More women on company boards leads to lower risk-taking and better outcomes

The share of women in top positions in business is increasing but, globally, it still remains just under 30 per cent. In many countries, women pursuing managerial positions still have great obstacles to overcome. Research has shown, for example, that women often need to be much more qualified and determined than male candidates in order to be elected as board members or CEO’s.

With their high equality rates, the Nordic countries provide a perfect setting for studying decision-making in companies, or how business and economy have changed along with the increased participation of women.

Finnish researchers examined a sample of Nordic listed companies in the period of 2009–2018 to investigate whether and how gender diversity on their boards had affected the companies’ decision-making. The researchers studied the impact of gender diversity on the companies’ decisions to acquire other businesses and their willingness to acknowledge unsuccessful corporate acquisitions.

What the researchers say: “A decision to acquire another business is one of the most important decisions made by company boards, and great risks are often involved,” said the lead author. “When a corporate acquisition turns out to be unsuccessful, another difficult decision is to write down the value of investment and thus show the loss resulting from the corporate acquisition. We can capture both of these decisions by examining the relation between the board gender diversity and the value of goodwill on the balance sheet.”

Goodwill refers to the value that arises when a company acquires another company for a price that exceeds the received identifiable net assets. The valuation is based on the hope that the acquired company will, in the future, bring in increased revenues, thus motivating the higher price. If the scenarios fail, the buyer will have to assume the loss and adjust the forecasts downward, which will result in the decrease of goodwill.

The researchers examined a total of 294 major changes in goodwill values and found that companies with a higher share of women on their boards tended to make fewer corporate acquisitions that resulted in high goodwill values.

“We interpret this to indicate that women on the board hold back risk-taking so that the company either pays a lower price or withdraws from the corporate acquisition”, said the researchers.

They also found a correlation between the share of women on company boards and the companies’ willingness to write down goodwill for corporate acquisitions.

“The latter finding suggests that it may be easier for women to admit a mistake instead of hiding it. The results are in line with previous research showing that men may possess unfounded self-confidence and tend to take too high financial risks. Correspondingly, the study supports the earlier results indicating that female representation has a positive effect on corporate governance and the quality of financial reporting” the lead author concluded.

So, what? A research piece I read about a year ago showed that the 30 most profitable companies in the Fortune 500 list all had either a female CEO or Board Chairperson. Multiple other studies have shown that women overall make better leaders than men and that they’re more transformational rather than transactional in their approach.

Other studies have shown that men under 45 are generally too ego-driven to make good CEOs (there are, of course, many exceptions).

Most corporate mergers ultimately fail (some 80%) and a huge number of them are driven by CEO egos rather than any rational argument. This ties in with earlier studies which showed that some 15% of Fortune 500 CEOs are either narcissists or psychopaths (usually both). Psychopathy and narcissism are both predominantly male disorders.

For more information on narcissism click here. For more on psychopaths click here.