Companies that have diverse boards are less prone to financial restatements and fraud, according to research from the University of Toronto that studied more than 6,000 companies listed in the United States, including Canadian firms.
Gender, which was the key factor studied, is “one of the key features of a board that can really change dynamics, how a board operates,” said author Aida Sijamic Wahid, an associate accounting professor at the Rotman School of Management.
Her research found that it wasn’t specific skills, characteristics, or efforts of the women on boards that made a difference. Instead, she concluded that diversity itself broadened the range of perspectives around the table.
“If it were that women are just better at monitoring, period, then adding a fourth and a fifth and a sixth and seventh and eighth should actually result in some sort of meaningful positive relationship, but it doesn’t,” Wahid told the Financial Post.
In fact, the study, which was published in the Journal of Business Ethics, found that the benefits in terms of financial restatements started to diminish when women were added beyond what she found to be the “optimal” number — about a third of an average nine-member board of directors.
Beyond three, “there doesn’t seem to be correlation between adding additional women and likelihood of (financial) restatement,” she said.
Wahid suggests this is because, at the optimal level, there is enough diversity to create “cognitive conflict,” which previous research has shown leads to increased effectiveness. The same research, however, has suggested that beyond a certain level, other problems can emerge to negate those effects.
“As the number of female directors increases, the benefit of diversity reverses,” Wahid’s study concludes.
The database she used included 6,132 companies that were publicly traded in the United States between 2000 and 2010, including some large Canadian companies, and compiled details about board members as well as financial restatements and “irregularities.”
She found that a firm with a female director or directors had a 6.7 per cent probability of financial misconduct, as captured by a restatement due to an “irregularity,” compared to a probability of 8.4 per cent for a firm with a non-diverse board.
Companies with female representation on their boards had a 13.3 per cent probability of any restatement, compared to 15.3 per cent for a firm with an all-male board of directors.
Wahid said her findings suggest the benefits of diversity could reach beyond gender.
“If you’re going to introduce perspectives, those perspectives might be coming not just from male versus female. They could be coming from people of different ages, from different racial backgrounds,” she said. “If we just focus on one, we could be essentially taking away from other dimensions of diversity and decreasing perspective.”
If you’re going to introduce perspectives, those perspectives might be coming not just from male versus female
Aida Sijamic Wahid
Andrew McDougall, a partner at Toronto-based law firm Osler Hoskin & Harcourt LLP, said studies that reinforce the belief that “diverse groups make better decisions” support a shift that is already under way at companies due to legislative change and the views of institutional investors.
Beginning this year, all companies governed by the Canada Business Corporations Act are required to disclose the representation on their boards — and in senior management — of four groups: women, visible minorities, Indigenous people and persons with disabilities.
“I am excited to see what is disclosed,” said MacDougall, who leads the corporate governance practice at Oslers.
“Not only will that provide a window into whether the push to include more women in leadership roles over the last several years has trickled down to venture issuers … but it will provide data about other diversity metrics that has not been previously available.”
The federal government said it amended the CBCA to require this disclosure “to foster diversity at the highest levels of corporate leadership in Canada, improve shareholder democracy and drive shareholder value through better transparency.”
The latest figures available from Statistics Canada tracking on women on boards were released last month, but they date back to 2017. The data shows that the boards of the majority of the more than 10,000 Canadian companies studied — 61.2 per cent — were composed entirely of men. Women held 18.1 per cent of board seats overall.
Securities regulators in several Canadian provinces have been collecting data on gender diversity for the past five years under a “comply or explain” regime introduced to address gender disparity on boards and in senior management of companies listed on the Toronto Stock Exchange.
The more recent data from regulators, which covers seven provinces over a 15-month period ending on March 31 last year, showed 73 per cent of the 641 companies tracked had at least one woman on their board, while the remaining 170 firms, or 27 per cent, did not have any women serving as directors.
Women held 17 per cent of board seats overall, up from 11 per cent five years ago, the data collected by regulators shows.
During the most recent period scrutinized, about one-third of vacated board seats were filled by women. In addition, half the firms whose disclosure was tracked by the regulators had adopted a policy relating the representation of women on their boards, while 22 per cent had set actual targets. By contrast, only three per cent of the firms had targets for representation of women in executive positions.
Canadian regulators had considered imposing targets or quotas on companies when the diversity regime was introduced five years ago, but stopped short of that tactic, which has gained traction elsewhere.
In California, for example, a new law required public companies with principal executive offices in the state to have at least one woman on their board by the end of last year. They’ll have to have two female directors by the end of 2021 under the law, which is facing a court challenge from a conservative group over the use of taxpayer funds to enforce the gender quotas.
MacDougall said he is a “big fan” of the Canadian model, which compels companies to comply with a push for more board diversity or explain why they don’t, because he says it can encourage change while avoiding the risk of unintended consequences brought on by more rigid compliance rules.
“However,” he added, “I am on record as advocating for the use of a minimum quota of at least one woman on each TSX company board (that) has four or more directors, in order to accelerate change.”
The push for more diverse boards has been playing out globally for several years, picking up steam among institutional investors. A survey published last summer by Institutional Shareholder Services (ISS), a proxy advisory firm, revealed that 61 per cent of global investors said gender diversity on boards is an “essential” attribute of effective governance.
Norway has one of the strictest gender parity regimes, and used hard quotas to reach 42 per cent board diversity in 2016, according to an earlier ISS report.
In January, David Solomon, chief executive of New York-based Goldman Sachs, signalled the investment bank is prepared to take action to push for board diversity. During a television interview at the World Economic Forum in Davos, Switzerland, he said Goldman would be prepared to take a company public only if it has at least one “diverse” board member, with a focus on women. The new policy goes into effect July 1 for companies planning an IPO in the United States or Europe.