CMSE11279 Corporate Governance

Introduction

Board diversity is a fairly new concept which has been recognised and implemented in corporate firms across the world and has been found to have a significant impact on the firm performance in majority of the cases. The aim of this report is to analyse the effectiveness of gender diversity quotas in corporate firms of two EU (European Union) countries, namely Germany and Belgium. The paper also focusses on the impact of board diversity on the firm performance in a generalised manner. The paper discusses about the importance of gender diversity quotas in corporate boardrooms and how it has been implemented in corporate firms of Belgium and Germany. Consequently, the effectiveness of such quotas in these two countries have been critically analysed to determine whether such quotas have increased corporate success or not. Later, the paper discusses and analyses the various theories that link board diversity with firm performance. The impact of board diversity on the grounds of gender, ethnicity, age and experience have been discussed in detail (Gordini and Rancati 2017). Lastly, the paper concludes with the impact of board diversity on firm performance have been elaborated upon and certain recommendations have also been included to enhance the same.

Evaluation & Scenario

Introduction

Gender diversity in corporate boardrooms is a research topic that has been intriguing scholars and corporate professionals alike. Gender diversity in corporate sector can be classified as a recent paradigm that has interested governments and corporate organisations. Gender diversity or inclusion in boardrooms, specifically, has been found to be incorporated with the aim of developing the productivity of business organisations. A fairly recent concept, women directors are being appointed more and more in corporate boardrooms, keeping in mind the positive aspects of the same. Human resource of an organisation is its strongest asset and diversity in it will ensure any firm’s success (Kim and Starks 2016). Corporate board of directors have numerous responsibilities like counselling and advising, acting as channels between the firm and outside agencies, providing access to resources for the firm and legitimising the firm actions. In such a case, inclusion of women in the corporate boardrooms will ensure that a better representation is in place and a better outcome is guaranteed.

Gender Diversity Quota in Belgium

Corporate boardrooms in EU (European Union) countries are working towards the gender diversity inclusion criteria after the various battles that women have been fighting for equal opportunity in election rights, education, safety, healthcare systems and employment rights. Belgium, is one such country which has been making a stand against gender inequality by establishing gender diversity quotas. Quotas for women in all walks of life like corporate, education, political, military and so on, will increase the growth of a nation and Belgium has been working towards including women in their parliamentary seats. In business sector, evidence has showed that higher the percentage of women in boards, higher is the economic outcome of the firm. Executive boards of certain listed companies in Belgium, since 2011, has temporary but mandatory quotas for including women in their midst, which is one third minimum and two thirds maximum of one or the other sex, by 2017 or 2019 (Levrau 2017). These gender diversity quotas will ensure that women’s under-representation is nullified and the talent of these women is utilised. Managerial roles should not be restricted to men and women have equal rights and the necessary skill set to manage and head academic, political and business sectors.

Gender Diversity Quota in Germany

The largest economy of the world that has implemented gender quotas is Germany. The corporate structure of Germany is regulated by the Stock Corporation Act, and has a two-tier system, one of which is the supervisory board and the other is the management board. With effect from January 2016, the law mandates a minimum of 30% representation of each sex on the supervisory boards of corporates in Germany (Gabaldon, Mensi-Klarbach and Seierstad 2017). The percentage of women occupying positions in the boards of corporation in Germany are significantly low and the establishment and implementation of this law made this law as an enforceable quota for gender diversity inclusion, specifically for women. This quota implementation has been a step ahead of the previous 20% board position being held by women. The representation of women in the higher positions of corporate firms promotes a role model for other women as well as increases the profitability and favourable outcomes of the same. Germany is different from other EU countries in the fact that the gender quotas are mandatory and legally binding. However the introduction of the gender diversity quota did not affect or change the size of the supervisory boards or make a higher probability of women to become a chairperson of a corporate firm.

Analysis 

Belgium’s introduction and implementation of the gender diversity quota has been a big step ahead since 2011 as it aims to introduce one third of female representatives in the executive board of directors by the year 2019. However, this quota reform is not the only trustworthy way of decreasing gender inequality in corporate firms and much needs to be done before the equality is here. In case of Germany, the higher representation of women in corporate boardrooms has benefitted the firms as a case of role-model for other women to work better and harder for the executive position (Wicker, Feiler and Breuer 2020). However the number of seats in the supervisory positions has not changed. The quota has also le4d to a single woman holding many positions as the percentage of women to be included is low. There has been no negative outcomes as such, of the gender diversity quota in corporate boardroom. Firm profitability has been shown to increase in Belgian listed companies but not in German corporate firms (Iannotta, Gatti and Huse 2016). Also, the probability of female members of the board occupying the chairperson seat is inconclusive as no such evidence has been documented. This issue needs to be addressed as soon as possible as managerial positions or chairperson seats are and should not be restricted to men.  

Impact of Board Diversity on Firm Performance

Board diversity and its impact on corporate firms has been exhibiting mixed results as every country that has implemented gender diversity quota in its corporate boardrooms has their unique approach. Diversity in corporate firms can be classified as demographics defined by gender, age, ethnicity and cognitive factors defined by education, skills, knowledge, values. Profitable outcomes are expected by managers and directors when any important decision is taken, on any business operation.  

Theories: There are some theories that are beneficial in determining the relationship between board diversity and firm performance.

1. Upper echelons theory (UET):This theory states that organisational success is depended on the executives’ beliefs, knowledge, efforts and experience. So, board diversity will affect the firm performance in a constructive manner as more board diversity will mean more experience and efforts by the executives, thus enhancing firm performance (Bin Khidmat, Ayub Khan and Ullah 2020).
2. Resource based theory: This suggests that human resources of a firm bring better forms of profitability so both board diversity and board size will affect firm performance progressively.
3. Human capital theory: This states that employees with substantial education, knowledge experience and skills will enhance firm performance, hence board diversity will contribute towards firm performance.
4. Agency theory: Thistheory is different in that the board diversity is thought to reinforce the monitoring role of board of directors when conflicts arise between managers and stakeholders of a corporate firms Studies suggest women to have better monitoring capabilities and board diversity to increase managerial accountability.
5. Social psychological theory: This theory however states that women directors with high class background are more likely to affect firm performance. Some studies report this to cause conflicts and longer decision making processes while some claim this to incorporate swift strategic actions by top executives (Khan and Subhan 2019).
6. Critical mass theory: This theory evolved when two or more women in a boardroom dampened the individual differentiation of women and reduced tokenism. Female board members often find themselves impossible to be heard owing to other member’s attitudes, hence being treated as tokens. To enhance dynamism and corporate decision making, board diversity needs to be incorporated (Green and Homroy 2018).

Fig.: Percentage of women in corporate boards

Source: (Green and Homroy 2018)

Another aspect which needs to be considered while studying the impact of corporate diversity in firms, is the inclusion of diversity (gender or otherwise) in the firms as a whole and in the executive board members (Ciavarella 2017). Female representation, minority classified members, foreign nationals, are all to be considered while studying the possible effect of board diversity in corporate firms and their strategies. Studies suggest that gender diversity can improve monitoring capabilities of board members, as often weak governance of corporates is rectified and enhanced. Gender diversity in corporates also reduces the firm’s risk level and some evidences have reported a positive correlation between the board’s strategic control and ratio of female directors. Another study reported that board diversity might be responsible for decreasing the value of shareholders in corporate firms and increased agency costs (Nguyen, Locke and Reddy 2015). Another aspect where board diversity affects firm performance is via the market performance of firms. Increased diversity in boards ensures increased perspectives or insights by the board members and consequently influence the decision-making process of executive members, thus affecting firm performance negatively or positively (Midavaine, Dolfsma and Aalbers 2016).

Analysis & Discussion

Introduction

Gender diversity in boardrooms are being encouraged by many countries across the world and significant impact of I has been observed in quite a number of listed companies. European and American corporate forms have been reporting primarily positive impacts but there have been negative or no relations between board diversity and firm performance (Seierstad et al. 2017). Apart from that, the impact of board diversity can be measured by a number of parameters like the firm’s return on equities, decision making process of board members and reputation of the firm in the market (Fernández-Temprano and Tejerina-Gaite 2020). Germany and Belgium are two such EU countries that have implemented gender diversity quotas in their corporate firms and their impact has been discussed henceforth.

Belgium: Gender Diversity in Firms

Belgium has been establishing gender diversity quotas in its various sectors like governmental elections and boardrooms so that the qualified women of the country are neither denied their right to managerial or such positions and nor are they demotivated from working better as no promising growth exists in their workplace. Belgium has established gender diversity quotas in its political sphere and corporate boardroom. From 1999 to 2007, the number of female members in the parliament has risen from 16.5% to 38%. This kind of progress is appreciable, however according to Mlambo- Ngcuka, the executive director of UN Women, this rate of progress is too slow and another 50 years will pass before the gender equality is established in the political sector. In case of business sector, Belgium has established gender diversity quota for the underprivileged, which is women in this case (Voorspoels and Bleijenbergh 2019). The proportional relationship between the success of corporate firms and inclusion of women in their corporate boardrooms has encouraged many others to include women in managerial positions. Qualified women are not denied the positions they are worthy of owing to the gender diversity quotas being incorporated in some listed companies of Belgium.

The quotas established and implemented are however temporary, and needs to be strengthened so that they become permanent fixtures in the corporate and government sectors alike. By law, since 2011, the executive boards of the listed companies have to constitute their boards in accordance to a minimum third and maximum two-thirds of one or the other sex, by the year 2017 or 2019. To battle the inequalities exhibited, based on gender, these quotas have been implemented which will be later removed when equal treatment is established. The average percentage of women making up the executive boards of listed companies in the EU as a whole is 17.8% while that of Belgium is 16.7%. Thus needs to be increased as quotas are rectifying the situation of under-representation of talented women in managerial or executive positions, albeit slowly (Sila, Gonzalez and Hagendorff 2016).

Fig.: Share of Women on corporate boards of Germany & Belgium

Source: (Sila, Gonzalez and Hagendorff 2016)

Germany: Gender Diversity in Firms

The under representation of women in the board of directors has been persistent due to a number of factors like lack of experience claimed by some corporate forms, filled up positions of director positions by male members, unprofessional attitudes of male directors, grouping of male members, type of ownership, size of corporate firms, growth orientation and so on. The attainment of board membership is also influenced by the educational qualification, self-promotion channels, family-ownership of firms, training and family life of women. In Germany, owing to the two tier corporate system, it becomes easier to analyse the effect and implications of gender diversity quota in corporate boardrooms.  The German Law on Equal Participation of Women and Men in Leadership Positions in the Private and Public Sector3 came into action in March 2015 and it gave deadlines to corporate firms to implement the same by January 2016 or compensate €50,000 as fine for non-compliance (Windscheid et al. 2018). The increase in women members has been found to be primarily in the supervisory board and negligible on the management board and the approximate difference is 9.3% higher in supervisory boards than management boards.

However, the gender diversity quota has been witnessed to have no such effect on the increase in number of seats in either of the two boards in German corporate firms. On the contrary, the mandatory clause of the gender diversity quota has led to a prevalence of the ‘golden-skirts’ effect, which means a single woman member to hold different positions in a firm as number of seats in the board of directors is limited (Fleischer 2021). The next point to be considered is the probability of women succeeding in the chairperson position of a corporate firm. Studies suggest that such a probability is almost zero, even after the inclusion of gender diversity quota.

Analysis of Board Diversity and its Impact on Firm Performance

Board diversity and its impact on firm performance have been researched and studied by many scientists over the years. Empirical research have been conducted with three parameters in mind- gender dummy, percentage of female directors and Blau-Index. The implementation of gender diversity quotas in the corporate firms has been mainly performed through laws, legislations and fines. Firm performance has been getting affected by the board diversity being practised by corporates and most of them are in the positive spectrum, with some claiming that effective decision making is positively influenced by including women in boards (Bernile, G., Bhagwat, V. and Yonker, S., 2018.).  Evidences are suggesting that the impact of diversity in corporate firms are either positive or negative or insignificant.

To study the impact of board diversity, it is necessary to weigh the positive and negative aspects of it, with relation to corporate firms. Positive aspects of it includes:

• better representation of its population and diverse customer base is addressed,
• organisational culture is diversified and employees are more inclined to approach the organisation with ideas, suggestions and thus discourage ‘group-thinking’
• Diversity in the firms will boost its social image and reputation (Chen 2015).

Negative aspects of the board diversity includes:

• Trust levels of diverse culture or diversity fluctuates as people are more prone to trust those who have similar culture interests. So this harbors conflicts and lesser productivity of groups.
• Communication dynamics of the group suffers.

Board diversity has been found by researches to be quite adverse when the corporate firms have weak governance measures, most of which includes takeover strategies. Also, the prevalence of women in board of directors and ethnic minority individuals have not been found to be significantly impacting form performance in some firms. On the contrary, the board diversity measures implemented by corporate firms has been found to have significant positive impact on the profitability and productivity of firms in Spain. In European firms however, female board members have been found to have a positive effect on firm performance (Shehata, Salhin and El-Helaly 2017). Firms with lower inquisitions costs and owned by the state have been found to have significant profit when board diversity is implemented.

Research shows that Turkish corporates have generally male-dominant firms and inclusion of females in board of directors have been found to have increased firm performance (Kılıç and Kuzey 2016). A Columbia Law School report (2016) found that cultural diversity in UK firms has been significantly negative as per the economic outcome, amounting to 1.43% reduction in return on equity. Board diversity has also been seen to increase firm value in Turkish and Vietnamese corporate firms, when measured by return on equity and return on assets (Terjesen, Couto and Francisco 2016). Correct representation of the community in the form of including women and minority population, has also been found to benefit firm performance.

Conclusion & Recommendations

To incorporate gender diversity or overall board diversity in the corporate boardrooms, governments of many countries have already utilised different approaches. Some of these incudes establishing laws and regulations and compensations if corporate firms do not comply with the same (Kagzi and Guha 2018). Another way to incorporate gender diversity firms would be to allow female members to have their say when managerial decisions are to be taken and improving the attitude of other board members towards the same by hosting events or seminars that emphasis upon the importance and benefits of diversity inclusion in the corporate boardroom. The inclusion of women in the corporate boardrooms has been found to influence the firm performance, majority in the positive spectrum and few in the negative spectrum.

The corporate firms of Germany have established the 30% lesser gender inclusion as per their government order, most of which are listed companies. Women member inclusion in the corporate boardrooms has made the supervisory board of German companies much enriched (by 9.3%). In case of Belgian companies, the percentage of women constituting the executive boards is 16.7%, which is lower than the overall percentage of the European Union countries. In conclusion it can be said that the impact of board diversity on the firm performance can be analysed by the various studies that have been conducted by the researchers over the years. Board diversity as discussed, can be based on grounds of sex, age, and ethnicity and so on. To include an effective board diversity in a firm will ensure that a correct representation of the community is implemented in the firms. Studies have shown that gender diversity in corporate boardrooms increase the decision making capabilities of the board and various insights enhances the same. The various theories that link the firm performance and board diversity have also been found to be relevant.

References:

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Bin Khidmat, W., Ayub Khan, M. and Ullah, H., 2020. The Effect of Board Diversity on Firm Performance: Evidence from Chinese L isted Companies. Indian Journal of Corporate Governance, 13(1), pp.9-33.

Chen, T., 2015. Institutions, board structure, and corporate performance: Evidence from Chinese firms. Journal of Corporate Finance, 32, pp.217-237.

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Fernández-Temprano, M.A. and Tejerina-Gaite, F., 2020. Types of director, board diversity and firm performance. Corporate Governance: The International Journal of Business in Society.

Fleischer, D., 2021. Does gender diversity in supervisory boards affect gender diversity in management boards in Germany? An empirical analysis. German Journal of Human Resource Management, p.2397002221997148.

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