Board Diversity and Shareholder Value

One of the important governance issues facing shareholders, regulators and interest groups seems to be the gender composition of board of directors. But yet, a key driver for good corporate governance should be a positive relationship between board diversity and shareholder value creation. Should this be legislative or voluntary is another point of contention.

In India, the 2013 Companies Act introduced a mandatory minimum of at least one female director for most listed companies which has increased India’s gender diversity at the board level to one of the highest rates in Asia, with 14% of all directorships held by women. Gender diversity remains a challenge for Japanese boards, with only 3% of directorships held by women. Many countries in Europe continue to encourage gender diversity at the board level, as national laws regulating the number of female directors proliferate on the back of an EU directive. On average, 21.2 % of board members of the largest publicly listed companies in the EU were women, in 2015, and only 19.2% of corporate directors in the Fortune 500 were women.

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Board diversity took shape as the right thing to do and to create equal opportunity for women who make up half the population, at the highest level. However, there is research to indicate that diversity actually enhances shareholder value. Therefore, board diversity must be considered in the context of shareholder value as opposed to making a token appointment to look good. There is however a possibility that a portion of the women appointed may come from the controlling families of the company.

One such study which examines the relationship between board diversity and firm value for Fortune 1000 firms was published in 2003 titled- “Corporate Governance, Board Diversity, and Firm Value” by David A. Carter∗ Betty J. Simkins W. Gary Simpson, Oklahoma State University, D.A.Carter et al./The Financial Review 38 (2003) 33–53. This research was important because it presented the first empirical evidence examining whether board diversity is associated with improved financial value. After controlling for size, industry, and other corporate governance measures, they found a significant positive relationship between the fraction of women or minorities on the board and firm value.

For Sri Lanka to improve diversity ratio on boards, it’s not going to be voluntary. The only option for effecting change is to take a top-down approach that will force organizations to change from the top to create a work environment that will allow female executives to thrive and add value. The number of qualified professional women has been growing in Sri Lanka. They can add value, but corporate Sri Lanka needs a strong push, so that it can take the first steps toward a legislated change.

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About surenraj

“Views expressed are my own”
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