfolios, not only financial, sector or competitive advantage issues are considered, but also ESG criteria. Hence the importance for companies of ESG matters in improving investor relations.
The relevance of ESG criteria is even greater if we take into account the Sustainable Development Goals (SDGs) agreed worldwide by the United Nations (UN) to be achieved by 2030. The SDGs form the most ambitious program in recent history aimed to address 17 major issues faced by humanity. European economies are considered the major economies that advocate for sustainable development (Buallay 2018). Here, the European Union's policies on business and sustainable development are important elements of its positive contribution to the realization of the UN Agenda 2030 for sustainable development. The SDGs encompass environmental, health and equality action with specific mention to gender issues.
Our paper focuses on analyzing the effects of board gender diversity on board decisions and is therefore directly related to SDG 5: Gender Equality, specifically in promoting the full participation of women at all levels of decision-making, including corporate boards. Gender diversity is a crucial aspect of sustainability and good corporate governance. This gender equality goal is a cross-cutting theme within the 2030 Agenda, essential for achieving the other SDGs. Additionally, our research focuses specifically on board decisions that integrate sustainability into their ESG strategies. ESG criteria are closely linked to several SDGs, as both aim to promote sustainable business practices that contribute to social well-being, environmental protection, and ethical governance. In summary, the Environmental criterion (E) is related to SDGs 6, 7, 12, 13, 14, and 15. The Social criterion (S) is connected to SDGs 1, 3, 4, 5, 8, and 10. Finally, the Governance criterion (G) is associated with SDGs 16 and 17.
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In this study, we have analyzed the role of women directors in fostering positive societal change through board decisions aligned with societal expectations on sustainability (Frynas and Yamahaki 2016). Using a comprehensive sample of European listed firms from 2009 to 2018, our work expands previous research on the association between board gender diversity and corporate sustainability practices by analyzing whether the use of compulsory quotas affect the influence of women directors on the firms’ sustainability practices. Specifically, we try to answer how women's involvement in the board of directors and the differences in the regime of appointment among member states (i.e. use of quotas) influences the scores in all three dimensions of corporate sustainability. Our results indicate in the first place, that female directors at the board have a positive effect of the firms’ sustainability practices, being this effect associated to non-executive female directors. Second, we provide novel evidence that the use of quotas attenuates this positive effect observed for female directors, although gender diversity is still beneficial for ESG practices under quota systems. Contrarily to the notion of tokenism (Kanter 1977) the positive effects of female directors are observable from the first women added to the board. Our findings are robust to alternative variable specifications and estimation techniques including Instrumental Variables-Two-Stage and Three-Stage Least Squares (IV-2SLS and 3SLS) estimations and Propensity Score Matching (PSM).
We specifically add to empirical evidence indicating that increasing gender diversity on company boards has a positive influence on corporate sustainability practices in the European markets. Unlike the work conducted by Valls Martínez et al. (2020), our study investigates whether the implementation of quotas for women's participation on corporate boards mitigates the positive effect of women directors on ESG performance. To do so, we examine the effects of mandatory board gender quotas as a situation in which firms lose their capability to choose internally and freely their optimal board gender structure based solely on cost–benefit arguments. Linked to the appointment of women directors. In contrast to Valls Martínez et al.'s study (2020), we not only consider the presence of women on the board, but also analyze the typology of female directors (executive and non-executive), recognizing that they do not form a homogeneous group and that their effect on sustainability may vary. Also, we employ IV-2SLS regressions to address concerns regarding endogeneity, taking into account the possibility of unobserved factors that may affect both dependent and independent variables. Additionally, we encounter potential issues of simultaneity, given that our primary independent variable of interest, the proportion of women on the board of directors, could be influenced by the dependent variable (ESG performance). Therefore, to mitigate potential problems of reverse causality, we choose to estimate simultaneous equations using the 3SLS methodology, which provides efficient estimates when error terms can be correlated across equations. In our study, we utilize 3SLS estimates of two simultaneous equations, treating the dependent variables, ESG performance and the proportion of women board directors as endogenous. Finally, we consider a broader sample period (10 years) which results relevant since the effects of corporate sustainability efforts might take some time to manifest. Also, the variables of interest in our study (i.e. gender diversity and the use of quotas) have evolved substantially over the last decade in Europe, with women reaching a relevant mass in the European boards and the use of quotas for a substantial number of countries only during the last years.
We also provide new insights into the effect of gender quotas. On the one hand, our results show that the positive influence female directors on sustainability corporate practices results less favorable in countries with a compulsory quota regime. On the other hand, we also find that gender diversity effects are not related to the achievement of a sufficient critical mass; on the contrary, the positive effects are observed from the very first woman appointed to the board. We cannot ignore that quotas have proved to be very effective as a fast track for achieving a critical mass of female board directors. However, our results about the irrelevance of reaching a certain critical mass in relation to sustainability practices and the moderating effects that quotas bring to the roles played by female directors in this matter cast a new light on the use of this type of legislation.
The rest of the paper is structured as follows. Section 2 summarizes prior literature and develops our research hypothesis. We discuss our sample and empirical framework in Sect. 3 while Sect. 4 describes our main results and robustness tests. Finally, Sect. 5 concludes the paper.
2 Theoretical framework and hypothesis development
The board of directors is a control governance mechanism, designed to supervise the activities of the managers (Jensen 1993), and to set the strategic objectives that should guide the course of the company (Hillman and Dalziel 2003). The Board's monitoring role includes overseeing the CEO and implementing the company's long-term strategy, firing and hiring the CEO, and evaluating and rewarding the CEO and top managers (Hillman and Dalziel 2003). To enable boards to carry out their functions more effectively, it is desirable to ensure that their structure is diverse in regard to gender, race and experience of its members (Westphal and Milton 2000). The Higgs Report (2003) highlights the importance of gender diversity in improving the effectiveness of boards, recommending that more women be appointed to boards and delegated committees. There are various arguments in favor of gender diversity on corporate boards. One first reason is that women's representation on the board and its committees has the advantage of adding legitimacy to the company as discrimination and inequality between men's and women's rights is considered unacceptable in developed societies. Also, gender diversity expands and enhances the range of experiences and views available on an all-male board (Daily and Dalton 2003; Laguir and Den Besten 2016).
In terms of the functioning of the working group, a more balanced representation of women directors on the board and its committees favors the workplace environment (Bilimoria and Huse 1997), reduces absenteeism on boards (Adams and Ferreira 2009) and improves group deliberations and decisions (Kravitz 2003). Gender-diverse boards are also optimal, as they produce superior supervision results compared to male boards (Adams and Ferreira 2009). Furthermore, gender diversity on boards of directors has a positive effect on firm performance, which increases as the firm's innovation intensity rises (Cabeza-García et al. 2021).
It is well established in the academic literature that board diversity influences many areas of the business management. A review of the empirical literature on board diversity highlights the benefits for the company, shareholders and stakeholders of incorporating women into their management and decision-making structures (Brieger et al. 2019). Improvements are evident in the company's performance (Erhardt et al. 2003; Bonn 2004; Krishnan and Park 2005; Smith et al. 2006; Nguyen and Faff 2007; Campbell and Mínguez-Vera 2008; Francoeur et al. 2008; Lückerath-Rovers 2013; Chapple and Humphrey 2014; Liu et al. 2014; Terjesen et al. 2016; Cabeza-García et al. 2021; García-Meca and Santana-Martín, 2023), lower company risk (Lenard et al. 2014; Hutchinson et al. 2015), greater innovation (Miller and del Carmen Triana 2009, Torchia et al. 2011), better corporate governance practices (Adams and Ferreira 2009; Gul et al. 2013; Kakabadse et al. 2015), the adoption of CSR strategies aligned with stakeholders (Hafsi and Turgut 2013; Zhang et al. 2013; Harjoto et al. 2015; Ben-Amar et al. 2017) and enhanced corporate image and reputation (Brammer et al. 2009). Despite these undoubted benefits women are still under-represented on boards of directors and their delegated committees (Terjesen et al. 2015; Dezső et al. 2016; Brieger et al. 2019).
2.1 Gendered attitudes towards sustainability practices
The relationship between gender diversity and ESG performance is a relevant topic that can be examined from two different theoretical perspectives: economic and sociological. From an economic perspective, the ESG performance has become significantly relevant in the area of investment decision making. The impact of the presence of women on ESG performance emerges as a determining factor that influences the allocation of capital and the availability of funds by companies. In this context, the signalling theory emerges as a relevant conceptual framework to assess the effect of gender diversity on ESG performance. This theory postulates that the inclusion of women on the board of directors can be interpreted as a signal that makes it easier for external stakeholders to evaluate the sustainability practices carried out by companies (Arayssi et al. 2016; Kassinis et al. 2016).
However, it is imperative to recognize that the evaluation of the impact of women directors on the board cannot ignore the effects of the socialization process in which they are immersed. This socialization process ultimately shapes women's attitudes toward prosocial behaviours, which have a direct impact on board decision-making. Women's socialization plays a key role in shaping their values and perceptions, which can significantly influence their approach to issues related to sustainability and corporate social responsibility. In this sense, a comprehensive analysis of the relationship between gender diversity and ESG performance requires consideration of both economic and sociological factors for a complete understanding of these dynamics.
Socialization theory provides us with a set of arguments supporting the presence of significant gender differences in directors' attitudes towards sustainability policies. Gender socialization theory, proposed by Dawson (1997) addresses the question of whether men and women differ in their ethical attitudes and decision making. Stoller (1964) and Chodorow (1978) point out how gender consciousness and major personality features arise during infancy through the mother–child relationship, which is experienced differently by boys and girls. Likewise, Lever (1978) argues that children's game patterns accentuate gender differences in personality. Girls' traditional games tend to be turn-based and competition is indirect, whereas boys' traditional games are more competitive and often require resolution through disputes. In this way, girls learn to respect inclusion and avoid damage, while boys assimilate respect for rules. In adolescence, boys and girls manifest differentiated relational orientations and have different competencies in the social sphere.
Further, Gilligan (1982) develops the moral and ethical dimensions and implications of socialization as a function of gender. In this sense, maintains that in adulthood, men and women clearly differ in their ethical orientations. Women's idea of morality is related to care and focuses on the comprehension of responsibilities and relationships, while men's idea of morality is associated with the acceptance of rights and norms. Feminist ethics, as an alternative to traditional ethics, emphasizes a greater concern for care and relationships, as opposed to traditional ethics, which is more concerned with individual rights and justice.
This view of ethics explains how men and women differ in their perceptions and ethical judgments. Radtke (2000) argues that women are more likely to be cautious, compassionate and empathetic compared to their male counterparts. These female personal traits, where compassion predominates, involve caring more about others and seeking the societal well-being as a whole (Beutel and Marini 1995). This would explain why women make more socially oriented decisions and actions than their male counterparts due to differences in their ethical codes and principles (Dawson 1997).
Findley and Ojanen (2013) show that women are more focused on community development and exhibit communal goals, whereas men exhibit agentic goals that promote personal achievement, hierarchy, and competition. Also, as noted by Nielsen and Huse (2010), women's greater sensitivity to others and their consideration towards different groups' interests and perspectives make women more proactive in making pro-social decisions, mainly in relation to corporate social responsibility (CSR), sustainability, and environmental strategies (Nielsen and Huse 2010).
Given personal trait discrepancies in moral principles, female managers are expected to be more likely to show consideration for the society's well-being compared to their male colleagues. Women's communal values favour their decisions to be more sensitive to ethical issues (Cohen et al. 1998). Similarly, Ibrahim et al. (2009) report that female managers follow and apply the company's code of ethics more rigorously and with more responsibility. Differences in ethical issues and moral concerns between female and male directors are expected to have an impact on sustainable investment decision. Atif et al. (2020) find that boards with two or more female directors have a positive impact on sustainable investment, with independent female directors having the greatest impact on sustainable investment (more strongly than female executive directors).
In our study, we also expect gender differences between female and male leaders on ethical issues and moral considerations will be reflected in the company's decision making and sustainability practices. Investments in sustainability improve the operational efficiency of the company (Greening and Turban 2000). However, such decisions require a long-term view of the company with respect to the society in general. Women have a set of personal characteristics inspired by the role society assigns to them: they are more empathetic, more sensitive to social issues, more altruistic than men (Bernardi and Threadgill 2011) and show a more collaborative leadership style (Eagly et al. 2003). These features allow them to be more concerned about sustainability activities, satisfying in this way society's expectations.
Signaling theory offers a valuable standpoint for arguing about the relationship between board gender diversity and firm ESG performance. Signaling theory suggests that, in situations of information asymmetry, decision-makers rely on observable signals emitted by other parties (Spence 1973). The inclusion of women on boards is interpreted as a signal that the company respects social values. In this context, gender differences are not assumed to result in different behavior by board members, but rather observers draw conclusions based on their own stereotypes (Kirsch 2018). Consequently, companies can use diversity on boards to send signals to stakeholders that would otherwise be unobservable, thus demonstrating their commitment to social responsibility and good corporate governance (Broome and Krawiec 2008).
When a firm has a significant representation of women in leadership positions, it sends a positive signal about its commitment to gender equality and diversity (Solal and Snellman 2019). This message can be perceived both internally within the organization and externally by society. Internally, it can motivate more women to aspire to leadership positions, thereby fostering equal opportunities. Externally, it can enhance the company's image and reputation, attract new customers and employees, and increase investor confidence in the company's policies. The signaling power and influence of a company's social and environmental profile largely depend on how effectively it communicates its social and environmental commitments to stakeholders, reflecting the level of its recognized commitment by society (McWilliams and Siegel 2001; Godfrey et al. 2009). Therefore, increased participation of women on boards could strengthen ESG signaling power, as the communicated information could be perceived as more authentic and reliable (Arayssi, et al. 2016). This greater female presence on boards can also improve the effectiveness of ESG information having a potential effect on ESG performance.
Therefore, considering that women are more prosocial and environmentally aware, and/or that the inclusion of women itself can be interpreted as a signal to society of a commitment to equality policies and sustainability practices, we postulate the following:
Hypothesis 1
Female representation on board of directors is positively related to the sustainability (ESG) scores for large European listed firms.
2.1.1 Quota effects on sustainability practices
2.1.2 Gender discrimination and quotas
Historically, women have been excluded from labor markets and today they are still underrepresented in management positions (Tatli et al. 2013), suffering in some cases the well-known "glass ceiling" phenomenon (Cech and Blair-Loy 2010), which keeps them in an unfavorable position. This invisible barrier makes it difficult for them to move up as they approach the top of the business hierarchy, which partly explains the low percentage of women on boards of directors. According to the Global Gender Gap Report (2020) presented at the World Economic Forum, on average, 22.3% of board members in OECD large corporations are women, with even less representation in emerging economies (e.g. 9.7% in China and 13.8% in India).
Even in positions of high responsibility, women face discrimination (Hahm et al. 2010) related to gender stereotypes in management positions (Schein 2007). People act on the basis of stereotypes and beliefs, that is, gender roles (Eagly 2009). This influences their management style, as they act according to the expectations from others (Gutek and Morasch 1982).
According to the general model of discrimination developed by Stone-Romero and Stone (2005), in the context of stereotype-based discrimination against women in organizational structures, women are seen as "less suitable for management positions, especially when compared with stereotypes of white, middle-aged workers" (Goldman et al. 2006). Men appear to represent hard or technical skills (i.e., knowledge, abilities, self-confidence, assertiveness, and dominance), while women are associated with soft skills (i.e. teamworking, communication, and emotional support). The problem emerges because hard or technical competences are currently the key to access to high-level management positions and not so much the soft competences associated by society with women. Consequently, it seems very likely that the criteria for access to management positions are biased against women because of this type of stereotype (Schein 2007).
Another approach that can explain gender discrimination is the theory of social identity (Tajfel and Turner 1979). This theory is mainly based on the assertion that group members tend to protect their self-esteem in order to achieve a positive and particular social identity. The desire to see oneself in a positive way is transferred to the group, creating a tendency to see one's own group in a positive way and, in turn, to perceive external groups in a negative light (Billig and Tajfel 1973). This can result in discrimination against minorities by giving preferential treatment to the inner group (i.e., white middle-aged men) and ultimately giving rise to the so-called phenomenon of in-group bias or in-group favoritism.
Also, women with the skills for leadership positions are at risk of suffering prejudice and discrimination for challenging stereotypical expectations (Rudman 1998). One explanation for this phenomenon is that women who demonstrate managerial strong skills may be perceived negatively by some colleagues because they do not behave as traditional females do and they do not comply with the female stereotype. These women are perceived as more competent, but at the same time less socially skilled, less pleasant, and therefore are less likely to be promoted.
The discrimination against women and the resulting under-representation in top corporate positions, has triggered a legislative action aimed to promote diversity in management teams (Humbert et al. 2019). The main argument for the adoption of gender quotas is their effectiveness as a tool for leveling opportunities in specific areas where women face systematic barriers due to discrimination or persistent stereotypes (Holzer and Neumark 2000). Gender quotas force companies to respond quickly to identify, develop, promote, and retain female talent on boards (Terjesen et al. 2015). In case of non-compliance with imposed quotas, sanctions vary from "soft" sanctions, such as non-consideration of public subsidies and state contracts (e.g., Spain), to forcing a non-compliant company to delist from a given country's stock exchange and/or relocate headquarters to another country (e.g., Norway) (Bøhren and Staubo 2014). Alternatively, some countries have fallen short of adopting laws on gender quotas and sanctions on boards, but they have introduced principles in their corporate governance codes to increase boards’ gender diversity. Although these principles are not mandatory, stakeholder expectations and industry norms can create strong pressures for compliance.
In 2002, Norway was the first country to impose an obligation on companies to ensure gender balance on boards of directors (40% gender quota on the boards of publicly listed companies and State-owned companies). Non-compliance implied hard sanctions such as company dissolution or delisting from the stock exchange. In 2007, the Spanish government announced a 40% soft quota by 2015 for listed companies with more than 250 employees. The Spanish quota did not penalize non-compliance, but instead offered incentives and priority for state contracts to compliant companies (De Cabo et al. 2019). In 2010, Iceland adopted a 40% hard quota for companies with more than 50 employees with a September 2013 deadline. At the beginning of 2011, France implemented a soft quota of 20% by 2014 and increased it to 40% by 2018, including hard sanctions for non-compliance. Italy and Belgium were the next in 2011, introducing quotas of 33%, in both cases non-compliance involves hard sanctions that include monetary penalties, open seats and suspension of board fee payments. Netherlands regulated in 2011 a “one-third” soft gender quota for large public and private limited companies that came into force in 2013. This quota system was revised in 2020 imposing a nomination compulsory quota according to which listed companies that did not reach the minimum 33% female directors’ quota may only appoint a woman to a vacant directorial position. Finally, Germany introduced in 2015 a 30% soft quota for the supervisory boards of listed companies. In 2021, Germany reinforced this regulation requiring at least one woman in the executive board and a 30% quota in the supervisory board with the possible imposition of fines for non-compliance. As of 2018, the remaining European countries did not have passed regulations requiring a quota system, although most had included recommendations in their codes of good governance.1
Most recently, June 2022, the European Union has agreed to impose gender quotas on the boards of major companies. The legislation requires listed companies in the 27 EU member states to have women occupy at least 40% of non-executive board seats or 33% of all board seats by mid-2026. Companies could be fined for failing to hire enough women on their boards and see director appointments cancelled for non-compliance with the law.
Gender quotas are often seen as a fast track towards more balanced gender representation at the upper echelons of companies. Increasing the gender balance has a positive effect on the dynamics of the group and provides a voice and greater legitimacy to the decisions taken by women directors. Quotas increase the number of women directors and, therefore, the influence of the "dominant" group decreases, and the effects of tokenism are dissipated. In this sense, it is often considered that a "critical mass" of at least 33% of each gender can shift group dynamics, preventing mere compliance with the norm and ensuring a substantive rather than symbolic change in the legitimacy of female directors' decisions (Kanter 1977; Konrad et al. 2008; Joecks et al. 2013). Quotas mitigate tokenism because there is a balance between men and women, and women are no longer seen as "other" by their peers. Once there is a more balanced board with a critical mass of women, women's opinions are perceived as more legitimate, and a woman's voice and decisions are seen as those of another individual, rather than a representative of a whole demographic group (Kanter 1977).
Also, as legitimacy is a socially constructed concept (Ely 1995; Harvey and Schaefer 2001), stakeholders have changed their attitudes towards female roles as society's values evolve (Ruef and Scott 1998). Previously, it was considered legitimate or appropriate in the interest of a wide group of stakeholders that boards of directors were exclusively composed of men (Freeman et al. 2007). However, gender imbalance is becoming more and more unacceptable to society and stakeholders, and it lacks legitimacy in many countries. This implies that mandatory quotas have gained support from stakeholders as an action consistent with current societal values of equality and social justice.
In contrast, opponents of quotas argue that in a competitive environment the most qualified person should have the opportunity to be a board member, independently of gender or status (Meier 2013). In many countries the proportion of women in senior management is low, so there is a limited pool of female candidates for directorial positions. For instance, the “golden skirts” phenomenon arose in Norway perhaps due to a perceived shortage of women with legitimacy as prospective directors. After the quota law was passed in Norway, a few women2 held multiple board memberships becoming over-boarded. Post-quota boards retained the most powerful male directors with multiple directorships, while less experienced men were replaced by women directors (Teigen 2015). The resulting social capital of these women became elitist, and it was not useful as a tool for avoiding discrimination or supporting diversity in business and equality in society (Rigolini and Huse 2021). Although, in Norway, the quota produced the desired increase in female directors (6% in 2002; 12% in 2005; 18% in 2006; 36% in 2008; 40% in 2009; Storvik and Teigen 2010), it did not lead to improvements to the female positions at lower levels in corporations or to the gender pay gap reduction (Bertrand et al. 2019).
Additionally, to the potential problem of over-commitment, the existence of a limited number of qualified women might lead the firms to accept candidates who are less experienced. Therefore, affirmative action policies increase the risk of promoting less qualified people to top management positions. Selecting board members solely based on demographic criteria may lead to overlooking other crucial qualities, resulting in the inclusion of members who lack appropriate experience and competence (Ferreira 2011). Eventually, if adequately qualified women are not found, quotas could be counterproductive and may reinforce negative stereotypes. Altogether, under a quota system, female directors’ influence might suffer because of an inadequate recruitment process that enrols overcommitted or lees qualified women directors.
Furthermore, the implementation of mandatory quotas could lead to the departure of experienced directors to make way for women with less tenure, which could negatively impact the quality of decisions made by the board (Seierstad and Opsahl 2011; Rigolini and Huse 2021). The loss of experience and perspective provided by veteran directors could weaken the board's ability to effectively address strategic challenges and evaluate potential risks. Thus, female directors selected due to quotas run the risk of having their legitimacy challenged (Konrad et al. 2008).
The expected effect of board gender quotas on the firms ESG performance can be understood from the perspectives of the signalling and the faultline theories. Firstly, the implementation of mandatory quotas to increase female representation in corporate boards may generate contradictory outcomes in the perception of commitment to gender equality and corporate legitimacy. These quotas could be interpreted as a forced and imposed commitment rather than an effective commitment to gender equality. Mandatory quotas may give the impression that the company is merely complying with a legal requirement instead of truly engaging in diversity and inclusion. Moreover, the enforcement of mandatory quotas may raise doubts about the legitimacy of women holding these positions. Some individuals may question whether these women were selected based on their skills and experience or solely to meet the quotas.
In summary, the implementation of mandatory quota system limits the effectiveness of women as a signal to the market. To enhance their legitimacy and demonstrate a genuine commitment to equality policies, companies must go beyond mere quota compliance and actively work to promote equal opportunities and create an inclusive environment for all individuals, regardless of their gender.
Mandatory quotas can have negative consequences on the functioning of the board of directors as a group. Potential drawbacks associated with demographic heterogeneity within the group, such as internal conflicts, lack of cooperation, and insufficient communication, have been identified (Ferreira 2011). Mandatory quotas can have negative consequences on the performance of the board of directors for several key reasons. Firstly, the imposition of quotas may lead to an excess of members on the board, hindering effective decision-making and coordination among members. This is because a sudden increase in the number of directors could dilute individual responsibility and complicate communication within the governing body.
Another aspect to consider when incorporating women through mandatory quotas is the potential formation of opposing factions between men and women directors especially when the latter have been appointed in application of a board gender quota. The differences in the form of board access (quota mandated versus meritocratic selection) adds to the gender difference in the formation of opposing director factions. The inclusion of women as a result of mandatory quotas could lead to tensions and conflicts among existing members, especially if it is perceived that the new additions have less experience or are inadequately qualified for the position. This could hinder effective collaboration and consensus decision-making within the board, compromising its ability to fulfil its oversight and leadership responsibilities. In summary, while mandatory quotas aim to promote gender diversity in boards of directors, it is crucial to consider potential adverse effects such as board size excess, loss of experience, and the formation of opposing factions.
Based on the previous discussion we expect less intense ESG performance influence of women directors when the have been appointed due to a mandatory quota. Accordingly, we propose the following hypothesis:
Hypothesis 2
The effect board’s gender diversity on sustainability (ESG) scores is lower when it is reached through compulsory quotas.
3 Data and sample selection
3.1 Sample and databases
Our initial sample of study consists of 4,573 firm-year observations corresponding to 768 European listed firms for which Sustainalytics provide ESG scores. We exclude from our sample 406 firm year observations corresponding to financial firms, we also exclude 91 observations due to lack of complete accounting data, 51 additional observations because we did not have market firm year valuation used to calculate the firm’s q ratio and finally 17 observations for firms that did not provide complete data on the structure of their boards. This process leaves us with a final sample of study formed by 4,008 firm-year observations on 689 non-financial listed companies from 22 European countries between 2009 and 2018. These companies represent a 61% of the aggregated market capitalization of the sample countries at the final year of the period of study. A description of the distribution of the sample by country and year is provided in Table A-I of an online appendix.
The ESG scores have been obtained from the consulting firm Sustainalytics and Standard & Poors. The structure of the board of directors has been consulted in the BoardEx database. Finally, the financial and market data which is used to control the size of the company, its profitability, leverage and growth opportunities, comes from Capital IQ. The information on quota laws has been manually consulted from country-specific regulatory repositories covering the period of study.
3.2 Measurement of variables
Our paper analyzes the influence of the board gender diversity on the firms’ sustainability scores. The dependent variable is the natural logarithm of the firm’s weighted ESG scores. We have considered the total score (TOTAL-ESG), the environment score (ENVIRONMENT), the corporate governance score (GOVERNANCE) and the social score (SOCIAL). The ESG scores range from 0 to 100 with low (high) values indicating poor (strong) sustainability performance.
In this paper, we aim to study the effect of the boards’ gender diversity and the use of quotas on the firms’ sustainability practices. We proxy gender diversity using the ratio of the number of female directors scaled by the boards’ size (FEM-BD). We go further in our analysis by studying the possible differences between executive and non-executive women directors. We proxy the role of these two types of female directors using the ratio of executive (EXEC-FEM-BD) and non-executive female directors (NEXEC-FEM-BD) scaled by the board’s size.
With respect to the implementation of quotas we use a binary variable (QUOTA) that takes the value of one for any firm-year observation if in this specific year and in the country corresponding to the firm’s nationality there is a compulsory quota system in place. With the term “compulsory” we refer to quota laws that impose sanctions (hard law) to those firms that do not achieve the gender diversity targets prescribed. We have classified in this category those countries imposing monetary penalties and restrictions to the formation of the board in the form of open seats or even the dissolution of the board (i.e., Norway, Italy, France, Belgium and Germany).3
We include a set of six control variables for board structure, and other firm characteristics considered to influence sustainability practices. Particularly, we control two elements of the board structure: board size using the natural logarithm of the number of board directors (BD-SIZE) and the proportion of non-executive directors (NEXEC-BD). It is often suggested that larger boards are more diverse, which make them more sensitivity to stakeholder interests including the engagement in more in social and ecological practices (Siciliano 1996; Ntim and Soobaroyen 2013; Chams and García-Blandón, 2019).
Previous evidence suggests the stronger stakeholder orientation of outside directors as compared to insiders (Ibrahim et al. 2003; Zhang et al. 2013). Since, outside directors’ reputation is linked to their success in addressing stakeholder issues, these directors are more inclined to satisfy stakeholder concerns compared to executive directors (Post et al. 2015). Mallin and Michelon (2011) argue that because of their orientation to stakeholders’ interests, outside directors will lead the firm towards engaging more in CSR activities. This argument is supported by the positive influence of board independence on the quality and transparency of voluntary disclosure of sustainability information as reported by Herda et al. (2014) for the 500 largest U.S. firms. Therefore, we control the influence of non-executive directors (NEXEC-BD) proxied by the number of non-executive directors scaled by board size (Table 1).
Table 1
Definition of variables
Name
Definition
Dependent variables
TOTAL-ESG
Logarithm of Sustainalytics total ESG firm’s score.
ENVIRONMENT
Logarithm of the environmental component of the historical weighted ESG firm’s score provided by Sustainalytics.
SOCIAL
Logarithm of the social component of the historical weighted ESG firm’s score provided by Sustainalytics.
GOVERNANCE
Logarithm of the corporate governance component of the historical weighted ESG firm’s score provided by Sustainalytics.
LOGIT TOTAL-ESG
Logit transformation of the variable TOTAL ESG. Log(TOTAL ESG /1- TOTAL ESG)
LOGIT ENVIRONMENT
Logit transformation of the variable ENVIRONMENT. Log(ENVIRONMENT /1- ENVIRONMENT)
LOGIT SOCIAL
Logit transformation of the variable SOCIAL. Log(SOCIAL /1- SOCIAL)
LOGIT GOVERNANCE
Logit transformation of the variable GOVERNANCE. Log(GOVERNANCE /1- GOVERNANCE)
TOTAL-ESG S&P
Logarithm of S&P total ESG firm’s score.
ENVIRONMENT S&P
Logarithm of the environmental component of the historical weighted ESG firm’s score provided by S&P.
SOCIAL S&P
Logarithm of the social component of the historical weighted ESG firm’s score provided by S&P.
GOVERNANCE S&P
Logarithm of the economic and corporate governance component of the historical weighted ESG firm’s score provided by S&P.
Female board representation variables
FEM-BD
Number of female directors scaled by the total number of board directors.
EXEC-FEM-BD
Number of female executive directors scaled by the total number of board directors
NEXEC-FEM-BD
Number of female non‐executive directors scaled by the total number of board directors
FEM-BD1
Indicator equal to the number of female directors on the board, if the number of female directors is below 2 and one if the number of female directors is two or more
FEM-BD2
Indicator equal to zero if the number of female directors is below two and one if the number of female directors is two or more.
FEM-BD3
Indicator equal to zero if the number of female directors is below three and the number of female directors-2 when there are at least three female directors.
QUOTA-GAP
The difference between the proportion of board women directors (FEM-BD) and the proportion of female directors required by the mandatory quota in a country and year.
Types of regulation on board gender diversity
QUOTA
Binary variable that takes the value of one if a country has implemented a board gender quota regulation with hard sanctions and zero otherwise
SOFT QUOTA
Binary variable that takes the value of one if a country has implemented a board gender quota regulation with weak sanctions and zero otherwise
RECOMMENDATIONS
Binary variable that takes the value of one if a country has implemented only voluntary recommendations on board gender diversity and zero otherwise
UNREGULATED
Binary variable that takes the value of one if a country has implemented no rules or recommendations on board gender diversity and zero otherwise
Instrumental variable
MALE-CONNECT
The proportion of male directors who have a seat on another board with female directors
FEM-INDUSTRY
Aggregate ratio of female directors at the two‐digit SIC industry level
HUMAN-WELLBEING
The human wellbeing dimension of the TH Köln sustainable Society Index (SSI)
Firm control variables
NEXEC-BD
Number of non-executive directors scaled by the total number of board directors.
BD-SIZE
Log transformation of the total number of board directors.
SIZE
The natural logarithm of the book value of total revenues.
LEVERAGE
The ratio between the book value of total liabilities and the book value of total assets.
PROFIT
The ratio between earnings before interest, taxes and total assets.
GROWTH
The ratio of the market value of equity to the book value of equity.
This table presents the definition of the variables used in the estimations: dependent variables, the independent and control variables
With respect to the firms' characteristics, we control firm size proxied by the logarithmic transformation of their annual total revenues (SIZE), as previous studies found that company size influences the level of engagement for sustainability-oriented strategies (Brammer and Millington 2006; Darnall et al. 2010; Fitjar 2011; Gallo and Christensen 2011). Large companies, facing greater public pressures and having greater levels of slack resources at their disposal, are more likely to implement sustainability management (Udayasankar 2008). Also leverage might affect sustainability practices as the more the company uses debt financing, the more likely it is to place debtholders’ interests above those of less powerful stakeholders (Artiach et al. 2010). The priority to meet the obligations of the debt contract will reduce the capability of the firms to attend to other stakeholders' interests through the investment in sustainability activities. Consequently, we control firms’ financial leverage using the ratio of total liabilities to total assets (LEVERAGE). Finally, we control the firm’s profitability using the ratio of earnings before interest payments and income taxes to total assets (PROFIT), and firms’ growth opportunities proxied by the Equity market to Book ratio (GROWTH). Highly profitable firms and those that have value creating investment opportunities are subject to less pressure from funding agents and enjoy more flexibility to invest in sustainability activities (Aksoy et al. 2020).
3.3 Descriptive statistics and correlations
Table 2 shows in Panel A the descriptive statistics of the variables and in Panel B the descriptive statistics of the proportion of women directors and ESG performance for firms in four different situations in relation to board gender diversity regulation (hard quota, soft quota, recommendations and unregulated). Table 3 displays the Pearson coefficients of pair-wise correlations.
Table 2
Descriptive statistics
PANEL A: Summary statistics
Variable
Number of observations
Mean
Standard deviation
Min
Max
TOTAL-ESG
4008
59.63542
10.91731
32.08333
91.86667
ENVIRONMENT
4008
57.70039
13.74903
26
97.51167
SOCIAL
4008
63.2342
11.24114
33.5
96.16
GOVERNANCE
4008
59.35156
12.54935
19.83333
98.74084
TOTAL ESG S&P
1663
44.4101
22.42415
2
92
ENVIRONMENT S&P
1663
43.32231
27.37247
0
100
SOCIAL S&P
1663
41.30307
23.0865
0
95
GOVERNANCE S&P
1663
48.48467
20.75688
4
94
FEM-BD
4008
0.2035066
0.1416254
0
0.714
EXEC-FEM-BD
4008
0.0088534
0.0303585
0
0.3
NEXEC-FEM-BD
4008
0.1937133
0.1413434
0
0.7142857
QUOTA
4008
0.3560379
0.4788864
0
1
QUOTA-GAP
1427
−0.0174705
0.1313507
−0.3
0.367
BD-SIZE
4008
13.31063
5.950261
3
49
NEXEC-BD
4008
0.8125154
0.1490395
0.1666667
1
SIZE
4008
7.729284
1.640434
−0.836648
11.05371
LEVERAGE
4008
0.5915726
0.2010151
0.0060935
1.202364
PROFIT
4008
0.0704653
0.0848657
−0.700988
0.3401905
GROWTH
4008
2.488673
2.787777
−2.46477
29.44885
PANEL B: Proportion of women directors and ESG performance by type of gender diversity regulation
Proportion of women board directors
Group
Obs
FEM-BD
t stats
Groups compared
Diff
t stats
1 QUOTA
1533
0. 283
83.92***
2 SOFT QUOTA
530
0.161
34.84***
(1) vs (2)
0.1225
19.25***
3 RECOMMENDATIONS
1103
0.198
45.03***
(1) vs (3)
0.0855
15.65***
4 UNREGULATED
1215
0. 125
42.59***
(1) vs (4)
0.1585
34.3***
ESG performance
Group
Obs
TOTAL ESG
t stats
Groups compared
diff
t stats
1 QUOTA
1533
4.098
880.73***
2 SOFT QUOTA
530
4.129
567.13***
(1) vs (2)
−0.031
−3.50***
3 RECOMMENDATIONS
1103
4.079
754.36***
(1) vs (3)
0.018
2.60***
4 UNREGULATED
1215
4.001
806.55***
(1) vs (4)
0.096
14.05***
Panel A: This table reports the descriptive statistics of the variables used in the study. Definition of variables is displayed in Table 1. TOTAL-ESG, ENVIRONMENT, SOCIAL and GOVERNANCE are respectively the total ESG weighted score, the environmental component of the ESG score, the social component of the ESG score and the corporate governance component of the ESG score provided by Sustainalytics. TOTAL-ESG S&P, ENVIRONMENT S&P, SOCIAL S&P and GOVERNANCE S&P are respectively the total ESG weighted score, the environmental component of the ESG score, the social component of the ESG score and the economic and corporate governance component of the ESG score provided by Standard & Poors. FEM-BD is the number of female directors scaled by the total number of board directors. EXEC-FEM-BD is the number of female executive directors scaled by the total number of board directors. NEXEC-FEM-BD is the number of female non-executive directors scaled by the total number of board directors. QUOTA is a binary variable that takes the value of one if for a certain country and year there is a gender quota system in place and zero otherwise. QUOTA-GAP is defined as the difference between the proportion of board women directors (FEM-BD) and the proportion of female directors required by the mandatory quota in a country and year. NEXEC-BD is the number of non-executive directors scaled by the total number of board directors. BD-SIZE is the log transformation of the total number of board directors. SIZE is the natural logarithm of the firm’s total revenues. PROFIT is the ratio between earnings before interest, taxes and total assets. LEVERAGE is the ratio between the book value of liabilities and the book value of total assets. GROWTH is the ratio of the market value of equity to the book value of equity. All variables are defined as in Table 1 except for the ESG scores and board size that for the sake of clarity are not log transformed. Panel B: This table compares the percentage of female directors and ESG performance for the subsamples of firm-year observations subjected to different types of national regulations related to board gender diversity: Quota (quota laws with hard penalties for infractions), soft quotas (quota laws with no penalties for infractions), Recommendations (voluntary recommendations from codes of good practice), Unregulated (No regulation at all). We display parametric t-tests for all subsamples and for the means differences. *, **, *** represent statistical significance at the 10%, 5% and 1% level, respectively
Table 3
Correlation matrix
Total-ESG
Environment
Social
Governance
FEM-BD
NEXEC-FEM-BD
EXEC-FEM-BD
QUOTA
QUOTA-GAP
NEXEC-BD
BD-SIZE
SIZE
Leverage
Profit
ENVIRONMENT
0.878
(0.000)
SOCIAL
0.8792
0.6307
(0.000)
(0.000)
GOVERNANCE
0.771
0.559
0.5505
(0.000)
(0.000)
(0.000)
FEM-BD
0.312
0.278
0.2643
0.2562
(0.000)
(0.000)
(0.000)
(0.000)
NEXEC-FEM-BD
0.0943
0.0893
0.1188
0.005
0.4149
(0.000)
(0.000)
(0.000)
(0.754)
(0.000)
EXEC-FEM-BD
−0.0737
−0.0943
−0.0571
−0.0255
0.1011
0.0031
(0.000)
(0.000)
(0.000)
(0.105)
(0.000)
(0.846)
QUOTA
0.3285
0.2977
0.2778
0.262
0.9734
0.4157
−0.1116
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
QUOTA-GAP
0.1296
0.1061
0.0924
0.1477
0.5061
0.0177
0.5
−0.1062
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.2624)
(0.000)
(0.000)
NEXEC-BD
0.2078
0.2124
0.2266
0.0551
−0.0453
0.126
0.0664
−0.0514
0.126
(0.000)
(0.000)
(0.000)
(0.000)
(0.004)
(0.000)
(0.000)
(0.001)
(0.000)
BD-SIZE
0.2398
0.2167
0.2043
0.1961
0.3686
0.08
−0.348
0.4446
0.08
−0.1472
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
SIZE
0.3929
0.3696
0.3714
0.2462
0.0266
0.0236
−0.0302
0.0331
0.0236
0.546
0.0393
(0.000)
(0.000)
(0.000)
(0.000)
(0.092)
(0.134)
(0.056)
(0.035)
(0.1344)
(0.000)
(0.012)
LEVERAGE
0.1302
0.0799
0.1586
0.0797
0.0564
0.0441
−0.0392
0.0694
0.0441
0.2127
0.0873
0.3101
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.005)
(0.013)
(0.000)
(0.0052)
(0.000)
(0.000)
(0.000)
PROFIT
0.0692
0.0652
0.0391
0.0865
−0.0357
−0.0987
−0.0227
−0.0368
−0.0987
−0.0127
−0.0133
0.1806
−0.2302
(0.000)
(0.000)
(0.013)
(0.000)
(0.023)
(0.000)
(0.150)
(0.019)
(0.000)
(0.420)
(0.401)
(0.000)
(0.000)
GROWTH
−0.0095
0.0009
−0.0525
0.046
0.0075
−0.0719
−0.0451
0.0136
−0.0719
−0.1633
0.0186
−0.1326
−0.0871
0.3379
(0.547)
(0.956)
(0.000)
(0.003)
(0.634)
(0.000)
(0.004)
(0.388)
(0.000)
(0.000)
(0.238)
(0.000)
(0.000)
(0.000)
p-Values in parentheses
Our main variables of interest are ESG performance and board gender diversity. The average total ESG, environmental, social and governance scores are 59.63, 57.70, 59.35 and 63.23 respectively while the proportion of female board directors is approximately 20%. These values are lower than the average 71.99 total ESG score and 32% proportion of female directors reported by Valls Martínez et al. (2020) for the EuroStoxx300 firms. This difference might be derived from the larger size of our sample that includes not only the largest blue chips in the European markets as it is for the case of EuroStoxx300 firms. It is worth mentioning that the majority female directors are non-executives, with the percentage of non-executives and executives being 19.4% and nearly 0.9% respectively. Finally, with respect to the other variable of study (i.e. the use of quotas) 35% of the firm year observations correspond to firms subjected to a regime of quotas which reveals the relevance of this type of regulations in Europe.
Panel B of Table 2 compares the proportion of women directors and ESG performance for firms in four different situations in relation to board gender diversity regulation: hard quotas (i.e. laws with hard penalties for infractions), soft quotas (i.e. laws with no penalties for infractions), voluntary recommendations and unregulated. Panel B shows the highest (lowest) value in the proportion of women directors in firms under a hard quota (no regulation) regime. We observe also positive and statistically significant differences in the proportion of women directors when we compare the firms under hard quotas to any of the other categories (unregulated, recommendations or soft quotas). In an untabulated analysis we regress the proportion of women directors on a binary variable (QUOTA) that takes the value of one if for a certain country and year there is a hard gender quota system in place and zero otherwise. We obtain positive and statistically significant coefficients for the variable QUOTA indicating that in comparison to the other alternatives (soft quotas, recommendations and no regulation) a hard quota is the most effective way to increase the proportion of women directors at that board. Finally, we observe positive and statistically significant differences between ESG performance of firms under hard quota laws regimes compared to recommendations or unregulated regimes, while we observe a negative difference when we compare firms under hard quotas with firms under soft quotas.
Table 3 shows positive and highly significant Pearson coefficients of pair-wise correlations between the indicators of gender diversity and the ESG scores. These coefficients provide support to our hypothesis that boards’ gender diversity favors the adoption of corporate sustainability practices. Interestingly enough, when we separate the effects of executive and non-executive female directors, we observe a positive correlation for non-executives and negative for executives. This result might suggest that the concerns about the wellbeing of external stakeholders and the society in general correspond to non-executives. We also observe a positive correlation between the indicator of the adoption of compulsory quotas and the ESG scores, although this result might be understood as contrary to our expectations, this interpretation might be wrong as this pair-wise correlation do not allow to disentangle the effects of the use of quotas from the effect derived of the strong presence of female directors in countries that have adopted the use of quotas. Although some of the independent variables showed high and statistically significant correlations, an analysis of the variance inflation factors showed that all VIF were far below the threshold value of 10 indicating no evidence of multicollinearity concerns (Kleinbaum et al. 1988).
4 Empirical method and results
4.1 Empirical methodology
We use the following regression equation to test our hypotheses on the effect of boards’ gender diversity and the use of quotas on the firms’ sustainability practices:
where subscript i denotes individual firms and subscript t represents the time period (t = 2009, 2005,…, 2018). The coefficients α, β, μ, γ and δ are the parameters to be estimated, while ε is a disturbance term. The dependent variables represented by “ESG performance” are the logarithmic transformation of total ESG score and its environmental, social, and governance sub scores. Our key proxies for gender diversity and the use of quotas are FEM-BD and QUOTA which are indicators of the proportion of boards’ gender diversity and the use of a compulsory quota rule that prescribes that companies have to achieve a certain percentage of female directors under the risk of facing penalties. CONTROLS comprise a total of six variables,4 as discussed in subSect. 3.2. In addition, year dummies (YEAR) and SIC industry dummies (INDUSTRY) are used to control for time fixed-effects and industry fixed-effects, respectively.
4.2 Main results
We discuss in this section the results concerning the effect of boards’ gender diversity and the use of quotas on the firm’s sustainability practices in the European market.
In order to alleviate endogeneity concerns we estimated Eq. (1) using IV-2SLS approach. Table 4 presents both the first stage estimation of the proportion of female board directors and the second stage estimation of the effect of female board representation on the ESG scores using the predictions from the first stage model. Following Adams and Ferreira (2009), we use the proportion of male directors with a seat in another gender-diverse board as an instrument to predict the proportion of female board directors. Also following Liu et al, (2014), we instrument the proportion women directors with the average proportion of female board directors at the two digits SIC industry level. The coefficients on both instrument variables are positive and highly significant. Also, the diagnosis shows that the set of instruments is valid and that the first stage model is not under-identified nor weakly identified.
Table 4
Effect of female directors on ESG score
1st Stage
2nd Stage
2nd Stage
2nd Stage
2nd Stage
FEM-BD
Total-ESG
Environment
Social
Governance
MALE-CONNECT
0.1219***
(14.59)
FEM-INDUSTRY
0.7337***
(3.16)
FEM-BD
0.5474***
0.7195***
0.5977***
0.2121**
(6.18)
(6.56)
(5.00)
(2.37)
BD-SIZE
0.0128**
0.0216***
0.0374***
0.0394***
−0.0203**
(2.14)
(2.69)
(3.76)
(3.63)
(−2.50)
NEXEC -BD
0.2597***
0.0800**
0.0210
0.1290***
0.1287***
(19.43)
(2.47)
(0.52)
(2.95)
(3.94)
SIZE
0.0017
0.0388***
0.0416***
0.0501***
0.0244***
(1.13)
(19.09)
(16.54)
(18.28)
(11.89)
LEVERAGE
0.0115
0.0108
0.0144
−0.0317*
0.0511***
(1.07)
(0.76)
(0.82)
(−1.66)
(3.57)
PROFIT
−0.0309
0.0240
0.0578
−0.0434
0.0426
(−1.22)
(0.72)
(1.40)
(−0.96)
(1.26)
GROWTH
−0.0013*
0.0010
0.0002
0.0026*
−0.0001
(−1.78)
(1.02)
(0.18)
(1.90)
(−0.10)
CONSTANT
−0.1718***
3.3260***
3.3308***
3.0168***
3.6257***
(−2.76)
(85.10)
(68.82)
(57.17)
(91.88)
Industry FE
Yes
Yes
Yes
Yes
Year FE
Yes
Yes
Yes
Yes
Total obs
4008
4008
4008
4008
4008
Adjusted R2
0.327
0.280
0.195
0.263
0.246
F-statistics
75.96***
66.08***
53.53***
56.21***
48.99***
Underidentification test
212.3***
212.3***
212.3***
212.3***
212.3***
Weak identification test
111.3***
111.3***
111.3***
111.3***
111.3***
Overidentification test
1.748
1.406
2.600
0.529
p-value of Sargan test
0.186
0.236
0.107
0.467
Regressions are estimated using IV-2SLS estimates. The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. We use MALE-CONNECT and FEM-INDUSTRY as instruments in the first stage regressions. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. FEM-BD is the number of female directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE) profitability (PROFIT)and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
The coefficients for the proportion of female board directors in the second stage models are all positive and statistically significant. Therefore, our results provide robust support to hypothesis H1. Given that the dependent value is log transformed, the exponential of the coefficient informs of the expected increase over the geometric average derived from our proxy of gender diversity. The coefficient in column 1 indicates that an increase in a 10% of female board representation is associated to a 7.28% increase in the geometric average value of the Total ESG score. For a geometric average score of 58.64 in our sample of study, this increase accounts for 4.26 points in the Total ESG score. Similarly, a 10% female board representation accounts for increases of 5.87, 4.78 and 1.45 points in the environmental, social and corporate governance scores. These results strongly support our hypothesis H1 indicating that board gender diversity favors the adoption of sustainability practices.
Table 5 presents the results for hypothesis H2 regarding the moderating effect of the use of a quota regime on the relationship between gender diversity and the adoption of sustainable corporate policies.
Table 5
Effect of female directors’ quotas on ESG score
1st Stage
1st Stage
2nd Stage
2nd Stage
2nd Stage
2nd stage
FEM-BD
FEM-BD X QUOTA
Total-ESG
Environment
Social
Governance
MALE-CONNECT
0.107***
−0.0206***
(11.30)
(−3.45)
FEM-INDUSTRY
0.481**
−0.384***
(2.16)
(−2.75)
QUOTA X MALE-CONNECT
−0.0217
0.116***
(−1.35)
(11.47)
QUOTA X FEM-INDUSTRY
0.439***
1.342***
(4.29)
(20.86)
QUOTA
0.0246
−0.000845
0.0643**
0.0929***
0.0496
0.1792***
(1.26)
(−0.07)
(2.34)
(2.72)
(1.35)
(2.63)
FEM-BD
0.7662***
0.9421***
0.7567***
0.4399***
(6.92)
(6.87)
(5.11)
(3.73)
FEM-BD X QUOTA
−0.5013***
−0.6075***
−0.4283***
−0.9111***
(−4.88)
(−4.78)
(−3.12)
(−3.72)
BD-SIZE
−0.0119**
−0.00990***
0.0365***
0.0523***
0.0540***
−0.0062
(−2.08)
(−2.75)
(4.53)
(5.25)
(5.01)
(−0.73)
NEXEC-BD
0.252***
0.151***
0.0996***
0.0541
0.1557***
0.2011***
(19.91)
(19.06)
(2.85)
(1.25)
(3.33)
(4.03)
SIZE
0.00376***
−0.000258
0.0366***
0.0394***
0.0483***
0.0220***
(2.61)
(−0.29)
(17.51)
(15.21)
(17.27)
(9.93)
LEVERAGE
0.00398
0.00613
0.0160
0.0199
−0.0267
0.0569***
(0.39)
(0.97)
(1.12)
(1.13)
(−1.40)
(3.77)
PROFIT
0.00928
−0.0125
−0.0143
0.0160
−0.0786*
−0.0075
(0.39)
(−0.84)
(−0.42)
(0.38)
(−1.73)
(−0.20)
GROWTH
−0.000415
−0.000163
0.0004
−0.0004
0.0019
−0.0007
(−0.59)
(−0.37)
(0.43)
(−0.32)
(1.46)
(−0.69)
CONSTANT
−0.126**
−0.0259
3.2798***
3.2753***
2.9771***
3.5436***
(−2.13)
(−0.70)
(81.40)
(65.65)
(55.26)
(75.71)
Total obs
4008
4008
4008
4008
4008
4008
Adjusted R2
0.405
0.808
0.273
0.187
0.270
0.162
F-statistics
95.15***
581.6***
61.26***
49.74***
52.67***
42.58***
Underidentification test
173.0***
173.0***
173.0***
70.81***
Weak identification test
44.87***
44.87***
44.87***
23.85***
Overidentification test
2.130
1.335
2.979
1.739
p-value of Sargan test
0.345
0.513
0.225
0.187
Regressions are estimated using IV-2SLS estimates. The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. We use MALE-CONNECT and FEM-INDUSTRY and their interaction with the indicator of gender quota regulation (QUOTA) as instruments in the first stage regressions. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. FEM-BD is the number of female directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE) board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE), profitability (PROFIT) and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
As in Table 4, we show the two-stage estimation results with instrumental variables. Similarly to Table 4 we obtain positive and significant coefficients for the percentage of women on the board for all columns. Concerning the question of interest: the moderating effect of the quota regime on the relationship between gender diversity and the adoption of sustainability policies, we obtain negative and statistically significant coefficients for the interaction term of the quota regime indicator and the proportion of women on the board. Providing support for our hypothesis H2 that expected a smaller effect of women when they access to the board through a mandatory quota system.5
Figure 1 represents the predicted values of the dependent variable TOTAL ESG as function of the proportion of women directors for firms under a hard quota regime (QUOTA = 1) and free from hard quota regulations (QUOTA = 0). We observe a positive effect of women directors on ESG performance although with different slopes when the variable QUOTA takes values of 0 and 1. There is a positive relationship between the proportion of women directors (FEM BD) of and ESG performance (TOTAL ESG) although this effect is less intense (but still positive) for firms under a hard quota regime.
Fig. 1
Moderating effect of gender quotas on gender diversity ESG performance relationship
The economic relevance of the effect of board gender diversity on ESG scores and the difference between regimes with and without hard quotas is economically relevant. For example, we observe that a 10% increase in the presence of women chosen under a voluntary or non-sanctioned system is associated with an increase of 6.74 points in the geometric average of the total ESG score. However, when women are elected under a hard quota system, the increase in the geometric average of the total ESG score is 1.77 points.
We have to be cautious with the interpretation of these results since IV-2SLS regressions yield statistically significant coefficients for the moderator variable QUOTA. We have performed hierarchical IV-2SLS and clustered OLS regressions including first the percentage of women directors (FEM-BD) and controls, adding in a second set of regressions the hard quota indicator (QUOTA) and finally the interaction term of the percentage of women directors and hard quota (FEM-BD x QUOTA). The comparison of the models presented in Table A-V of the online appendix shows positive and statistically significant coefficients for our main variable of interest (FEM-BD). We obtain negative and statistically significant coefficients for the binary indicator of hard quota regime when we add it to the regression model. Finally, when we add the interaction term we obtain negative and statistically coefficients for the interacted variables and positive and significant coefficients for the variable QUOTA. As noted by (Sharma et al. 1981) having statistically significant coefficients for the moderator variable (QUOTA) and statistically significant coefficients for the interaction term (QUOTAxFEM-BD) suggest the existence of a quasi-moderation negative effect of hard quotas over the positive effect of women directors on ESG performance.
Although the existence of a quasi-moderating effect does not allow to resolve the ambiguity about which of the predictor variables QUOTA or FEM-BD is the moderator, there is no sound theoretical support to justify that the proportion of women directors modifies the relationship between the existence of a gender quota regimen and ESG performance. It is more plausible to think in terms of the different expected effect of women directors depending on the way (voluntary or compulsory) in which they have been appointed, which suggests a moderating effect of the quota on the relationship between the proportion of board women directors and the firm’s ESG performance. This interpretation is also supported from clustered OLS estimations that yield non statistically significant coefficients for the variable QUOTA and statistically significant coefficients for its interaction with the variable FEM-BD.
4.3 Robustness tests
In this section we present robustness checks using 3SLS, Propensity Score Matching (PSM) and OLS robust regressions on matched samples to alleviate indigeneity concerns. Also, to demonstrate that our results in Tables 4and 5 are not sensitive to our proxies ESG performance, we present results for alternative scores and transformations of the Sustainalytics ESG scores.
Apart from the endogeneity concerns due to unobserved factors that may affect both dependent and independent variables, there might be problems due to simultaneity as our main independent variable FEM-BD might be a function of the dependent variable (ESG performance). Female directors might not be randomly appointed as board directors due to two possible situations. Firstly, women might be attracted by firms with better ESG performance due to reputational considerations. The capability of women to choose certain boards will be stronger in situations of an excess of demand for female directors, such as it is the case of compulsory board gender quotas. Alternatively, women directors might be preferred by firms to signal their commitment with sustainability policies. Therefore, there might be a problem of reverse causality due to the fact that women directors might have an effect on ESG performance and simultaneously ESG performance might affect women presence in the board of directors. The estimation of simultaneous equations using 3SLS methodology addresses problems of endogeneity due reverse causality and provides efficient estimates when error terms can be correlated across equations. We use 3SLS estimates of two simultaneous equations, treating the dependent variables, ESG performance (TOTAL ESG, ENVORONMENT, SOCIAL AND GOVERNANCE) and board gender diversity (FEM-BD), as endogenous.
Our results in Table 6 resemble those in Table 4 and provide further support to hypothesis H1. The positive and statistically significant coefficients for the variable FEM-BD indicate that a 10% increase in the percentage of women directors is associated with an increase of 4.00, 4.22 6.68 and 1.35 points in the geometric average of the total ESG score, the environment score, the social score and the governance score respectively.
Table 6
Effect of female directors on ESG score (3SLS estimations)
Regressions are estimated using IV-3SLS estimates of a system of two equations one predicting the firms’ ESG performance as a function of FEM-BD (Panel A) and the second predicting FEM-BD as a function of the firms ESG performance (Panel B). The dependent variables in Eq. 1 are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). The dependent variable in Eq. 2 is the proportion of women board directors (FEM-BD). We use MALE-CONNECT and FEM-INDUSTRY as instruments for FEM-BD and HUMAN-WELLBEING as instrument for the ESG scores. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. HUMAN-WELLBEING is the human wellbeing dimension of the TH Köln sustainable Society Index (SSI). FEM-BD is the number of female directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE) profitability (PROFIT)and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
Relating PSM analysis, first, we compare the mean values of the firm’s sustainability scores for matched samples after controlling for confounding factors that might affect systematically the adoption of sustainability practices. Panel A of Table 7 displays the covariate balance across firms with gender diverse boards (treatment group) and firms with all-male boards (comparison group) before and after matching and panel B shows the means’ difference of sustainability scores between these groups of firms for the whole sample and for the matched samples.
Table 7
Results for treatment effect analysis using Propensity Score Matching: Effect of board gender diversity
PANEL A: Covariate balance across treatment and comparison groups before and after matching
Original sample (Mean)
Nearest neighbor matched sample (Mean)
Outcome variables
Treated
Controls
Difference
t stat
Treated
Controls
Difference
t stat
BD SIZE
2.4404
2.1743
0.2661***
[15.79]
2.282
2.2784
0.0036
[0.13]
NEXEC-BD
0.82135
0.74527
0.07608***
[12.04]
0.79124
0.79498
−0.00374
[−0.33]
SIZE
7.8126
7.1165
0.6961***
[10.16]
7.3406
7.3704
−0.0298
[−0.25]
LEVERAGE
0.62762
0.56751
0.06011***
[6.61]
0.60135
0.57196
0.02939
[1.84]
PROFIT
0.0646
0.06893
−0.00433
[−1.21]
0.07133
0.06946
0.00187
[0.31]
GROWTH
2.3149
2.5921
−0.2772**
[−2.39]
2.2013
2.6197
−0.4184
[−1.95]
PANEL B: Average treatment effect on the treated
Outcome variables
Original sample (Mean)
Nearest neighbor matched sample (Mean)
Treated
Controls
Difference
t stat
Treated
Controls
Difference
t stat
TOTAL-ESG
4.0891
3.9608
0.1283***
[16.98]
4.0376
3.9792
0.0584***
[4.69]
ENVIRONMENT
4.0430
3.8951
0.1479***
[14.13]
3.9812
3.9244
0.0568***
[3.36]
SOCIAL
4.0891
3.9495
0.1396***
[15.86]
4.0352
3.9689
0.0663***
[4.32]
GOVERNANCE
4.1353
4.0450
0.0903***
[11.76]
4.0982
4.0554
0.0428***
[3.28]
Average differences of ESG scores, between firms with gender diverse and all-male boards based on matched samples from Propensity Score Matching analysis (PSM) using a Nearest Neighbor strategy. Panel A presents covariate balance across treatment (gender diverse boards) and comparison (all-male boards) groups before and after matching. Panel B presents average differences of the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE) for the original sample and matched samples obtained from PSM analysis. NEXEC-BD is the number of non-executive directors scaled by the total number of board directors. BD-SIZE is the log transformation of the total number of board directors. SIZE is the naperian logarithm of the firm’s book value of total revenue. LEVERAGE is the ratio of book value of total liabilities to total assets. PROFIT is the ratio of EBIT to total assets. GROWTH is the ratio of the market value of equity to the book value of equity. Levels of significance are indicated by **, and *** for 5%, and 1%, respectively
We have used a nearest neighbour strategy to form the comparison groups. Our results in panel A show that the balancing of the matching is correct generating non-statistically significant differences between gender-diverse and all-male boards at conventional levels between the covariates that could act as confounding factors. Our PSM results show that the average value of the total ESG, social, environment and corporate governance scores are higher for the group of firms with gender diverse boards than for the comparison group of firms with all-male boards. The means’ difference of ESG scores from matched samples provide further support to hypothesis H1 and confirms our results from the regression analysis in Table 4.
We have also performed regressions of Tables 4 and 5 using the matched samples derived from the nearest-neighbour matching strategy. Results are shown on Table 8. Panel A shows the effect of gender diversity while panel B displays the effect of the use of quotas. We show in Panel A positive coefficients for the indicator of board gender diversity across all columns. These coefficients are statistically significant for all the ESG scores confirming that board gender diversity is associated to better sustainability practices and provide further support to hypothesis H1. The results concerning the effect of quota regulations in panel B show negative and statistically significant coefficients for the interaction terms of the indicator of gender diversity and the use of quotas. This result confirms the moderating effect of quota regulations on the relationship between gender diversity and the sustainability scores indicating that the use of quotas reduces the beneficial effect of female board directors on the adoption of sustainability practices. Women directors are associated to higher sustainability scores albeit this effect is smaller if they have been selected under a quota regime. These results provide further support to the hypothesis H2 indicating that the use of quotas might attenuate the influence of women directors on the board deliberations.
Table 8
Regression analysis based on matched samples
(1)
(2)
(3)
(4)
Total-ESG
Environment
Social
Governance
PANEL A: Effect of female directors on ESG scores
FEM−BD
0.0602***
0.0669***
0.0558***
0.0559***
(6.57)
(5.27)
(4.83)
(5.77)
BD−SIZE
−0.00734
0.0176
0.00781
−0.0645***
(−0.45)
(0.78)
(0.38)
(−3.76)
NEXEC−BD
0.181***
0.234***
0.177***
0.147***
(5.96)
(5.54)
(4.62)
(4.58)
SIZE
0.0357***
0.0399***
0.0439***
0.0210***
(9.44)
(7.62)
(9.22)
(5.27)
LEVERAGE
−0.0240
−0.0763**
−0.0190
0.0331
(−0.95)
(−2.14)
(−0.59)
(1.22)
PROFIT
−0.0228
−0.00906
−0.0112
−0.0199
(−0.38)
(−0.11)
(−0.14)
(−0.30)
GROWTH
0.000915
0.000487
0.000210
0.000427
(0.53)
(0.20)
(0.10)
(0.23)
CONSTANT
3.381***
3.226***
3.160***
3.827***
(42.96)
(29.68)
(31.96)
(46.21)
Total obs
1039
1025
1025
1025
Adjusted R2
0.222
0.213
0.184
0.234
F−statistics
12.83
12.06
10.26
13.51
p−value
0.0000
0.0000
0.0000
0.0000
PANEL B: Effect of gender quotas
FEM−BD
0.0695***
0.0811***
0.0624***
0.0673***
(6.76)
(5.69)
(4.80)
(6.20)
QUOTA
0.0543***
0.0914***
0.0754***
−0.0120
(2.72)
(3.30)
(2.99)
(−0.57)
FEM−BD X QUOTA
−0.0632**
−0.100***
−0.0639**
−0.0360
(−2.57)
(−2.95)
(−2.06)
(−1.39)
BD−SIZE
−0.00664
0.0183
0.00666
−0.0601***
(−0.41)
(0.81)
(0.33)
(−3.50)
NEXEC−BD
0.191***
0.250***
0.190***
0.147***
(6.26)
(5.92)
(4.94)
(4.57)
SIZE
0.0350***
0.0390***
0.0436***
0.0200***
(9.24)
(7.44)
(9.13)
(5.00)
LEVERAGE
−0.0234
−0.0774**
−0.0205
0.0347
(−0.93)
(−2.18)
(−0.63)
(1.28)
PROFIT
−0.0192
−0.0111
−0.0109
−0.0250
(−0.33)
(−0.13)
(−0.14)
(−0.38)
GROWTH
0.000727
0.000295
0.000120
0.000274
(0.42)
(0.12)
(0.05)
(0.15)
CONSTANT
3.466***
3.295***
3.294***
3.876***
(45.30)
(31.23)
(34.29)
(48.19)
Total obs
1039
1025
1025
1025
Adjusted R2
0.226
0.220
0.190
0.240
F-statistics
12.24
11.69
9.905
12.95
p-value
0.0000
0.0000
0.0000
0.0000
This table presents predictions of the effect of female directors (Panel A) and the existence of gender quota regulations (Panel B) on the firm’s sustainability performance. Regressions are estimated on matched samples from PSM presented in Table 7 using OLS with standard errors clustered at the firm level. The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. FEM-BD is the number of female directors scaled by the total number of board directors. QUOTA is a binary indicator of gender quota regulation. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE), profitability (PROFIT), and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
Finally, we have also checked if our results are dependent on the use of alternative ESG scores. First, we address possible concerns raised by Berg et al. (2022) about the construction of ESG ratings leading to divergence and low correlations across ESG scores of different data providers. Second, we use logit transformations of Sustainalytics ESG scores defined as Logit score = Log (score/1-score) as dependent variables. This logit transformation runs from minus infinity to positive infinity and stretches the range of the score making this variable more suitable for regression analysis.
We show in Table 9 regression results using S&P Global ESG scores6 as proxies of the firms’ ESG performance in panel A and logit transformations of Sustanalytics ESG scores in panel B. We continue to observe positive and statistically significant coefficients for the proportion of women directors (FEM-BD) and negative and statistically coefficients for the interaction term (FEM-BD X QUOTA). These findings offer further support to our previous results using alternative measures of the dependent variable and hence, provide reaffirmation supporting our hypothesis H1 and H2.
Table 9
Effect of female directors and quotas on alternative measures of ESG performance
Panel A: Results for S&P ESG scores
1st Stage
2nd Stage
2nd Stage
2nd Stage
2nd Stage
FEM-BD
TOTAL-ESG S&P
ENVIRONMENT S&P
SOCIAL S&P
GOVERNANCE S&P
Effect of female directors on ESG scores
MALE-CONNECT
0.1268***
(10.10)
FEM-INDUSTRY
0.0670
(0.15)
FEM-BD
0.0090
1.6616***
4.0668***
1.9231***
1.0912***
(0.98)
(4.30)
(3.34)
(3.33)
(3.35)
BD-SIZE
0.3323***
0.1516***
0.4349***
0.1578***
0.0774**
(16.20)
(4.19)
(3.82)
(2.92)
(2.54)
NEXEC -BD
0.0104***
0.1421
0.3992
0.0514
0.1872
(4.20)
(0.85)
(0.76)
(0.21)
(1.34)
SIZE
0.0451***
0.1405***
0.2203***
0.1778***
0.1075***
(2.58)
(13.51)
(6.73)
(11.45)
(12.27)
LEVERAGE
0.0411
0.2481***
0.3694*
0.4400***
0.2427***
(0.74)
(3.51)
(1.66)
(4.17)
(4.07)
PROFIT
−0.0012
0.4794**
1.0821
0.9857***
0.3693**
(−1.06)
(2.21)
(1.58)
(3.04)
(2.02)
GROWTH
−0.1555
−0.0047
−0.0191
−0.0184***
−0.0007
(−1.29)
(−1.05)
(−1.34)
(−2.72)
(−0.19)
CONSTANT
0.1268***
0.4641***
−3.5183***
−0.2998
1.2773***
(10.10)
(2.78)
(−6.69)
(−1.20)
(9.08)
Industry FE
Yes
Yes
Yes
Yes
Year FE
Yes
Yes
Yes
Yes
Total obs
1663
1663
1663
1663
1663
Adjusted R2
0.3092
0.359
0.145
0.283
0.401
F-statistics
34.82
49.40
18.95
34.51
56.67
Idstat
97.30
97.30
97.30
97.30
97.30
Idp
7.45e-22
7.45e-22
7.45e-22
7.45e-22
7.45e-22
Widstat
50.96
50.96
50.96
50.96
50.96
Sarganp
0.305
0.589
0.175
0.947
Sargan
1.054
0.292
1.836
0.00434
Estat
7.865
6.611
4.371
4.864
Estatp
0.00504
0.0101
0.0366
0.0274
1st Stage
1st Stage
2nd Stage
2nd Stage
2nd Stage
2nd Stage
FEM-BD
FEM-BD X QUOTA
TOTAL-ESG S&P
ENVIRONMENT S&P
SOCIAL S&P
GOVERNANCE S&P
Effect of female directors’ quotas on ESG score
MALE-CONNECT
−0.0232***
−0.0152**
(−2.61)
(−2.47)
FEM-INDUSTRY
0.0281
−0.492*
(0.07)
(−1.66)
QUOTA X MALE-CONNECT
−0.0238
0.120***
(−0.99)
(7.23)
QUOTA X FEM-INDUSTRY
0.0662
0.879***
(0.38)
(7.34)
QUOTA
0.0851**
0.0849***
0.3928**
0.3038
1.0253**
0.3793*
(2.51)
(3.63)
(2.15)
(0.53)
(2.57)
(1.76)
FEM-BD
2.3644***
5.9165***
2.9430***
1.6538***
(4.52)
(3.64)
(3.61)
(3.76)
FEM-BD X QUOTA
−1.8656***
−2.8662
−4.1328***
−1.7325**
(−3.07)
(−1.51)
(−3.07)
(−2.38)
BD-SIZE
−0.0232***
−0.0152**
0.1904***
0.5998***
0.1908***
0.1090***
(−2.61)
(−2.47)
(4.74)
(4.80)
(3.04)
(3.21)
NEXEC-BD
0.308***
0.187***
0.2880
0.4538
0.5151
0.3510*
(15.99)
(14.13)
(1.34)
(0.68)
(1.39)
(1.75)
SIZE
0.0126***
0.00412***
0.1373***
0.2000***
0.1801***
0.1058***
(5.44)
(2.59)
(11.46)
(5.37)
(9.51)
(10.34)
LEVERAGE
0.0273*
0.00926
0.2628***
0.4184*
0.4657***
0.2577***
(1.67)
(0.82)
(3.66)
(1.87)
(4.17)
(4.27)
PROFIT
0.0403
0.0597*
0.5298**
1.1244
1.1244***
0.4212**
(0.78)
(1.68)
(2.36)
(1.61)
(3.20)
(2.21)
GROWTH
0.000315
−0.000681
−0.0080*
−0.0285**
−0.0236***
−0.0036
(0.29)
(−0.91)
(−1.72)
(−1.97)
(−3.25)
(−0.92)
CONSTANT
−0.103
−0.0305
0.1884
−4.0025***
−0.8963***
1.0177***
(−0.91)
(−0.39)
(0.99)
(−6.78)
(−2.75)
(5.78)
Industry FE
Yes
Yes
Yes
Yes
Yes
Yes
Year FE
Yes
Yes
Yes
Yes
Yes
Yes
Total obs
1663
1663
1663
1663
1663
1663
Adjusted R2
0.398
0.825
0.323
0.120
0.181
0.372
F-statistics
44.92
315.1
43.39
16.96
28.17
49.69
Underidentification test
55.78***
55.78***
55.78***
55.78***
Weak identification test
14.20***
14.20***
14.20***
14.20***
Overidentification test
2.550
0.459
1.766
0.000205
p-value of Sargan test
0.279
0.795
0.184
0.989
Estat
3.183
4.416
0.272
1.031
Estatp
0.0744
0.0356
0.602
0.310
PANEL B: Results for logit transformations of sustainalytics ESG scores
Logit total-ESG
Logit environment
Logit social
Logit governance
Effect of female directors on ESG scores
FEM-BD
1.4058***
1.4960***
1.9066***
0.7248***
(5.87)
(4.79)
(6.32)
(2.65)
BD-SIZE
0.0538**
0.0946***
0.1130***
−0.0781***
(2.47)
(3.34)
(4.13)
(−3.14)
NEXEC-BD
0.1876**
0.3181***
0.0032
0.3537***
(2.14)
(2.79)
(0.03)
(3.53)
SIZE
0.1058***
0.1351***
0.1106***
0.0719***
(19.26)
(18.88)
(16.00)
(11.45)
LEVERAGE
0.0013
−0.1188**
−0.0137
0.1402***
(0.03)
(−2.37)
(−0.28)
(3.19)
PROFIT
0.0112
−0.1519
0.0545
0.1225
(0.12)
(−1.29)
(0.48)
(1.18)
GROWTH
0.0045*
0.0106***
0.0021
−0.0017
(1.66)
(3.01)
(0.63)
(−0.55)
CONSTANT
−1.5282***
−2.1862***
−1.5021***
−0.8429***
(−14.46)
(−15.87)
(−11.29)
(−6.98)
Total obs
4008
4008
4008
4008
Adjusted R2
0.272
0.257
0.183
0.212
F-statistics
62.01
53.13
48.56
40.76
Underidentification test
212.3***
212.3***
212.3***
212.3***
Weak identification test
111.3***
111.3***
111.3***
111.3***
Overidentification test
1.058
2.005
0.699
0.231
p-value of Sargan test
0.304
0.157
0.403
0.631
Estat
9.202
3.557
20.44
0.165
Estatp
0.00242
0.0593
0.00000614
0.685
Effect of female directors’ quotas on ESG score
FEM-BD
1.9466***
1.9493***
2.4213***
1.4911***
(6.40)
(5.00)
(6.39)
(4.09)
QUOTA
0.3680**
0.1381
0.3316
0.6590***
(2.09)
(0.61)
(1.52)
(3.13)
FEM-BD X QUOTA
−1.9980***
−1.1318
−1.8415**
−3.2533***
(−3.16)
(−1.40)
(−2.34)
(−4.29)
BD-SIZE
0.0902***
0.1308***
0.1484***
−0.0320
(4.10)
(4.63)
(5.41)
(−1.21)
NEXEC-BD
0.3400***
0.3768**
0.1405
0.6219***
(2.64)
(2.28)
(0.88)
(4.03)
SIZE
0.1000***
0.1302***
0.1052***
0.0639***
(17.50)
(17.78)
(14.78)
(9.32)
LEVERAGE
0.0157
−0.1062**
0.0000
0.1598***
(0.40)
(−2.13)
(0.00)
(3.42)
PROFIT
−0.1068
−0.2419**
−0.0568
−0.0499
(−1.13)
(−2.00)
(−0.48)
(−0.44)
GROWTH
0.0029
0.0091***
0.0006
−0.0038
(1.06)
(2.60)
(0.18)
(−1.15)
CONSTANT
−1.7090***
−2.2909***
−1.6690***
−1.1354***
(−14.14)
(−14.79)
(−11.10)
(−7.83)
Total obs
4008
4008
4008
4008
Adjusted R2
0.249
0.258
0.177
0.106
F-statistics
56.23
49.42
45.12
35.24
Underidentification test
70.81***
70.81***
70.81***
70.81***
Weak identification test
23.85***
23.85***
23.85***
23.85***
Overidentification test
0.595
1.853
0.434
0.692
p-value of Sargan test
0.441
0.173
0.510
0.406
Estat
1.254
1.120
5.869
1.542
Estatp
0.263
0.290
0.0154
0.214
Regressions are estimated using IV-2SLS estimates. The dependent variables in PANEL A are the total ESG weighted score (TOTAL-ESG S&P), the environmental component of the ESG score (ENVIRONMENT S&P), the social component of the ESG score (SOCIAL S&P) and the corporate governance component of the ESG score (GOVERNANCE S&P) provided by Standard & Poors. All scores are log transformed. The dependent variables in PANEL B are the Logit transformations of Sustainalytics ESG scores as defined in Table 1. We use MALE-CONNECT and FEM-INDUSTRY and their interaction with the indicator of gender quota regulation (QUOTA) as instruments in the first stage regressions. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. FEM-BD is the number of female directors scaled by the total number of board directors. First stage regressions in panel B are omitted since they are the same as in Tables 3 and 4. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE) profitability (PROFIT)and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively.
4.4 Additional analysis
In Table 10 we perform an additional analysis to examine whether there are differences in the adoption of sustainability practices depending on whether female directors are executives or non-executives. The main results show that non-executive female directors have a positive and significant effect on all sustainability scores. In contrast, female executive directors have no significant effect on the adoption of sustainability policies in the company.7 This result suggests that non-executives are the main drivers of sustainability policies in the company and corresponds to the notion that non-executives act as a buffer between the board executives and the stakeholders’ interests (Pass 2004).
Table 10
Executive and non-executive female directors
Total-ESG
Environment
Social
Governance
EXEC-FEM-BD
−0.0496
−0.242
−0.0679
0.203
(−0.34)
(−1.20)
(−0.37)
(1.30)
NEXEC-FEM-BD
0.284***
0.382***
0.247***
0.222***
(7.08)
(6.77)
(5.18)
(5.45)
BD-SIZE
0.0261
0.0431*
0.0458**
−0.0214
(1.38)
(1.68)
(2.09)
(−1.19)
NEXEC-BD
0.137***
0.151***
0.145***
0.124***
(3.57)
(2.69)
(3.15)
(2.81)
SIZE
0.0396***
0.0508***
0.0430***
0.0245***
(8.64)
(8.15)
(7.93)
(5.04)
LEVERAGE
0.0109
−0.0333
0.0162
0.0505
(0.32)
(−0.71)
(0.42)
(1.59)
PROFIT
0.0194
−0.0477
0.0491
0.0441
(0.31)
(−0.57)
(0.67)
(0.67)
GROWTH
0.000488
0.00196
−0.000608
−0.0000887
(0.28)
(0.80)
(−0.31)
(−0.06)
CONSTANT
3.400***
3.248***
3.234***
3.729***
(53.58)
(26.26)
(49.40)
(59.59)
Total obs
4008
4008
4008
4008
Adjusted R2
0.318
0.283
0.274
0.246
F-statistics
35.24
24.07
28.60
20.35
p-value
0.0000
0.0000
0.0000
0.0000
Regressions are estimated using OLS with standard errors clustered at the firm level. The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. EXEC-FEM-BD is the number of female executive directors scaled by the total number of board directors. NEXEC-FEM-BD is the number of female non-executive directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE) board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE), profitability (PROFIT), and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
It is not surprising that executive directors are not prone to promote sustainability practices which are for the benefit of external stakeholders and the society in general, since the contractual duties of the executives are with the firm’s shareholders and not with external stakeholders. Moreover, the use of market performance bonuses in the executives’ compensation packages discourages the investment in sustainability practices that might pay off only in the long term. As for the economic relevance of the effect, the coefficient in column one of Table 10 indicates that a 10% increase in the presence of female non-executive directors is associated to a higher 3.28% of the average Total ESG score, which in the case of the sample corresponds to an increase of 1.92 points in this score.
Kanter (1977) have introduced the notion of tokenism according to which female directors as a minority group, in many cases consisting of just one individual might have very limited influence on the board’s deliberations. As the same proportion of female directors might be represented by different numbers of women directors depending on the board’s size, we explore if reduced groups of women directors (as small as one woman) have a real voice and are not seen as mere tokens representing female gender stereotypes. To find out whether female board members are affected by tokenism (Kanter 1977), we have carried out a piecewise regression analysis so as to gauge the effect of the first women director (FEM-BD1), the second (FEM-BD2) and the third and subsequent women (FEM-BD3) on the firms’ sustainability performance. The coefficients for these variables are positive and statistically significant across all columns of Table 11. Contrarily to the notion of tokenism, this result suggests, that gender diversity has a positive effect from the first female board member.
Table 11
Piecewise regression: effect of additional female directors
Total-ESG
Environment
Social
Governance
FEM-BD1
0.0338***
0.0372**
0.0354**
0.0298**
(2.64)
(2.08)
(2.26)
(2.21)
FEM-BD2
0.0356***
0.0455***
0.0238*
0.0405***
(3.17)
(3.01)
(1.74)
(3.59)
FEM-BD3
0.0155***
0.0217***
0.0133***
0.0107**
(3.52)
(3.67)
(2.66)
(2.35)
BD-SIZE
−0.0165
−0.0124
0.0104
−0.0585***
(−0.83)
(−0.46)
(0.44)
(−3.07)
NEXEC-BD
0.180***
0.226***
0.187***
0.131***
(4.91)
(4.22)
(4.34)
(3.18)
SIZE
0.0388***
0.0498***
0.0424***
0.0239***
(8.38)
(7.92)
(7.69)
(4.92)
LEVERAGE
0.0108
−0.0325
0.0166
0.0489
(0.32)
(−0.69)
(0.43)
(1.55)
PROFIT
0.0162
−0.0509
0.0462
0.0402
(0.26)
(−0.62)
(0.63)
(0.62)
GROWTH
0.000334
0.00181
−0.000723
−0.000306
(0.19)
(0.74)
(−0.37)
(−0.19)
CONSTANT
3.464***
3.323***
3.282***
3.805***
(55.24)
(27.39)
(49.39)
(60.60)
Total obs
4008
4008
4008
4008
Adjusted R2
0.313
0.274
0.269
0.248
F-statistics
33.19
22.22
27.33
20.09
p-value
0.0000
0.0000
0.0000
0.0000
Regressions are estimated using OLS with standard errors clustered at the firm level. The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. FEM-BD1 is the number of female directors on the board, if the number of female directors is below 2 and one if the number of female directors is two or more. FEM-BD2, is equal to zero if the number of female directors is below two and one if the number of female directors is two or more. FEM-BD3, is equal to zero if the number of female directors is below three and the number of female directors-2 when there are at least three female directors. All models include controls of board’s size (BD-SIZE) board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE), profitability (PROFIT), and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
We note in columns 1, 2 and 4 that the effect associated to the second female director slightly exceeds that of the first one. Also, in all cases the effect of the first woman exceeds that of the third and subsequent female directors. This result suggests that the presence of a second woman with whom coalitions can be formed enhances the gender diversity effects represented by the presence of a single woman. Beyond the second women director, although positive, there is a decreasing contribution of additional women to firms’ sustainability performance. Overall, the results seem to go against the notion that "one and only” women directors are treated as tokens and suggest that there is no critical mass of three women beyond which the beneficial effects of gender diversity are triggered. This "magical number" may be closer to two women at least in the context of sustainability performance.
Firms can use the appointment of women directors as a signaling device to communicate positive organizational qualities to shareholders or outside stakeholders such as potential investors, consumers, employees or competitors. By appointing women directors, firms signal their commitment to gender diversity which is positively associated to firms’ legitimacy (Meyer and Rowan 1977). By making a certain proportion of women directors compulsory, hard gender quotas limit the signaling capacity of women director appointment decisions. In a hard gender quota environment, stakeholders might only perceive the proportion of women directors above the required quota as a positive signal. Conversely holding a proportion of women directors under the quota might be perceived as a negative signal of resistance to gender equality.
We have estimated the effect of the board gender gap with respect to the quota requirements in countries and periods when a hard quota has been enforced (i.e. when companies can be punished for non-compliance with the quota law8). For this purpose, we have built the variable QUOTA GAP calculated as the difference between the proportion of women directors and the mandatory quota requirements. This variable will take negative values for companies that are not complying with the quota law and zero or positive values for companies that are complying with the quota. We perform this analysis for all observations corresponding to countries and years where there is a compulsory board gender quota regulation in place and also separately for quota-compliant and quota-uncompliant firms as the signal released might be different in these two situations. We show this analysis in Table 12.
Table 12
Effect of compliance with quota requirements on ESG performance
Total-ESG
Environment
Social
Governance
PANEL A: Effect of gender gap total sample of firms under hard quota regulation
QUOTA-GAP
0.202***
0.353***
0.109**
0.150***
(4.86)
(6.00)
(2.28)
(3.41)
Total obs
1130
1130
1130
1130
Adjusted R2
0.309
0.263
0.307
0.248
F
31.82
24.18
26.87
23.58
PANEL B: Effect of gender gap for quota-compliant firms
QUOTA-GAP
0.331***
0.568***
0.230**
0.192**
(3.73)
(4.31)
(2.47)
(2.15)
Total obs
638
638
638
638
Adjusted R2
0.313
0.258
0.330
0.195
F
23.80
19.85
18.80
18.07
PANEL C: Effect of gender gap for quota-uncompliant firms
QUOTA-GAP
−0.00328
0.00481
−0.101
0.134
(−0.03)
(0.04)
(−0.81)
(1.35)
BD-SIZE
−0.00410
0.0159
0.0249
−0.0813***
Total obs
492
492
492
492
Adjusted R2
0.327
0.309
0.302
0.328
F
13.98
12.96
13.70
16.18
Regressions are estimated using OLS with standard errors clustered at the firm level. Panel A shows results for all observations corresponding to countries and years where there is a compulsory board gender quota regulation in place. PANELS B and C show respectively results for the subsamples formed by quota-compliant firms (PANEL B) and quota-uncompliant firms (PANEL C). The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. QUOTA-GAP is defined as the difference between the proportion of board women directors (FEM-BD) and the proportion of female directors required by the mandatory quota in a country and year. All models include controls of board’s size (BD-SIZE) board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE), profitability (PROFIT), and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
Our results in panel A of Table 12 show positive and statistically significant coefficients for the variable QUOTA GAP indicating that companies that have a higher proportion of woman directors in comparison with the quota requirements show better ESG performance. The behavior of this variable could differ between its positive and negative ranges as a small variation from positive (compliance) to negative (incompliance) puts the firm in a very different situation. When we split the sample into the group of firms with a proportion of women directors above (below) the quota requirements, we observe positive and statistically significant coefficients for the former sample, while the coefficients were non statistically significant for the latter. This result suggests that when a quota is enforced it is the proportion of women directors above the quota threshold that has a positive impact on the firms’ ESG performance. This result is consistent with the notion that once the quota is enforced investors take the quota threshold “for granted” and therefore the proportion of women below that threshold has no signaling capacity and only the proportion of women above this threshold serves as a signal to the market of the firms’ commitment with sustainable practices.
From the standpoint of the signaling theory, firms might use the appointment of women directors to convey information about unobservable firm qualities such as reputation or prestige (Bear et al. 2010). Reputation is a valuable intangible asset for all kind of firms that is positively correlated to firms’ performance (Roberts and Dowling 2002). However, there are certain cases such as family firms where reputation becomes especially relevant. The long-term involvement and strong identification with the business of the controlling family and their social ties with the community might make these controlling shareholders more sensitive to reputational considerations.
We have explored the possibility that the role played by women directors might depend on the importance of legitimacy or reputation for a business. We have analyzed the effect of women directors on ESG performance in two samples formed the first by non-family firms and the second by family firms. In this second one we further analyze if family firms in which the family name formed part of the company name (i.e. the family reputation is more directly linked to the firm’s outcomes) show different gender diversity ESG performance relationship compared to family firms where there is not such a direct link between firm and family names. In order to classify the sample firms in the categories of family and non-family firms we used information provided by the NRG Metrics database, which follows any trace of family involvement in the firm, as founder, owner/voteholder, or officer. We used a binary variable identifying family firms as those in which the founding-family holds at least 25% of the voting rights or (if less) a family member serves as either executive or supervisory board member. This threshold is similar to those used in previous studies on European firms (e.g. Andres 2008; Amore et al. 2022).
Our results shown in Table 13 indicate that women directors were not equally associated with firms ESG performance. While we obtained positive and statistically significant coefficients for the sample of non-family firms, these coefficients were not statistically significant for the subsample of family firms. However, when we split the sample between family firms with a direct identification of the family and the company through the company name, we observe a positive and statistically significant relationship between the proportion of female directors and firm ESG performance for firms strongly associated to the family name while this relationship was negative in the case of firms without such association. This last result suggests that women directors play a role in protecting the family reputation when there is a risk that the family name becomes damaged by the family firms’ low ESG performance.
Table 13
Effect of female directors on ESG score. (Family and non-family firms)
Total-ESG
Environment
Social
Governance
PANEL A: Non-family firms
FEM-BD
0.7362***
0.6973***
0.9520***
0.4035**
(4.90)
(3.56)
(5.22)
(2.57)
Total obs
1743
1743
1743
1743
Adjusted R2
0.263
0.270
0.150
0.288
F-statistics
30.01
28.29
23.79
26.12
Underidentification test
84.43***
84.43***
84.43***
84.43***
Weak identification test
43.68***
43.68***
43.68***
43.68***
Overidentification test
3.084
1.997
5.900
0.0894
p-value of Sargan test
0.0791
0.158
0.0151
0.765
PANEL B: Family firms
FEM-BD
−0.0636
−0.1932
0.1623
−0.1575
(−0.42)
(−0.88)
(0.90)
(−1.12)
Total obs
271
271
271
271
Adjusted R2
0.429
0.465
0.420
0.277
F-statistics
9.531***
11.14***
9.297***
5.594***
Underidentification test
56.88***
56.88***
56.88***
56.88***
Weak identification test
32.54***
32.54***
32.54***
32.54***
Overidentification test
1.220
0.0212
0.343
3.372
p-value of Sargan test
0.269
0.884
0.558
0.0663
PANEL C: Family firms with family name as part of the firm name
FEM-BD
2.0448**
1.4890
3.4698**
0.9031
(2.11)
(1.52)
(2.44)
(1.54)
BD-SIZE
−0.0381
−0.0583
−0.1305
0.0969
Total obs
74
74
74
74
Adjusted R2
−0.474
0.0810
−1.131
0.212
F-statistics
1.632
2.561
1.179
2.897
Underidentification test
8.504**
8.504**
8.504**
8.504**
Weak identification test
3.441**
3.441**
3.441**
3.441**
Overidentification test
1.530
0.280
1.795
2.735
p-value of Sargan test
0.216
0.597
0.180
0.0982
PANEL D: Family firms with no family name in the company name
FEM-BD
−0.3902*
−0.5457*
−0.2861
−0.3040*
(−1.85)
(−1.69)
(−1.28)
(−1.70)
Total obs
197
197
197
197
Adjusted R2
0.365
0.395
0.454
0.329
F-statistics
7.104
7.588
8.438
5.980
Underidentification test
34.78***
34.78***
34.78***
34.78***
Weak identification test
18.33***
18.33***
18.33***
18.33***
Overidentification test
0.289
0.00609
0.166
1.380
p-value of Sargan test
0.591
0.938
0.684
0.240
Regressions are estimated using IV-2SLS estimates. We show results for non-family firms (PANEL A), family firms (PANEL B), family firms with identification between family and company name (PANEL C), family firms without identification between family and company name (PANEL D). The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. We use MALE-CONNECT and FEM-INDUSTRY as instruments in the first stage regressions. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. FEM-BD is the number of female directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE) profitability (PROFIT) and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
Finally, we have explored the effects of insiders’ entrenchment and type II agency issues on the women directors-ESG performance relationship. We have separated firms in which the largest owner has voting rights in excess of their cash flow rights as a feature that constitutes an entrenchment device that allow insiders self-serving behavior and wealth expropriation. Our results in Table 14 indicate a positive and statistically significant relationship between the proportion of women directors where the largest shareholder holds equal voting and cash-flow rights while this relationship was not statistically significant when the largest shareholder has an excess of voting rights over cash-flow rights. This result is consistent with the notion that entrenched insiders reduce CSR activities to indulge in self-serving activities (Oh et al. 2017; Seaborn et al. 2020). Therefore, our analysis suggests that the positive role of women directors on ESG performance succumbs in situations where there are agency II problems due to the break of the one-share one-vote democracy rule.
Table 14
Effect of female directors on ESG score (large shareholders entrenchment)
Total-ESG
Environment
Social
Governance
PANEL A: Equal voting and cash flow rights of the largest shareholder
FEM-BD
0.5937***
0.5313***
0.8396***
0.2876***
(5.82)
(3.88)
(6.64)
(2.72)
Total obs
3038
3038
3038
3038
Adjusted R2
0.288
0.268
0.193
0.255
F-statistics
51.44
41.95
42.21
39.05
Underidentification test
165.7
165.7
165.7
165.7
Weak identification test
86.84
86.84
86.84
86.84
Overidentification test
2.175
1.449
2.468
0.0572
p-value of Sargan test
0.140
0.229
0.116
0.811
PANEL B: Excess voting rights over cash flow rights of the largest shareholder
FEM-BD
0.1371
0.2924
0.3785
−0.2918
(0.40)
(0.62)
(0.87)
(−0.88)
BD-SIZE
−0.0233
0.0005
−0.0608
−0.0127
Total obs
496
496
496
496
Adjusted R2
0.297
0.275
0.220
0.297
F-statistics
9.262
8.537
7.372
11.30
Underidentification test
14.33
14.33
14.33
14.33
Weak identification test
6.977
6.977
6.977
6.977
Overidentification test
1.461
1.072
1.270
0.526
p-value of Sargan test
0.227
0.301
0.260
0.468
Regressions are estimated using IV-2SLS estimates. We show results for firms where the largest shareholder holds equal voting and cash flow rights (PANEL A), and firms where the largest shareholder holds excess voting rights over cash flow rights (PANEL B). The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. We use MALE-CONNECT and FEM-INDUSTRY as instruments in the first stage regressions. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. FEM-BD is the number of female directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE) profitability (PROFIT)and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
Finally, the effect of female directors on the firm’s affairs might be more pronounced if they hold specific leading positions, such as the chair of the board. The chair of the board is responsible for managing board dynamics and running the board effectively by fostering board directors’ participation in the deliberations (Machold et al. 2011). Thus, female directors in chair positions can be especially influential in the determination firms’ ESG performance. We have analyzed the influence of female board chair position by considering separate subsamples of firms with its board chaired by a woman or by a man. Our results in Table 15 indicate that women directors have a positive effect on ESG performance in boards chaired either by women or by men, but coefficients for the variable of interest (FEM-BD) are between two and four times higher in companies chaired by women. This result is consistent with the notion that women directors have a stronger (and positive) effect on firm’s ESG performance when they play central roles such as board chair.
Table 15
Effect of female directors on ESG score (Gender of board chair)
Total-ESG
Environment
Social
Governance
PANEL A: Boards chaired by women
FEM-BD
1.3206***
1.8406***
1.2770***
0.5237
(2.89)
(2.99)
(2.67)
(1.19)
Total obs
178
178
178
178
Adjusted R2
0.134
0.0507
0.174
0.225
F-statistics
3.481
3.030
3.844
3.208
Underidentification test
20.88***
20.88***
20.88***
20.88***
Weak identification test
10.16***
10.16***
10.16***
10.16***
Overidentification test
0.951
0.597
0.920
1.132
p-value of Sargan test
0.330
0.440
0.337
0.287
PANEL B: Boards chaired by men
FEM-BD
0.4334***
0.3962***
0.6317***
0.1676*
(4.55)
(3.07)
(5.34)
(1.69)
Total obs
3375
3375
3375
3375
Adjusted R2
0.302
0.275
0.218
0.257
F-statistics
57.30
47.63
45.82
44.53
Underidentification test
184.1***
184.1***
184.1***
184.1***
Weak identification test
96.59***
96.59***
96.59***
96.59***
Overidentification test
1.804
0.935
2.568
0.0691
p-value of Sargan test
0.179
0.334
0.109
0.793
Regressions are estimated using IV-2SLS estimates. We show results for firms where the board is chaired by a woman (PANEL A), and firms where the board is chaired by a man (PANEL B). The dependent variables are the total ESG weighted score (TOTAL-ESG), the environmental component of the ESG score (ENVIRONMENT), the social component of the ESG score (SOCIAL) and the corporate governance component of the ESG score (GOVERNANCE). All scores are log transformed. We use MALE-CONNECT and FEM-INDUSTRY as instruments in the first stage regressions. MALE-CONNECT is the proportion of male directors who have a seat on another board with female directors. FEM-INDUSTRY is the aggregate ratio of female directors at the two-digit SIC industry level. FEM-BD is the number of female directors scaled by the total number of board directors. All models include controls of board’s size (BD-SIZE), board’s independence (NEXEC-BD), firm’s size (SIZE), leverage (LEVERAGE) profitability (PROFIT)and investment opportunities (GROWTH) as defined in Table 1. Firm SIC industry and year dummies are included in the estimations. ***, **, and * represent significance at the 1%, 5%, and 10% level, respectively
5 Discussion and conclusions
In recent years, academic discussions have highlighted the need for companies to actively engage in sustainability practices (Linnenluecke and Griffiths 2010). The ongoing debate on gender equality has reached the field of corporate sustainability, that is, the firms’ tendency to conduct themselves in an economically, socially and environmentally responsible manner, benefiting all stakeholders and the whole society. This paper examines the potential impact of gender diversity and the use of board gender mandatory quotas on corporate sustainability practices with the aim of providing further evidence and expanding the political and social debate on the role of women in the decision-making structures of listed companies.
Our first line of research is grounded in two theories: gender socialization theory and signaling theory, aiming to understand how the presence of women on boards of directors can positively influence the adoption of sustainability strategies and practices in companies, encompassing environmental, social, and corporate governance aspects. Gender socialization theory argues that stereotypically assigned caregiving roles associated with women are linked to personal traits that favor the adoption of sustainable practices. The signaling theory suggests that visible actions taken by a company can be interpreted by external stakeholders as indications of its values, commitments, and capabilities. The inclusion of women on boards of directors could be perceived as a signal of firms’ commitment to diversity, gender equality, and thus sustainability in its broader dimensions.
Although female directors have been traditionally underrepresented in the firms’ top positions, our results indicate that large listed European companies are taking responsibility for closing this gap by appointing women to their boards. We observe for our sample of study that female directors represented in 2009 a meagre 10% of the boards’ composition while their weight experienced a steady increase reaching 28% by 2018.
Our main findings support the notion that boards’ gender diversity encourages companies to adopt sustainability policies and to act in a socially responsible fashion. Results suggest that gender diversity on the board has a positive and significant impact on environmental, social and corporate governance scores. These effects are mainly due to the participation of non-executive female directors and contrarily to the critical mass postulates, begin from the first female director appointed to the board. These results are robust to the use of different techniques for controlling potential endogeneity problems. Our findings expand and strengthen the literature on board diversity that highlights the benefits for the company, shareholders and stakeholders of incorporating women into their management and decision-making structures (Adams and Ferreira 2009; Brieger et al. 2019; Cabeza-García et al. 2021; Valls Martínez et al. 2020).
The second line of research focuses on the possible existence of differences in the relationship between board gender diversity and firm ESG performance due to the enforcement of mandatory board gender quotas. We explore how the implementation of gender board quotas can have effects on the external perception of the company and on the internal dynamics of the board. From the signaling theory standpoint, we argue that the appointment of women directors as a result of a mandatory quota, loses its signaling capacity, as it is perceived more as an imposed measure rather than a voluntary and genuine action by the company. Also, from a failure perspective, it is posited that an externally imposed increase of women on boards, may contribute to the creation of opposing board factions leading conflicts and difficulties in board performance.
Our results suggest that, although the overall contribution of female directors to firm’s sustainability remains positive under all appointment systems, this positive effect is attenuated in the case of mandatory quotas. From the signaling theory perspective, we can understand the attenuation of the effects of women directors as stemming from the diluted signal of women director appointments under mandatory board gender quota regimes. From a failure perspective, this result can be interpreted as a negative reaction (backlash) to the imposition of a forced board structure that differs from the one that the firm considered optimal and had arrived at of its own free will. Second, under the positive action of quotas new female directors might be perceived as “unfairly” appointed, which might lead to internal board tensions, detrimental to its correct functioning. In the first place, this situation may erode the legitimacy of the new female board members, limiting their contribution to the work of the board, and in the second place, it may create tensions among board members that might damage the correct functioning of the board's deliberations.
Our study is timely in the European context after the agreement of the European Council and the European Parliament in June 2022 to implement new regulations on gender equality requiring the boards of listed companies in the 27 EU member states to have at least 40% of non-executive board seats or 33% of all board seats occupied by women by mid-2026. Our results indicating a positive association between women on boards and companies' sustainability scores supports this recent development and encourage the incorporating women into decision-making institutions, as a means of fulfilling the demanding EU sustainability agenda by 2050.
Also, the relatively smaller effect of female directors on sustainability performance under quota systems, calls for a deep debate on the implementation of this type of regulation. Quota laws have proved to be a fast track to correct gender imbalance at the board level. However, the pay gender gap and the under-representation of women in top executive positions continues as a pervasive phenomenon even in countries that have adopted quotas, proving that firms do not go often beyond the legal requirements of quotas in their policies of gender equality. We call for further analysis on the use of quotas as their effectiveness could be influenced by the degree of opposition by individuals to State interventionism, the length of the period for their implementation or the adoption of negative sanctions for non-complaints. A thorough analysis of these factors might assist regulators in the design of gender policies at the corporate level.
Our results, contrary to the tokenism phenomenon affecting female directors, highlight the need for further analysis of the tokenism and critical mass concepts in a multi country framework. The magical number of three female directors has often been used in the literature as the critical mass that triggers effective changes in boards’ behavior. However, we must ask ourselves whether this concept can be applied independently of the group size considered. This reflection is particularly relevant given the significant differences in board size observed among countries.
While the results have proved to be robust, we recognize several limitations in the study that moderate their scope and, at the same time, suggest possible lines of future research. Although our proxies of female representation and participation on the board have been widely used in previous studies, it is necessary to search for new ways of capturing the effective power of women in board decisions. A qualitative approach based on in-depth interviews could provide interesting insights into the dynamics of group decision-making within corporate boards. Consideration of these qualitative aspects could lead to a deeper understanding about the debate and decision-making process in highly diverse boards characterized by the confrontation of a wide variety of ideas and opinions.
Also, using quantitative sustainability scores limits the study's scope to large listed companies for which these scores are available. However, it is an empirical question to analyze whether the results obtained hold in the case of small and mid-cap listed firms. Moreover, the information transparency requirements for listed companies make it difficult to extrapolate our results to private companies.
Finally, the present study has been carried out on a sample of developed countries that have passed a long time ago their early stages of development characterized by the intensive exploitation of their local natural resources. It would be of the upmost interest to analyze sustainability policies and their relationship with gender diversity in emerging countries for which the extraction and sale of raw materials and non-renewable resources constitute their main source of growth. In this regard, there are at least two relevant matters to consider. First, contrarily to what one might think, some developing countries present gender equality records similar or even above those of developed countries.9 Second, in the absence of external sources of support, the most immediate way for these countries to boost their development would be through the exploitation of natural resources that constitute the world's main reserves. The over-exploitation of these last reservoirs might have devastating effects on a global scale, that calls for a controversial debate on the path of development for these countries.
Acknowledgements
Financial support from the Spanish Ministry of Science and Innovation via Project PID2022-140940NB-I00 and from the Government of the Principate of Asturias via Project AYUD/2021/50878 is gratefully acknowledged.
Declarations
Conflict of interests
The authors have no relevant financial or non-financial interests to disclose.
Ethical approval
All authors reviewed the results and approved the final version of the manuscript.
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Since 2018 Portugal, Austria and Greece have adopted board gender quota systems, but they came into force after the final year of our period of study (2018).
We present also the descriptive statistics of the evolution of the proportion of women directors and ESG performance for countries adopting hard quotas (Norway, France, Belgium, Germany and Italy), soft quotas (Spain, The Netherlands), voluntary recommendations (Austria, Portugal, Sweden, Finland, Luxembourg, Slovenia, Denmark, Greece, Poland, Romania, Ireland) and with no quota or recommendations (Bulgaria, Czech Republic, Estonia, Croatia, Cyprus, Lithuania, Malta, Slovakia, Latvia). We consider the changing of regulations throughout the period of study 2009–18. For instance, in the descriptive analysis, the observations of German firms appear as part of the unregulated group before 2010, in the group of observations adopting voluntary recommendations from 2011 to 2014 and in the group of observations corresponding to countries adopting hard quotas from 2015 to 2018. Nevertheless, as our regression analysis compare compulsory regulation (hard quota) to any other situation (soft quotas, recommendations or no regulation) observations from German firms will be coded as 0 before 2015 and 1 after 2015.
We have also estimated Eq. (1) with a set of seven controls, the six described in Sect. 3.2. and a control of the ownership structure (LARGE 3) which reflects the aggregated ownership stake of the three largest shareholders. The sign and the statistical significance of the variables of interest (FEM-BD and FEM-BD X QUOTA) are similar with and without the control of ownership structure. We show these alternative estimations in Table A-IV of the online appendix.
Hypothesis H2 explores the effects of female directors when women directors are appointed under a mandatory quota regime (i.e. externally imposed board structure) compared to any situation when firms have freedom to decide internally their board gender mix (soft quotas, recommendations, and no regulations at all). In an untabulated analysis comparing hard gender quotas individually to soft gender quotas and to voluntary recommendations we observe that women directors appointed under voluntary regimes (either soft quotas or recommendations) show stronger (and positive) effects on the firm ESG performance than women directors appointed under hard quota regimes. This result provides further support to the hypothesis H2.
When we do a similar analysis at the committee level, we obtain evidence of the positive effect of non-executive directors and some evidence indicating a similar influence of the executive directors at the audit and nomination committee level. Nevertheless, we have to be cautious about this last result given that presence of women executive directors at the committee level is nearly inexistent (0.05% at the audit committee, 0.04% at the nomination committee and 0.06% at the remuneration committee). We have added the results on women directors at the committee level as Table A-VII of the online appendix.
According to the Global Gender Gap Report (2020) presented at the World Economic Forum, developing countries such as Nicaragua and Rwanda and are respectively the fifth and ninth positions of the global gender gap index, above New Zealand, Ireland, Spain or Germany.
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