The past decade has seen an explosion of boardroom gender diversity reforms worldwide. As of 2014, 23 countries have amended governance codes and 14 countries have enacted laws to increase gender diversity on corporate boards. While investors play a critical role in engaging with company boards and are increasingly focused on social equity, the evidence is scant on how these reforms affect investors’ monitoring role. This gap also contrasts with regulators’ reliance on investors to help ensure firms’ faithful implementation of the reforms. In our paper, we assess the change in the association between institutional ownership and female directorships following the boardroom gender-diversity reforms worldwide.
Boardroom diversity is a key social performance issue, and its reforms represent major social and governance policy initiatives. These reforms may facilitate the monitoring role of institutional investors regarding corporate diversity for two reasons. First, the reforms can facilitate private communications among managers and investors by setting a standard for fair representation of genders on corporate boards. Institutions can also leverage public pressure for the reforms in their private negotiations with managers. Second, the reforms can make it easier for institutional investors to collaborate with other investors and stakeholders, an important factor for successful engagement.
Because the impact of the reforms on institutional monitoring likely depends on the level of information asymmetry between corporate insiders and corporate outsiders, we separately examine foreign institutional investors and domestic institutional investors. Prior to the reforms, foreign investors may have been more careful in voicing their preferences and forming partnerships with other active investors and stakeholders because they were less familiar with the local business environment and practices. If the reforms help institutional investors better communicate with managers and coordinate among themselves, we predict that foreign institutional investors will become more effective at increasing female representation on boards following the reforms. In contrast, domestic investors have a much more information about local companies. The strong local business ties can also help these investors communicate their preferences to companies and coordinate among themselves relatively easily. Thus, the reforms may not affect domestic investors’ monitoring role because they have more information about, and stronger connections with, local businesses.
We test our predictions using a difference-in-differences design based on a worldwide sample from 2000 to 2017. Our treatment sample consists of firms from 25 countries that amended a corporate governance code or enacted legislation to improve boardroom gender diversity. Our benchmark sample consists of firms from 18 countries that did not adopt any of these reforms during our sample period. We find that more foreign institutional investors, but not domestic investors, are associated with more female directors after the reforms. Additional analyses find that the increased association occurred after the adoption of the reforms, and the result is robust to using alternative samples, event windows, and estimation methods.
Next, we investigate the role of social norms. Unlike governance regulations that are part of a country’s formal institutions, social norms are informal, reflecting the collective beliefs and understanding of acceptable group behaviors. If the reforms helped foreign institutional investors to voice their preferences, we expect our results to be primarily driven by foreign institutional investors from countries with a high social-equity norm. Using the gender equality index based on the World Values Survey and the European Values Survey data to serve as a proxy for social-equity norms, our analyses confirm this expectation.
We also consider the role of investor type and find that our results are driven by foreign pension funds and independent institutions (e.g., mutual funds). In an additional test that explores whether the monitoring role of institutional investors depends on reform approaches, we find that the result holds for both governance code reforms and the legislative reforms.
A natural question is whether the post-reform changes in boardroom gender diversity are in line with changes in firm performance. Consistent with the notion that the governance changes triggered by the reforms increase firm value, we find that reform compliance is associated with subsequent improvements in firm performance, as measured by Tobin’s Q, market-to-book ratios, and return on investment. Furthermore, consistent with the governance changes’ credibility, we find that firms with increased female directorships have a more independent board and a higher percentage of women serving on key committees (audit, compensation, and nominating committees). While the new female directors are on average younger than the female directors appointed pre-reform, they have similar levels of MBA education and CEO experience.
Collectively, our findings suggest that boardroom gender diversity reforms facilitate the engagement of foreign institutional investors and empower them to drive change. Furthermore, changes in the formal institutions of these investors’ home countries interact with informal factors to shape their focus in the investee companies. While the effect of boardroom gender-diversity reforms on firm value is subject to much debate, and prior single-country studies on these reforms provide mixed evidence, our global study suggests that, on average, these reforms are beneficial to shareholders, especially for foreign institutional investors.
This post comes to us from professors Larry Fauver at the University of Tennessee – Knoxville, Mingyi Hung at Hong Kong University of Science & Technology, Alvaro G. Taboada at Mississippi State University, and Emily Jing Wang at Hong Kong University of Science & Technology. It is based on their recent article, “Boardroom Gender Diversity Reforms and Institutional Monitoring: Global Evidence,” available here.