Gender diversity in organizations and in boards in particular, has been an important topic in recent years for both academic researchers and business leaders, investors and policy makers (Upadhyay & Zeng, 2014). Gender diversity is expected by many scholars to improve board processes and organizational effectiveness. This diversity could be arranged by increasing the number of female board members. However, increasing the number of female board members has also shown some negative effects. This paper will look at both the negative and positive effects of increasing the number of female board members. The focus of this paper will be on the Management Board and the processes which result in firm performance. The Netherlands has a two-tier structure which also includes a Supervisory Board, but their board processes will not be explored in depth. As stated, although the final goal of board diversity is firm performance, we will consider mainly the board processes which directly or indirectly influence firm performance.
Current best practice recommendations in the Netherlands are of high importance for all listed Dutch firms and all large companies (balance sheet of over 500 million) that have registered offices in the Netherlands. Departure from the recommendations is only allowed when an explanation for this has been given (Dutch Corporate Governance Code, 2009). Gender diversity is part of Principle 3 and it states: ‘The supervisory board shall aim for a diverse composition in terms of such factors as gender and age.’ (Dutch Corporate Governance Code, 2009, p. 22). As a result, they only promote diversity in the Supervisory Board. There is no recommendation concerning diversity in the Management Board. The focus of researchers and practitioners on the topic of gender diversity in the last decades illustrates the importance of gender diversity and consequently asks for an in depth review of existent literature on this topic.
The rest of this paper will focus first on the positive aspects of gender diversity on board processes and will thereafter review the negative aspects found in existent literature. We will end with a conclusion in which we try to summarize our findings. As has been stated before, the main goal of this paper is to write a recommended alteration for the Dutch Corporate Governance Code.
According to Eagly & Carli (2003) it is not a good thing that there are still not that many females on board functions (Merens & van den Brakel, 2014). They argue that females place a greater emphasis on transformational leadership than men. Furthermore, women make use of contingent rewards, which is a subscale of transactional leadership style and positively related to effective leadership. Men on the other hand, place a greater emphasis on subscales of transactional leadership, like laissez faire and active and passive leadership style. Laissez faire and passive styles are negatively related to effective leadership. In addition, the role that women on boards have in particularly is often based in their participative management style (Pearce & Zahra, 1991). Also, they are a lot more sensitive compared to their male colleagues (Bradshaw & Wicks, 2000). In the workplace they put a lot of attention and consideration on the needs of others, so women may have an active involvement in issues of strategic nature that both can concern the organization and her stakeholders. Therefore, it might be that women are especially sensitive for decisions that are made regarding organizational practices, like environmental politics and corporate social responsibility. This is one of the reasons why women can place a lot of input in control tasks and issues that have a strategic nature. Thus, women can be more effective in doing strategic control tasks (Nielsen & Huse, 2010). This is confirmed by prior research which states that women are especially valued by their ability to have strategic input and above that, produce more productive discourse (Bilimoria, 2000). Above all, several studies confirmed that women at the Management Board is positively related to stock return (e.g.: Adams & Ferreira, 2009; Hillman, Shropshire & Cannella Jr, 2007). This indicates that board diversity is associated with the breath of perspectives that come with board diversity, more cognitive resources, and overall problem-solving capacity of the team (Dwyer, Richard & Chadwick, 2003).
However, as previous literature argues, the processes that happen within the board are a key asset for board effectiveness (Finkelstein & Mooney, 2003). However, board diversity is not directly related to board performance, but more to the quality of decisions (Pye & Pettigrew, 2005). Concerning the processes, there are some positive aspects about women in the TMT as well. For example, gender diversity is offered as one of the possibilities to reduce the groupthink phenomenon (Daily, Dalton, & Cannella, 2003; Robinson & Dechant, 1997). The reason for this can be found in the sociology literature. When a woman enters a board with all men, the heterogeneity of the group will obviously increase. Earlier research suggests that heterogeneity reduces the groupthink phenomena because of their diverse set of solutions for a particular task. This in turn, will lead to effective group discussions and high quality decision making (Umans, Collin & Tagesson, 2008; Ely & Thomas, 2001). Also above expectations, higher diversity in gender leads to more cooperative choices made by the group (Rogelberg & Rumery, 1996). In accordance with these positive outcomes, it turns out that women attend to a higher percentage of meetings in comparison to their male colleagues. Furthermore, with the presence of women on the board, males are a lot more eager to attend meetings (Adams & Ferreira, 2009) and results in a reduced chance of arising conflict between board members (Nielsen & Huse, 2010). Another advantage about gender diversity is that it can increase the creativity and innovation in organizations and this relates to improved problem solving (Daily & Dalton, 2003). Furthermore, a diverse group comes with diverse things. For example, compared to homogenies groups, groups which are diverse in their gender provide greater resources and networks, because it offers access to untapped resources and networks (Kakabadse, et al., 2015). Besides that, gender diversity creates career incentives done by signaling and mentoring (Daily et al., 2003) and it will enhance the public and investor relations and legitimacy (Baysinger & Butler, 1985).
On the other hand, there is a point at which diversity can have his negative effects. Tuggle, Schnatterly & Johnson (2010) argue that this depends on how strong the faultlines are of the board. Faultlines are ‘hypothetical dividing lines that may split a group into subgroups based on one or more attributes’ (Lau & Murnighan, 1998). When these faultlines are stronger, the attributes within the subgroups of boards are more lined up in the same way. This means that strong faultlines are unlikely when a group is of little diversity. In our context, the only characteristic we look at is the diversity based on gender. So if you only take this characteristic in account, this means there will be weak faultlines within subgroups and this will reduce the chances of behavioral disintegration or conflict. The boards can take this diversity in their advantage, because it allows the boards to benefit from the variety of different attributes and perspectives. What have to be taken into account is that when there are more characteristics on which the subgroups differ, the faultlines will be stronger. These members will agree more on affect, process issues and conflict and this leads, finally, to reduced firm performance (cf. Tuggle, Schnatterly & Johnson, 2010).
To summarize, there are a lot of positive things about women on management boards regarding the effectiveness of processes, which could lead to a better performance in the end. However, there is also a flip side of the coin. Women on management boards do not only bring positive effects, but also negative things. As stated before, the effects of gender diversity could turn out negative when there are also other characteristics on which the TMT members differ. So when the faultlines become stronger, this finally could results in very negative effects regarding the processes. More negative aspects of women on management boards will be addressed in the next part.
As was stated before, there are some negative aspects of higher number of women in the Management Board as well. A more gender-diverse board could create more disagreement and conflict, which could result in long, drawn-out discussions. This can be a serious problem when a firm has to react quickly to market shocks (Ferreira, 2010). According to Eckel and Grossman (2008), compared to men, women often are more risk averse. Boards of firms in dynamic markets often need to make decisions that can carry a lot of risks and therefore, women could delay decision-making, and it could cause firms to miss out on interesting opportunities. Furthermore, women are less fond of being exposed to competition (Niederle, Segal and Vesterlund, 2008). They tend to try to avoid competitive environments, which also could result in conflicts in board processes regarding decision-making. Women in a predominantly male board also may adapt to male behavior so that gender differences disappear (Adams & Funk, 2009). Lastly, Dreber and Johannesson (2008) found that women were found to lie more often in order to secure monetary payoffs in experiments.
The best example of empirical experience is from Norway, which introduced a law mandating a 40% representation of both males and females on boards of publicly listed firms. And indeed, female board membership rose from 9% in 2003 to 40% nowadays. But as many studies concluded, like for instance Bertrand et al.’s study (2014), the quota resulted in younger and less experienced boards, and it resulted in a decline in operating performance.
Many other countries, such as the UK, Germany and France are introducing such quotas as well, now or in the near future (Bertrand et al., 2014). Over the last few years there has been much debate about whether those quotas damage or strengthen women’s interests. If countries are introducing those quotas, there is a huge chance that women will be selected in boards because of the fact that they are female, instead of on the fact that they are the most capable person. This might result into unqualified board members and thus incapable boards (Allemand & Barbe, 2014). Also, if women are employed through quotas, they will be considered as victims of ‘tokenism’, which is defined as ‘the practice of hiring or appointing a token number of people from underrepresented groups in order to deflect criticism or comply with affirmative action rules’ (thefreedictionary.com, 2015). The effects of being a token are thoroughly discussed in Kanter’s study (1977) of how the ratio of women in a group affects group processes. Kanter mentions that being a token can have three consequences that could lead to less effective board processes, namely visibility, polarization, and assimilation (Elstad & Ladegard, 2010). Visibility refers to the fact that tokens (women) have the feeling that they are being watched, which results in perceptions of performance pressure. Women may also perceive a pressure not to outperform men and therefore they will choose to become socially invisible and keep low profile. Polarization implies that the dominant group (men) feels threatened by women, and therefore they heighten their boundaries by emphasizing their majority. Men could thus exclude women from informal networks where socialization takes place, and this could also lead to conflict and thus less effective board processes (Elstad & Ladegard, 2010). Assimilation implies that women are forced into stereotypical categories defined by men and therefore not seen as who they really are, e.g., forced to express ‘suitable behavior’.
Conclusion & recommendations
The analysis of both positive and negative aspects clearly showed that forced increase of the number of females on the board is not always the right choice, but women on the board might have many positive effects which cannot be ruled out completely by possible negative aspects. In this part of the paper we will try to summarize our findings and use them to bring out an advice concerning an alteration for the Dutch Corporate Governance Code.
As stated in the introduction, the Dutch Corporate Governance Code only has a recommendation concerning gender diversity on the Supervisory Board. However, in the last pages of their document, some important aspects have been pointed out. They emphasize that diversity and the position of women have been important themes to cover since the introduction of the code in 2003 (Dutch Corporate Governance Code, 2009 p. 47). Furthermore, they state that, concerning their recommendation for diversity at the Supervisory Board, it was the right choice not to include target figures (Dutch Corporate Governance Code, 2009 p. 55).
Our analysis showed that diversity is not only important on a Supervisory Board but could also be useful in top management and on the Management Board. We believe, therefore, that it would be a good choice to amplify the Code with a recommendation on gender diversity for the Management Board.
One of the most important considerations according to us is whether to follow the example from Norway by including a quota in our recommendations. We believe that the negative effects and the negative associations (tokenism) are a reason to not choose for a quota of women on the Management Board. Furthermore, as has been stated in the Dutch Corporate Governance Code on the Supervisory Board, it is most important that the right people are chosen. As a result of those two reasons, we would recommend to include a recommendation on Gender Diversity for the Management Board which is comparable to the existing recommendation for diversity on the Supervisory Board.
Although we did not look into other aspects of diversity, such as age; profession; and nationality, we do expect that diversity on these aspects might also have a positive influence on the functioning of the Management Board. Considering these aspects in light of the Corporate Governance Code concerning the Management Board is something we believe might need some attention. However, that would go beyond the scope of this report.