A company with a gender-diverse board of directors is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value, according to new research by Kaisa Snellman, Assistant Professor of Organisational Behaviour at INSEAD, and Isabelle Solal, Post-Doctoral Research Fellow from INSEAD.

The authors’ paper, “Women Don’t Mean Business? Gender Penalty in Board Composition,” published in the INFORMS journal Organisation Science, suggests that investors respond to the presence of female leaders not simply on their own merit, but as broader cues of firm preferences.

The study itself observes and analyses investor responses to board diversity. Results show that one additional woman on the board results in a 2.3 percent decrease in the company’s market value on average. This might seem like a miniscule amount, but in reality can amount to millions, even hundreds of millions of dollars.

The researchers looked at 14 years of panel data from US public firms and saw that firms with more female directors were penalised.

“Firms that increase board diversity suffer a decrease in market value and the effect is amplified for firms that have received higher ratings for their diversity practices across the organisation,” said Solal.

“If investors believe that female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, a firm unintentionally signals a weaker commitment to shareholder value than a firm with a non-diverse board,” added Snellman.

Some reports by consulting firms and financial institutions have shown a positive correlation between firm value and gender-diverse boards, but recent studies based on long-term data show a negative effect on female board representation. The explanation is found in how investors interpret the decision.

“Our results imply that when additional information on the firm’s preferences is available, the market relies on that information in order to lessen the uncertainty surrounding the board diversity cue. Additional information may come from observing other choices the firm makes, notably in terms of diversity policies,” continued Snellman.

The researchers argue that fostering awareness is the first step in addressing and eliminating damaging assumptions. They suggest firms should carefully frame female appointments and reassure shareholders of corporate goals.

“We see that anything that suggests to shareholders that the appointment of a female director is essentially a diversity measure is more likely to lead them to respond negatively. So it is important that companies focus on the woman’s qualifications and experience when they make the appointment, instead of focusing on the fact that she is a woman and would increase the gender diversity of the board. While well-intentioned, this kind of language is ultimately unhelpful,” said the researchers in an interview with HR Asia.

The paper suggests that over time, just as greater exposure to female leaders has been shown to reduce stereotype bias, the increase in female board appointments should likewise decrease the perception that firms select directors for any reason other than their qualifications.

“There is strong evidence that diverse and inclusive teams make better decisions, faster, leading to improved outcomes. Society and businesses are making slow but steady progress in breaking down barriers and embracing the rich value that comes with greater diversity and inclusion, but this important research is another reminder that we still have a long way to go,” said Pinar Keskinocak, INFORMS 2020 president.


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