Gender Diversity in the Board Room: The Firm Size Factor

What role does firm size play in the relationship between gender diversity and firm performance?

Sana Mohsni and Alia Shata of Carleton University explored this question in their 2021 Toronto CFA Society Investment Research Award-winning paper, “Board Gender Diversity and Firm Performance: The Role of Firm Size.”

Mohsni and Shata examined 371 Canadian companies listed on the S&P/TSX Composite Index from 2010 to 2019 and used several measures of board gender diversity, as well as return on assets (ROA) and return on equity (ROE ) as company performance metrics.

His conclusion? Smaller is better.

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Company size key to effective board diversity

Mohsni and Shata’s results show that the larger the firm, the smaller the positive relationship between board gender diversity and firm performance. They also found that female directors have a greater impact on the performance of smaller firms compared to their larger counterparts and theorize that smaller firms may provide a better environment for female directors to realize their potential.

These findings may explain the conflicting results of previous studies on gender diversity and firm performance. They suggest that the benefits of board gender diversity may be limited for some companies and that an organization’s context must be considered to better assess and reap the benefits of gender diversity.

This company size can reduce the added value that gender diversity brings to board performance, meaning that larger companies need to make better use of the skills, knowledge and ideas of female board members. These companies may need to reassess their organizational structures and communication methods to facilitate better discussions at board level, better decision-making and better integration of women directors.

“Investment managers and practicing analysts interested in gender diversity and good governance should target smaller companies with high diversity initiatives.” Mohsni said The Analyst. “They can also put pressure on larger companies to create work environments that allow women managers to reach their full potential, because women managers are good for the bottom line.”

According to the research, the value that board gender diversity adds to performance is strongest in financial services, consumer staples, utilities and real estate. The effect is negative and significant in the industry. The results also suggest that the negative moderating effect of size is stronger in financial services, consumer staples, utilities, and real estate, and that the negative correlation between board gender diversity and performance in business is emphasized in larger organizations.

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Make a change, don’t empty policies

Mohsni and Shata also found that policies to increase gender diversity in large companies can sometimes be detrimental to performance. Women who are included on boards because of policies or quotas may be perceived as less competent or less qualified because they are assumed to come from a smaller pool of candidates. This can, in turn, undermine the effectiveness of these initiatives.

Since 2014, for example, the Ontario Securities Commission’s board gender diversity compliance or disclosure policy, which requires companies to annually disclose the number and percentage of women on boards, has had a negative effect on the relationship between gender diversity and firm performance. , and the moderating effect of firm size has persisted after the implementation of the rule.

Although Mohsni and Shata’s research was limited to the Canadian context, institutional and cultural systems have important influences on gender diversity and board performance dynamics, and thus cross-country studies add to our understanding .

The authors believe that there is much room for further research in this area. Their report only considers gender diversity, but ethnicity and age, among other factors, can also influence firm performance, and firm size can moderate this influence. Furthermore, Mohsni and Shata focus on financial performance metrics, but note the growing prominence of non-financial performance metrics (eg environmental, social and governance (ESG) criteria) and suggest that they may be worthy of a more detailed examination.

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Balancing corporate obligations with success

Indeed, boards of directors are increasingly responsible for issues of corporate social responsibility and sustainability, and although a growing body of literature indicates that the inclusion of women directors can influence various board decisions, the role of firm size in these contexts is not well understood and requires further analysis.

Chris Guthrie, CEO of Hillsdale Investment Management, which co-sponsors the award, said Mohsni and Shata’s research shows that analysts need to measure the benefits of diversity as carefully as ROA and ROE and perhaps should develop a “return on diversity” (ROD) metric.

To be sure, perspectives vary on the influence of gender diversity on performance. Some theorize that it can contribute to a better understanding of the market and a broader view of the business environment and improve a company’s reputation. On the other hand, some believe that the more diverse an organization’s perspectives and skills, the more difficult it will be to manage, reach consensus, and make decisions.

Given these conflicting theories, the influence of board diversity on governance and firm value requires the kind of precise testing and analysis demonstrated in Mohsni and Shata’s scholarship.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images / Thomas Barwick

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Rossa O’Reilly, CFA

Rossa O’Reilly was managing director of institutional securities research at CIBC World Markets for 26 years, from 1984 to 2010, and vice president and director of Dominion Securities, the predecessor company of RBC Capital Markets, for 14 years, from 1971 to 1984. He has 40 years of experience analyzing listed stocks in the real estate, conglomerate and transportation sectors and developing stock market strategy. He is a board member and president of the CFA Institute and a former advisor to the CFA Institute Research Foundation. He is a member of the board of directors of The Canadian Foundation for Advancement of Investor Rights and has also been a member of the Accounting Standards Committee of the CICA, serving from 1985 to 1988. He was president of CFA Society Toronto in 1984 and a member of the society’s board of directors from 1982 to 1988 and again from 2009 to 2012. He has been editor of The Analyst, the quarterly magazine of CFA Society Toronto, and is a regular contributor to this and other periodicals. He has contributed to curriculum texts for the CFA Institute on industry and business analysis, real estate and REIT analysis, and the structure and functions of the investment industry, and has been a frequent speaker at conferences and television He holds a master’s degree in mathematics and economics from Trinity College, University of Dublin, Ireland, and is a member of the Canadian Securities Institute.

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