A board of directors plays a crucial role in determining the success of any organization and is largely responsible for major strategic decisions. However, females in these top management roles are often underrepresented. Without women on boards, companies are losing out—not only on talented leaders, but also on different perspectives of business. This raises the question: in what ways do companies with women on the board perform differently than companies with all-male boards?
Prior research suggests there are gender differences in risk-taking decisions, with many researchers supporting that women are more sensitive to risk than men. However, Ofra Bazel-Shoham, research assistant professor in the Department of Finance at the Fox School, reconsiders the implications of this conclusion.
Bazel-Shoham argues that female leaders change the way business is being done in her paper, “The Effect of Board Gender Diversity on R&D.” She looked at boards’ decisions regarding high-risk, high-reward investment decisions, as well as their professional behavior, to understand the differences in outcomes that gender-diverse boards produce. The research recently won the Best Paper Award at the 2018 Engaged Management Scholarship Conference, hosted by Temple University this September. The award was sponsored by Business Horizons, an academic journal from Indiana University.
As a proxy for analyzing risk-taking decisions, Bazel-Shoham used choices around research and development (R&D), often a potentially risky yet highly rewarding investment. “It requires upfront resources and has a very low probability of success,” she says.
Bazel-Shoham, who is also the academic director of Fox School’s new part-time MBA Program in Conshohocken, collected data from CEOs and board members in 44 countries and over a period of 16 years. The gender disparity was already obvious, as she notes in her sample only 2% of all CEOs and 9% of all board members were female.
The study found that while the direct correlation between the number of women on boards and the number of investments in R&D was negative, women were more likely to focus on monitoring performance, which ends up incentivizing risky but data-driven decisions. Bazel-Shoham says, “As female leaders put more emphasis on monitoring, gender-diverse boards were able to quantify and measure their decisions better than all-male boards.”
Bazel-Shoham elucidates this argument by analyzing the behavior of female directors who are most often outnumbered by their male counterparts. Her interviews with female leaders suggest that being in a minority puts more pressure on women to not make mistakes and make data-driven decisions.
She elaborates, “We realized that female directors felt they were ‘under a magnifying glass’ most of the time and were judged more stringently than their male colleagues.” This made them make more conservative decisions, which usually translated into making lesser high-risk R&D investments. However, teams that quantified their results better supported performance-based compensation where incentives are measurable and dependent on the actual outcome rather than on vaguely defined promises.
Organizations often use performance-based incentives to motivate managers to make riskier but potentially profitable long-term investing decisions. Bazel-Shoham says, “We observed that such remuneration systems encourage CEOs and senior management to engage in more R&D activities.” With women involved, boards more often supported this form of compensation, in affect encouraging managers to make more of these investments. Bazel-Shoham found that these actions successfully mitigated women’s effect of being more risk-averse.
Besides indirectly increasing R&D spending, Bazel-Shoham notes having even one woman on the board of directors significantly influences how the board behaves, the decisions it makes and their resulting outcomes. To illustrate this, she quotes an experience of a male CEO of a large educational organization. “The women directors read all the materials ahead of time, have specific questions and are more professional than the others,” he says. “They have changed the organizational culture of the board. The men, in turn, have started to prepare themselves better as well.”
Underrepresentation of women on boards of directors continues to be a pressing issue to shareholders and society at large. However, organizations are slowly understanding the strategic importance of leveraging a more diverse top management team. With rapidly changing market dynamics, leveraging the power of gender diversity is beneficial for the long-term success of businesses.