How Board Gender Diversity Affects the Relation between CSR and Firm Value

The economic benefits of corporate social responsibility (CSR) and workplace gender diversity are areas of growing interest for business leaders and regulators. Research shows that socially responsible activities enhance firm value while irresponsible social activities destroy value and that firms with more women directors tend to do better on social and environmental issues. In a new study, we examine the interplay between board gender diversity and CSR performance on firm value, more specifically, whether female representation on the board moderates the effect of CSR performance on firm value.

Several arguments suggest that board gender diversity could reduce the negative effect of CSR concerns on firm value. First, females, who are socialized to be more empathic, may be more concerned about the effect of negative CSR activities on stakeholder welfare than male directors are. Besides the greater incentive to rectify the CSR concerns, female board representation could lead to more timely remediation of CSR concerns by bringing diverse perspectives to board room discussions and through more rigorous monitoring of management. Investors may perceive negative CSR activities as less concerning when there is board gender diversity because firms with gender-diverse boards tend to have better corporate reputations from good CSR performance. These suggest that board gender diversity could mitigate the negative effects of CSR concerns on firm value.

On the other hand, it is also probable that investors are more disappointed and unforgiving when firms with gender-diverse boards are involved in CSR concerns because such irresponsible activities are less anticipated. When firms perceived as socially responsible behave irresponsibly, stakeholder trust is broken, leading to a reputation loss and investor reassessment of the firm’s CSR-related risk to future cash flows. If so, the effect of CSR concerns on the market’s assessment of firm value could be more negative for firms with gender-diverse boards than for firms without them. Thus, whether investors react more negatively or more positively to CSR concerns for firms with gender-diverse boards is an empirical question.

With respect to CSR strengths, the effect of good CSR activities on firm value is likely more positive when there is more female representation on the board for two reasons. First, firms with female directors are more likely to enhance stakeholder relationships through substantive CSR programs and initiatives rather than symbolic, green-washing activities, which could backfire and destroy firm value. Second, investors may perceive a firm’s positive CSR performance as more genuine and credible when its board exhibits gender diversity, which is an element of good CSR performance.

We employ an instrumental variables approach and the dynamic Generalized Method of Moments (GMM) method to account for unobserved heterogeneity, simultaneity, and the dynamic relation between the board structure and firm performance. We measure market-assessed firm value using Tobin’s Q and annual stock return, board gender diversity using the Blau index, and firm CSR strengths and concerns using CSR performance indicators in the categories of community, human rights, product, employee, and environment from the Kinder, Lydenberg, and Domini (KLD) dataset.

Our empirical findings for a sample of U.S. S&P 1500 firms from 2009 to 2018 show that female board representation significantly moderates the impact of firm CSR performance on firm value. Specifically, the effect of overall CSR performance and CSR strengths on Tobin’s Q and returns is more positive when there is greater female representation on the board, suggesting that gender-diverse boards enhance the effect of CSR performance on firm value. In contrast, the effect of CSR concerns on firm value is more negative when there is more female representation on the board, which suggests that female board representation exacerbates the negative effect of CSR concerns on firm value. These results hold when we use alternative proxies to measure female board presentation and CSR performance.

To further investigate whether female board representation moderates the effect of CSR performance on firm value, we examine whether female board representation moderates the effect of CSR strengths and concerns on return on assets (ROA), an accounting-based measure of firm financial performance.

We find that the relation between CSR strength and ROA is more positive when there is female representation on the board, suggesting that CSR initiatives enhance firm financial performance when there are more women on the board. On the other hand, female board representation does not moderate the effect of CSR concerns on ROA. Overall, the findings on CSR concerns suggest a loss of trust in the management when firms that exhibit gender diversity perform poorly on CSR-related matters, resulting in a downward adjustment of reputational premium embedded in the market’s assessment of firm value.

Our findings suggest that board gender diversity enhances the positive effect of CSR activities on firm value. However, once firms commit to gender diversity, they may be penalized more by the market when they show poor performance in other CSR dimensions.

Our study contributes to the literature on how female board representation affects firm value. To the best of our knowledge, this study is the first to provide evidence on the moderating effect of board gender diversity on the relation between CSR performance and firm value in the U.S. Our findings contribute to the emerging body of research that examines the moderating effect of board gender diversity on firm value and relate to research that examines market reactions to negative events with the interplay of a firm’s CSR performance.

From a practical standpoint, evidence that female board representation enhances the positive effect of CSR initiatives on firm value should be relevant to the current regulatory debate over mandates for gender diversity on U.S. boards.

This post comes to us from Yunyi Li, Charl de Villiers, and Lina Zixuan Li at the University of Auckland Business School and Leye Li at the University of New South Wales, Sydney. It is based on their recent paper, “The moderating effect of board gender diversity on the relation between corporate social responsibility and firm value,” available here.

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