Another Reason to push for Female Directors

Diversity is an important strategy of TDG. Below you can see one more resarch note why we are insisting on female employee existence and female directors existence on our company. Good reading…

Research has shown that female board representation leads to better acquisition and investment decisions and less-aggressive risk-taking. A new study suggests an underlying mechanism for those results: Female directors temper the overconfidence of male CEOs.

The researchers gathered data on 1629 U.S.  companies and their leaders from 1998 to 2013. As a proxy for overconfidence, they looked at whether CEOs had held stock options when exercising them would have yielded hefty profits; the researchers reasoned that a failure to cash in when the market price is high reflects the often unrealistic belief that it will go even higher. The data showed that male CEOs whose boards included women were less likely than other male chief executives to hang on to so-called deep-in-the-money options.  (There was no such effect for female leaders.) This happened, the researchers believe, because female directors, lacking membership in “old boy” networks, tend to be less conformist than their male counterparts and are thus more likely to challenge the CEO, curbing his overconfidence.

Next the researchers looked at how the companies in their sample performed. in industries with an abundance of overconfident CEOs  (pharmaceuticals, construction, and computer software, among others), the presence of one or more women on the board was associated with less-aggressive investment policies, better acquisition decisions, and improved financial results. Last they drilled down into the performance of a subset of firms during the 2007-2009 financial crisis. This showed that firms with female board representation suffered smaller hits to firm value, return on assets, and return on equity, because their CEOs were less likely to adopt aggressive and risky strategies. “Female board representation matters more in some industries than others” the researchers conclude, adding that in times of crisis, “firms that do not have (sufficient) female board representation suffer a greater drop in performance.”

Source: “ Why Female Board Representation Matters: The Role of Female Directors in Reducing Male CEO Overconfidence,” by Jie Chen et al. (Journal of Empirical Finance,  2019)