Does it Pay to Have Women on Corporate Boards? Building a Business Case for Gender Diversity

Shaneeza Baksh
Major in Business Administration, Towson University

Nhung Hendy
Professor, Department of Management, Towson University


Diversity, inclusion, and equity have received growing
interest among executives and management researchers
for at least two reasons. First, there is a business
case for promoting diversity, inclusion, and equity in
organizations including increased innovation, employee
engagement, revenue, and profits (e.g., Bourke et al.,
2017). Recently, a large-scale meta-analysis reported that
gender diversity on corporate boards of directors was
positively related to improved board decision-making,
board attendance, and firm’s financial performance (Halliday
et al., 2021). Second, advancing diversity, inclusion,
and equity is the right thing to do under the justice view
of ethics as organizations move beyond legal compliance
to avoid workplace discrimination (Noon, 2007).

Despite nearly six decades since the passage of the Civil
Rights Act in 1964, the progress toward gender diversity,
equity and inclusion in the U.S. corporate board rooms
has been slow (Halliday et al., 2021). According to the
latest data, in 2019, women held 22% of board seats in
Russell 3000 companies (2020 Women on Boards, 2020)
even when their participation in the workforce was more
than 50% (Civilian Labor Force, 2021). One reason that
might explain the lack of women on corporate boards
is the structural deficit of female students majoring in
finance or corporate finance as documented in at least
one study using longitudinal data covering 2009 to 2018
undergraduate enrollment (Hawash, & Stephen, 2019).

In addition, there was a decline in women serving as
portfolio-managers, a typical role before being promoted
to a corporate board member (Rogow, 2017).

To remedy the situation, in 2018, Women on Boards
was signed into law in California to advance equal
representation along gender line on corporate boards
of publicly traded firms in California (CA Secretary of
State, 2018). Specifically, one or two female directors
would be required contingent upon the size of the publicly
traded firm by the end of 2021. However, as of this
writing, California is the only state in the U.S. that has
mandated a gender quota on corporate boards and its
impact on firm performance has yet to be established. In
this study, we argued that having women on corporate
boards is aligned with the view of managing stakeholder
groups based on Freeman’s (1984) stakeholder theory of
strategic management. In contrast to Friedman’s (1970)
shareholder theory in which the sole responsibility of
the firm is to maximize shareholders’ return on investment,
stakeholder theory views that both shareholders’
value and stakeholders’ value (e.g., employee satisfaction
and productivity) can be achieved. An anecdotal
evidence is given to illustrate the dualities of having
both shareholders’ and stakeholders’ interests served
by filling the gender gap on corporate boards. In 2018,
T. Rowe Price, a Fortune 500 company headquartered
in Baltimore, Maryland, voted to add a female director
to their Board of Directors, raising the number of female
directors from three to four out of an eleven-member
board size. Following this increase in board’s gender
diversity, they saw an increase in productivity, evidenced
by a gain in revenue per FTE from $696,556 in 2017
(before) to $762,797 in 2019 (after) – a productivity gain
of $66,241. In addition, shareholders also benefited
from an increase in shareholder’s return on equity from
27.15% to 31.67% – a gain of 4.52%.


We conducted an empirical investigation to test Freeman’s
(1984) stakeholder theory. A stratified random
sample of 100 companies with 10 each representing 10
sectors from the Standard & Poor 500 was included. The
10 sectors included were Basic Materials, Communication
Services, Consumer Cyclical, Consumer Defensive,
Energy, Financial Services, Healthcare, Real Estate,
Technology, and Utilities. We used publicly available data
including the firm’s annual financial reports and proxy
statements filed with the Securities and Exchange Commission
to extract usable data for analysis. We restricted
our analysis to 2019 data to control for the COVID-19
pandemic impact on the firm’s performance. The number
of women serving on corporate board by the end of 2019
was used as an indicator of gender diversity on corporate
boards. Other variables including number of directors
on the corporate board (board size), number of full-time
equivalent employees of the firm (firm size) and the sector
were used as control variables. In this study, corporate
boards varied in size from 5 to 17 with a median of 11
directors. The number of women on corporate boards
ranged from 1 to 7 with a median of 3 women directors.
Outcome variables include shareholder’s return
on equity and revenue per full-time employees (FTEs).
Nine dummy coded variables were created to represent
the 10 sectors in all statistical analyses with consumer
defensive as the reference sector. We used a median
split of 27% of female representation (or 3 women) to
create a dichotomous variable of gender diversity on
corporate boards. Firms that have 27% or less of women
serving as directors (47) were classified as low in gender
diversity whereas firms that had more than 27% women
(53) were classified as high in gender diversity on their
corporate boards.


We conducted two hierarchical regression analyses in
which we regressed sector dummy variables and firm
size onto shareholder’s return on equity (ROE) in the first
step, and gender diversity on boards in the second step,
and found that firms that had 3 or more women on their
corporate boards had an average gain of about $0.22
in ROE relative to firms having fewer than 3 women in
their corporate boards after controlling for firm size and
sector (See Table 1 and Figure 1). In addition, board’s
gender diversity explained 2% of incremental variance
in shareholder’s ROE.

Next, we performed the same hierarchical regression
but this time, in the second step, we regressed gender
diversity onto revenue per FTE. As shown in Table 1,
board gender diversity had a positive and significant
influence on firm’s productivity after controlling for sector
and firm size (β = 0.18, p < .05). Converting this statistical
finding into dollar terms, firms that had 3 or more
women on their boards had more productive employees
compared to firms with fewer women on their boards.
On average, the firm’s productivity gain was $414,469.
Figure 2 shows a breakdown of gender diversity effect
on firm’s productivity by sector. Our findings provided
support to Freeman’s (1984) stakeholder theory such that
having more women on corporate boards benefited both
shareholders and employees, an important stakeholder
group. In addition, the study findings provided support
to viewing shareholders and stakeholders as interdependent
and complementary, rather than opposing forces.
Our findings can be explained by the differentiated
perspectives between genders such as the feminine
management style (Carter & Williams, 2003). Specifically,
female directors were more likely to monitor executive
decision making than male directors (Triana et al.,
2013). In addition, female directors were more likely to
encourage governance practices benefiting stakeholder
groups (e.g., corporate social responsibility), rather than
just shareholders (Halliday et al., 2021). Our study is not
without limitations. First, the sample of firms included
in the study was small, which may hinder the external
validity of the study. Second, we only examined gender
diversity and firm performance for one year period,
rather than multi-year period. Therefore, a longitudinal
study is needed in future research to further validate our
findings. Third, future research should examine diversity
on corporate boards in terms of the CEO’s gender, age,
and disabilities to be more inclusive.


This study provides data supporting that it pays to
increase gender diversity on corporate boards in the
U.S. Women directors can and will positively impact
firm performance through increasing shareholder’s
value while at the same time benefiting employees, an
important stakeholder group. As the sample of firms in
this study includes several that are headquartered in
Maryland, this study is relevant to our regional economic
sustainable development because it raised awareness
that there is a business case or a sustained competitive
advantage for firms to advance equal gender representation
in the corporate board room.


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