09 September 2024 Women at the board table positively impact investment decisions

Bringing greater diversity to corporate boardrooms has been a focus in parts of the world with regulatory reforms on promoting female directorships. One of Wiley's top 10 most cited papers in 2022/23 has delved deeper into boardroom diversity and found that female directors positively impact business investment decisions. This research demonstrates to regulators, policymakers and stakeholders that appointing women to boards helps implement effective governance systems vital for instilling confidence and protecting shareholder interests.

Written by Dr Sanaullah Farooq, Dr Muhammad Nadeem and Lincoln University's Professor Christoper Gan, Boardroom gender diversity and investment inefficiency: New evidence from the United Kingdom, examines the link between boardroom gender diversity and investment inefficiency. Based on a sample of United Kingdom (UK) businesses from 2005 to 2018, researchers examined the impact of female directors on the efficiency of capital investments.

“Important discussions take place on boards. Diversity brings a range of perspectives and talent that synergises the board, leading to more well-rounded decisions,” says Dr Farooq. “There needs to be a raised awareness of giving women a fair shot at landing a seat on a board of directors.

“From our findings and others published, female directors encourage better business performance and governance, are less tolerant of poor managerial performance, make better investment decisions and are more transparent in disclosing information. Research suggests that women in management minimise corporate risks and improve corporate social responsibility.”

Following regulatory reforms in the UK to increase female representation on corporate boards, the study found that gender-diverse boards strengthen the financial monitoring of a business, improving decision-making and resulting in less under and over-investment.

Female directors improve the efficiency of capital investments through three channels, board dynamics, stewardship effect and information environment. The dynamics of a board improve with female directors' active participation in activities such as meetings and governance sub-committees where they seek discussion and clarity on the viability and rationality of investments.

“Forging productive relationships within a business sees female directors help align a chief executive officer’s interest with a business and by doing so, helps mitigate inefficient investment decisions. Female directors help create information-rich environments that raise confidence with stakeholders on the availability of profitable investments, resulting in the supply of capital being eased,” says Dr Farooq.

The study also found that corporate boards with three or more female directors have a more significant and positive influence on investment decisions because they have a greater voice at the board table.

“By achieving critical mass, female directors can change boardroom dynamics and encourage policymaking. So, rather than tick-box compliance, aim to have three or more female directors for a more pronounced effect on financial decision-making,” says Dr Farooq.  

Promoting greater gender representation can be adopted across other countries including New Zealand shares Dr Farooq and beyond corporate entities.

“I expect similar findings in non-listed organisations. Decades of studies show women leaders help increase productivity, enhance collaboration and inspire organisational dedication and improve fairness in the workplace. This is why legislation encouraging female representation at board level should be encouraged.”

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