By Mak Yuen Teen

Note: This is a commentary on an article in the Business Times about gender diversity and business performance (which followed several media reports about the study which is the subject of this article). I wrote it because whenever a study like this is reported in the media, I will have practitioners writing to me asking me what I thought of the findings.

I am a strong advocate for boards having greater diversity, including gender diversity. But as I have written in the past, it is not just a “numbers” game – how we achieve that diversity (e.g., through proper search and nomination processes) and how companies “engage” with diversity are what truly matters.

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The author: “As a starting point, we looked at the role of women directors in board processes. We found that when the overall proportion of women directors increases, the number of board meetings decreases. One might have thought that having more women on board leads to better efficiency and hence fewer meetings.”

My comment: No, I wouldn’t have thought that having more women on board would necessarily lead to greater efficiency (although some directors have shared with me their experiences of boards behaving more professionally when there are women on the boards) nor would I have thought that better efficiency means fewer board meetings.  Most engaged boards that I know of would meet at least about 6 times a year to keep apprised of the affairs of the company and to discharge their fiduciary and regulatory obligations (such as approving quarterly and annual financial statements/reports). Would a board having say 2 board meetings per year be considered by the author to be more efficient?

The author: “Yet, the strange thing is the number of board meetings increases when the proportion of women independent directors among all independent directors also increases. This is the reverse effect of overall board gender diversity. Indeed, it may be due to the higher level of scrutiny by women independent directors.”

My comment: It is only strange if one assumes that having fewer board meetings is good thing and that just having more women independent directors is also a good thing. But he found that companies having more women independent directors actually have more board meetings, so perhaps having more board meetings is not so bad after all. So, he now argues instead that having more board meetings could mean more scrutiny. In other words, if there are fewer meetings, then the argument is greater efficiency, but if there are more meetings, it is greater scrutiny. This seems like a “heads you win, tails I lose” sort of argument. The data is not going to tell you which is the “correct” argument.

The author: “The finding actually squares with an observation from an earlier study made by CGIO pertaining to the 100 largest companies in Singapore. There we found that when the board has a non-independent chairman, the overall women representation on boards increases from 9.9 per cent to 11.3 per cent. On the other hand, women representation among independent directors decreases from 11.8 per cent to 11.2 per cent.”

“In other words, non-independent chairmen bring in more women to the board but these directors are non-independent and are probably relatives of these chairmen. It may be that this then reduces the incidence of board monitoring and hence board meetings.”

My comment: So now he seems to have settled on the assumption – which is not tested in the study – that having fewer board meetings means less scrutiny (number of board meetings is a blunt measure for measuring board scrutiny – for instance, we don’t know long the meetings are, just to name one limitation). 

I would add that the percentage difference for women independent directors in the two groups of companies of 11.8 percent and 11.2 percent he referred to above is rather small and is probably not statistically significant. Given an average board size of 7 directors among SGX companies, we are talking about a difference of 0.04 women independent directors on average between the two groups of companies he referred to.

The author: “In our current study, we then looked at the influence of women directors on corporate governance. While we established that the overall proportion of women directors has a positive impact on corporate governance scores, the proportion of women independent directors has 1.5 times more impact than that by just the overall proportion of women directors.”

My comment: This may be just spurious correlation. For example, those with more women independent directors rather than women executive directors and women non-independent non-executive directors may be more likely to be professionally managed companies while those with more of the latter women directors may be more likely to be family companies. Family companies are also likely to be smaller with fewer resources to implement good corporate governance practices (or if one is cynical, smaller companies have fewer resources to hire consultants to help write nice corporate governance reports to obtain higher corporate governance scores). It may not be that women independent directors affects the corporate governance score of a company – but rather both the proportion of women independent directors and corporate governance scores being correlated with the size of companies and whether they are professionally-managed or family companies. There appears to be no theory as to how women independent directors actually lead to a company having better corporate governance  – beyond an assumption that more board meetings equate to greater scrutiny, despite the author himself initially arguing that more board meetings equate to lower efficiency.

The author: “The most interesting finding probably relates to the impact on the company’s financial performance. Our study determined that the proportion of women independent directors has a positive direct impact on the company’s financial performance as measured by the ratio of the firm’s market value to its book value.”

“Notably, the proportion of women independent directors has 17.3 times more impact on financial performance than that induced by the overall proportion of women directors.”

My comment: In order to establish cause and effect, one needs a good theory to start with. Sometimes, what is the cause and what is the effect are reasonably self-evident. For example, if we correlate age and number of ailments, one would likely find a strong correlation and would be able to assume that it is age that drives number of ailments, and not the other way around.

However, one cannot conclusively establish cause and effect by simply running correlations or regressions. Some academic studies use sophisticated statistical techniques such as “two-stage least squares regression” or “instrumental variables” to try to statistically establish causality. Unfortunately, no amount of statistical sophistication can overcome the lack of a good theory especially if one cannot manipulate the “cause”, control for other factors, and observe the “effect”.

Further, it is unclear whether the research controls for other factors that affect the ratio of market value to book value. Growth companies and those with lots of intangible assets (that are often not recorded on the balance sheet) are likely to have higher market-to-book ratios. For example, if consumer-facing companies are more likely to appoint more women independent directors and these companies also tend to have fewer “bricks and mortar assets”, then a relationship between percentage of women independent directors and the market-to-book ratio may be spurious.

I do not have any problems with academics or anyone expressing an opinion based on their personal beliefs, experiences, observations or anecdotal evidence. Not everything that is true can be scientifically proven. Equally, not everything that is purported to be supported by “academic evidence” should be accepted without question. Policymakers and practitioners need to be wary about flawed academic research being used to satisfy demands for “evidence-based” policies. Sometimes, policymakers would just have to make difficult policy decisions based on judgement after a careful assessment, not based on flawed empirical evidence.