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Literature Review on relationship between Board gender diversity and its impact on firm performance

Literature Review on relationship between Board gender diversity and its impact on firm performance.

Executive summary

This report was established to critically review the existing literature on the relationship between board gender diversity and firm performance. Over time, a lot of corporate governances’ mechanisms were studied in relation to firm performance, gender diversity has been a focus due to its significance of lately. An increasing attention from both academics and practitioners on the issue of gender diversity on board has been received in previous years, focusing on argument of efficiency and better monitoring benefit from a gender diverse board. This report is motivated by the current debate on the role of gender diversity on firm performance. The main aim of this report is to establish focus for further research by critically evaluating both theoretical literatures and empirical literatures on board gender diversity and firm performance. Specifically, the report found some areas of improvement in previous literatures and researches that constrain generality of result on the relationship between board gender diversity and firm performance. Furthermore, several literatures are proposed for more understanding of the context in terms of using a different theoretical perspective and Finally, the implication of this report will be useful to policy makers in both public and private sector.

Introduction
The term corporate governance signifies the structure and functioning of the corporate polity (Richard Eells, 1960). (Yasser, Entebang ; Mansor, 2011) defined CG as a system in which firms are managed and governed by a board. Corporate governance is the broad term which describes the processes, customs, policies, laws and institutions that directs the organizations and corporations in the way they act, administer and control their operations. (Humera Khan 2015). In firms, the board of director plays a crucial role in corporate governance which makes them accountable to stakeholder (Rao ; Tilt, 2016)., where they impact directly or indirectly on the firm overall performance i.e. Financial, through monitoring by providing strategic functions. (Kang, Cheng, ; Gray, 2007; Ntim, 2013; Terjesen et al., 2016; Mangunyi, 2011). The separation of ownership from control is the core of the agency problems facing by the firms (Berle ; Means 1932; Jensen ; Meckling 1976). The Cadbury Report (1992) described the board as a mechanism by which companies are directed and governed. The board is viewed as the most important corporate governance mechanism. Blair (1995) (Monks and Minow, 2001) (Jensen, 1993; Short et al., 1999).

The past dispute atop corporate scandals such as Enron and WorldCom and subsequent companies’ failure, proposes the need for concern of corporate governance in corporations (Margolis and Walsh 2003). One of the most important mechanisms in corporate governance that protects interest of the stakeholders is board gender diversity (Erhardt, Werbel and Shrader, 2003). Gender diversity on board makes the ineffective of the management team eliminated (Terjesen et al., 2016). For example, Adams and Ferreira (2009) show that a gender diverse board spend more time on monitoring and may be more independent. Also, Carpenter (2002) found male and female directors thinking is different i.e. heterogeneity, which is likely to effect firm performamce base on decision making (Hillman, Cannella, & Harris, 2002; Hillman, Cannella, & Paetzold, 2000; Groysberg & Bell, 2013; Hillman et al., 2002; Singh et al., 2008). Carter, D’Souza, Simkins, and Simpson (2010) suggest gender diversity on board leads to better corporate governance which has impact on firm performance. Compared to theorotical eveidence, empirical evidence linking gender diversity to firm financial performance is more equivocal, Ferreira (2015) suggest that too many methodological problems affect previous research results. Despite the volume of empirical evidence, there has been no consensus on gender diverse board impact on firm performance. Given the emphasis being placed on board diversity as a part of good corporate Governance, this paper is expected to add to the current body of knowledge on the existing argument relating to Board gender diversity, and widen stock of literature by critically examining the existing literature on board gender diversity and its impact on firm performance and stressing the need and significance to encourage firms on female inclusion on board and its implication.

The remainder of the report is organized as follows. Theoretical review part presents the Theoretical case on a relationship between board diversity and firm value, and the empirical review part examines prior empirical evidence on board composition and firm value relevant to the study, while Recommendation and conclusion concludes
the paper.

Literature Review

Theoretical review
There are several theories on the effect of corporate governance on financial performance
of the firms. This paper will examine board gender diversity as a corporate governance variable based on these two theories.

Agency theory
Agency theory plays an important role in stressing and highlighting board mechanism with the need to monitor the management on behalf of the shareholders which results in board roles on firm performance (Vo and Nguyen, 2014). Jensen and Meckling (1976) developed the agency theory which supports the separation between governing and decision making and can be explained as a result of “efficient form of economic organization” (Fama and Jensen, 1983; Jensen, 1986; Jensen and Meckling, 1976) Further, Zahra and Pearce (1983) views it as an approach: “agency approach is among the most recognized in research on contribution of boards”. Eisenhardt (1989) explained as principal delegate some decision-making authority to the agent and it becomes expensive and difficult for the principal to verify what the agent is doing, various conflicts arise, agency theory is focused on solving such problems.
Although, Jensen and Meckling (1976) suggested that decision taking is reduced due to the delegation authority by the manager in the firm. Himmelberg,, Hubbard and Palia. (1999), argued by saying agent problem is volatile in comparison to cultures, industries and firms.

In 2001, a study carried by McColgan (2001) extended the work of Jensen and Meckling (1976) where he gave a very broader view of corporate governance and agency theory, focusing on divergence of shareholders’ interests to managers interests. He agreed with views of previous studies suggesting an effective corporate governance mechanism can drastically reduce agency problems i.e. agency cost. As human behaviour is sometimes unscrupulous and selfish. Agency theory advocates fundamental function of the agent is to control managerial behaviours and ensure that managers act in the interests of shareholders (Muth and Donaldson, 1998, Ajinkya et al., 1999; Bhojraj and Sengupta,2003), prescribing strong agent and principal control (Gursoy and Aydogan, 2002). Principals delegate the running of business to the directors or managers, who are the shareholder’s agents (Clarke, 2004). Agency theory suggest the presence of women on board improves firm performance (Hampel, 1998). According to (Randöy, Thomsen and Oxelheim, 2006; Carter et al., 2007) found that a more diverse board may entail better monitoring of managers, because board diversity increases board independence through agency theory.

Resource Dependency Theory
Resource dependence theory provides a theoretical perspective for the role of the board as a resource to the firm (Johnson, Daily, and Ellstrand, 1996; Hillman, Canella, and Paetzold 2000).
Resource Dependence Theory views board diversity as an instrument that facilitate access to resources which management may use to make the firm successful i.e. financial performance (Johnson, Daily and Ellstrand, 1996). In the current business firms require an increasingly diverse board due complexity in the 21st century (Stiles, 2001). (Barney, 1991) stressed that firm performance is strongly influenced by human resources through the resource dependency theory, these asserts to (Pugliese, Minichilli, and Zattoni, 2014) research which suggest that boards provide firms with benefit and access to scare resources through better information and professional network connections. According to Terjesen, Sealy, ; Singh (2009) found due to women understanding of the market as consumers, they tend to provide the firm with unique connections to the market.
Although the resource dependency is used by many scholars because of its importance in explaining the behaviour of firms with regard to its external environment, recent research scrutinises the theory because it cannot be used to directly explain a firm’s performance (Sharif & Yeoh, 2014; Drees and Heugens, 2013; Davis and Cobb, 2010; Hillman, Withers, and Collins, 2009).

Empirical review
Board gender diversity refers to the presence of women on corporate boards of directors or women representation on boards (Dutta and Bose, 2006; Julizaerma and Sori, 2012) Although it is a growing area of corporate governance research in recent years, most empirical research on the subject is restricted to developed countries(Habbash, 2010; Kang, Cheng, and Gray,
2007). Empirical evidence depicts the presence of women directors in board level positions as responsible for various firm outcomes. The relationship between gender diversity and firm performance has however been inconclusive and still open to further empirical enquiry. Some studies established a positive and significant relationship between gender diversity and firm performance.
(Pillal 2018) used a sample of 349 financial and non-financial companies listed in the stock exchanges of the GCC countries from years 2005 to 2012 and found that corporate governance variables such as gender diversity affect the Financial Performance in majority of the countries in the GCC. Similarly, In Turkey, K?l?ç and Kuzey, (2016) used instrumental variables regression analysis on company entities listed on the Borsa Istanbul from year 2008 to 2012 and found even though boards are mostly male dominated in turkey, gender diversity on board is positively related to financial performance.
The study employed simultaneous equations of multiple regressions in the analysis to control for the possible problem of endogeneity (Tobin’s Q). Using a different approach in china, Nadeen 2017 used intellectual capital (IC) as a measure, applying an adjusted-value added intellectual coefficient (VAIC) model with a generalised method of moment (GMM), Arrelano–Bond developed on 906 Chinese listed firms from 2010 to 2014 and found gender diversity has a significant relationship with IC efficiency. Moreover, found the relationship disappears in static ordinary least square estimation when endogeneity is accounted for using dynamic GMM.
In Span, Cammpbell (2008) used panel data analysis and found that gender diversity has a positive effect on firm value and also found that the opposite causal relationship is not significant, suggesting that that greater gender diversity may generate economic gains
On firms which increase their female board membership. Another study In Italy, Gordini 2017 used Panel data analysis in an unbalanced panel of 918 Italian listed companies during the years 2011-2014 and found a positive effect on the relationship between gender diversity–firm financial performance. Also, In Denmark, Smith et al. (2006) found that the proportion of women in top management jobs tends to have positive effects on firm performance after using data from 2,500 largest Danish firms between year 1993-2001.

Additionally, In US, Erhardt, Werbel et al. (2003) used correlation and regression analyses on financial performance data of 127 large US companies specifically of year 1993 and 1998 and found gender diversity is positively associated with financial performance. Simillarly, Conyon 2017, used quantile regression methods on over 3000 US firms from 2007 to 2014 annual data and found the presence of women on the board has a positive effect on firm performance. Critically, he showed the firm performance is altered by the presence of women directors suggesting female directors in low-performing firms tends to have a less significant impact compared to high-performing firms. Furthermore, the study found firm performance and board gender diversity has a positive correlation using the instrumental variable quantile regression. In 2015, Post Byron 2015, statistically combine the results from 140 studies and examine whether these results vary by firms’ legal/regulatory and socio-cultural contexts and found that female board representation is positively related to accounting returns in countries with stronger shareholder protections and also found the relationship between female board representation and market performance is positive in countries with greater gender parity.

On the other hand, there is evidence from previous studies to support a significant and negative relationship between gender diversity and firm performance. For example;
In US, Adams and Ferreira (2009) used the ordinary least squares model on 1,939 firms from year 1996 to 2003 and found a negative relationship between gender diversity on the board and financial performance. In UK, Haslam et al (2010) used multiple regression analysis for all financial time stock index 100 companies from years 2001 to 2005 and found a negative relationship between gender diversity on boards and firm performance (Tobin’s Q).
There are also studies that found no evidence linking board diversity to firm
performance. For example
In 2015, pletzer 2015, used a systematic literature search strategy to meta-analytically investigate 20 studies on 3097 companies published in peer-reviewed academic journals which focused on the relationship between female representation on corporate boards and firm financial performance and found if other factors are not considered i.e. developing vs. developed countries and higher vs. lower income countries., then the mere representation of females on corporate boards is not related to firm financial performance. Also, In France, Dang 2016 used quantile regression from a dynamic perspective on a panel of French listed companies (SBF 120) and found across quantiles, the impact of board gender diversity on firm performance differs and also depends on the measure of performance under consideration i.e. Tobin’s Q and RoA. In Netherlands and Denmark, Marinova et al (2010) used the two-stage least-squares estimation on 186 listed firms and found no effect of board gender diversity on firm performance. In 2014, Chapple 2014 used an aggregate (market-level) approach on firms and associated its portfolios performance with gender diverse boards compared to those firms without. Also, into consideration if there is a within-industry effect weather performance is linked to a gender diverse board. Although the study overall did not find an evidence of an association between diversity and performance but suggest there is a weak evidence of a negative correlation between having multiple women on the board and performance and also in some industries diversity is positively correlated with performance. In US, Dobbin and Jung (2011) found no effect of board gender diversity on firm performance on largest US firms from year 1996 to 2007 using the cross-sectional time-series models. Similarly, In US, (Carter, D’Souza et al. 2010) used a sample of 2,300 firm years in S;P 500 index from year 1998 to 2002 and found the relationship between the gender diversity of the board and financial performance are insignificant, suggesting that gender diversity neither have a negative impact on company financial performance nor does it have a positive impact. Likewise, in 2015 Sila 2015 used a dynamic model and found no evidence relating influences equity risk to having women on board.

Conclusion and Recommendation
This report contributes to the corporate governance literature by critically reviewed both theoretical literatures and empirical literatures on board gender diversity and evaluated its influence on firm performance. To sum up, there are mixed results in the existing literature on the relationship between board gender diversity and its influence on firm performance. i.e. positive, negative and no effect. Empirical evidence on the association between board gender diversity and firm performance is equivocal and inconclusive with prior studies yielding conflicting findings. Therefore, the relationship between gender diversity and firm performance is inconclusive and is thus still open to further empirical enquiry.
The report found some areas of improvement in previous literatures and researches that constrain generality of result on the relationship between board gender diversity and firm performance. First, most existing research only focused on two theoretical theories i.e. resource dependence theory and agency theory, when exploring the relationship between board gender diversity and firm performance. This report recommends further research should explore the relationship through other theories i.e. stewardship theory, stakeholder theory, to better understand the context. Second, most existing research only focused financial performance when exploring the influence of gender diversity on firm performance, this report recommends further research should focus on non-financial when exploring the influence of gender diversity on firm performance, to better understand the context. Additionally, methodological shortcomings have limited previous researchers on finding an optimal between board diversity and its influence on firm performance on most of the previous studies therefore, this report recommends the issue is addressed conclusively by further research taking longitudinal approach on previous studies related to the relationship between board gender diversity and firm performance. Finally, although in developed countries there are many researches which relate to the relationship between board gender diversity and firm performance, it is the opposite when exploring developing countries. Therefore, this report recommends further research should focus on developing countries to better understand the context of the relationship between board gender diversity and its influence on firm performance.