Board Diversity and Corporate Performance: Filling in the Gaps: Corporate Board Gender Diversity and Stock Performance: The Competence Gap or Institutional Investor Bias?

March 2011, 89 N.C.L. Rev. 809

Author: Frank Dobbin and Jiwook Jung

Excerpt

Introduction
 
Women have been gaining ground on corporate boards. They held 14.8% of Fortune 500 seats in 2007. Yet the effect of women on corporate performance is a matter of some debate. Studies using data at one or two points in time find that gender diversity on boards is associated with higher stock values and greater profitability. However, studies using panel data over a number of years, which explore the effects of adding women to boards, generally show no effects or negative effects. This suggests that the association between board diversity and performance identified in cross-sectional studies is spurious - a consequence perhaps of the fact that successful firms appoint women to their boards.

Scholars have assumed that if board diversity affects corporate performance, it is through its influence on group processes in the boardroom. Thus they draw on theories from social psychology about groups. On the positive side, gender and racial diversity may operate as occupational diversity does in small groups, enabling groups to come to better decisions and to come to them more quickly. On the negative side, gender and racial diversity have been found to increase conflict in small groups, and this may inhibit their decision-making capacity.

We explore another mechanism linking board diversity to firm performance. For certain performance outcomes, notably stock price, what goes on in board meetings may be of less importance than what goes on in the equities markets. Boards themselves are attuned ... [footnotes omitted]

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