Sector News

Appointing Women To Company Boards Helps Avoid Scandals, Fraud, And Corruption

March 9, 2015
Diversity & Inclusion
Companies that invest in gender diversity at high levels are less likely to fall prey to fraud, corruption, and other scandalous episodes, according to a new analysis by MSCI Inc.
 
The group looked at thousands of companies around the world and cross-referenced the proportion of women serving on a company’s board with its propensity for governance scandals such as bribe-taking, conflicts with regulators, and tensions with shareholders. It gauged a company’s diversity not only by the raw total of women on its board, but by whether or not the company went beyond the diversity requirements of local regulation for companies based in countries that require a certain share of board seats to go to women.
 
The resulting data set showed “a clear pattern between having higher than mandated percentages of women on boards and fewer governance-related controversies,” the analysts wrote. It also revealed that companies that take gender diversity seriously at high levels also manage risk better on the whole.
 
Much of the existing research on board diversity has shown that putting more women in top jobs produces an economic upside for companies, and the new research suggests it also helps guard against downsides. While the predictive power of this finding is of course limited — failing to hire women doesn’t ensure that your CEO will get caught selling trade secrets or anything — MSCI’s Matt Moscardi did suggest that a dearth of women on the board should be a warning sign for risk-averse investors. MSCI provides index funds for stocks around the world and conducts related market analysis.
 
“I don’t think this is because women are inherently more ‘moral’ than men,” Anne Richards, a high-ranking executive at one of the largest investment firms in Europe, told the Financial Times. Instead it shows “that gender diversity is a good proxy for more general cognitive diversity, and we know that cognitive diversity leads to better problem solving and outcomes.”
 
Indeed, the new analysis comports with previous research findings that diversity of identities within a workplace breeds better outcomes. Experiments in Texas and Singapore found that racially homogenous teams of financial traders priced fake stocks far less accurately than racially diverse trading teams. Researchers believe the finding shows that people are implicitly biased to trust that people who look like them are telling the truth, and to double-check what a person of a dissimilar identity group tells them.
 
There is a wealth of evidence that the gender component of cognitive diversity on a team is particularly crucial to maximizing a company’s potential. Companies with more women on their boards are less likely to overpay in mergers and conduct fewer of them overall, both of which are good for shareholders. In global stock markets, companies with multiple women on the board have outperformed those lead by all-male directors by a significant margin in recent years. 
 
Organizations with poor financial performance are markedly less gender diverse in leadership than those with stronger financials, according a survey released last summer. Gender-diverse boards not only yield stronger overall performance, but make companies more likely to steer through volatile economic cycles safely and even profitably.
 
Research findings like these have been trickling out for years, but the market doesn’t seem to have internalized the lessons of such studies. Despite years of slow progress at increasing the aggregate gender diversity of American boardrooms, the imbalance remains severe. Male board members named John, Robert, James, or William alone outnumber all women. The Fortune 500 companies have made no progress at all on gender diversity for most of the past decade.
 
Some European countries have turned to legal requirements to impose gender diversity on companies that have been slow on the uptake. But in the U.S., even the far gentler rules mandating diversity disclosures in corporate filings are so flawed and vague that they have no tangible effect on company behavior or thinking.
 
By Alan Pyke
 

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