Board Gender Diversity and Firm Risk

*Zyed Achour*

### **Abstract**

In this chapter, we address the following question: Does board gender diversity affect global risk? Drawing on agency theory, upper echelon theory, and human capital theory, we hypothesize that gender diversity on the board of directors will decrease the volatility of firm risk. Applying fixed effect estimation on a panel data of listed French companies (SBF120) for the years 2011–2018, the results show a negative link between the percentage of female directors on the board and the standard deviation of monthly stock return as firm risk proxy suggesting that the inclusion of more women on corporate boards could improve financial stability. Our findings contribute to the literature by providing empirical evidence from France occupying the first place at the European level with the most female presence on the boards of directors.1

**Keywords:** board gender diversity, board of directors, corporate governance, firm risk, SBF 120

#### **1. Introduction**

Recent years have been marked by an abundance of research, both theoretical and empirical, dealing with the impact of board gender diversity on firm performance. Results have often remained mixed and the mechanisms by which gender diversity could impact global performance remain ambiguous and not fully understood. Furthermore, little attention has been devoted to gender diversity on the board of directors as an instrument moderating firm risk.

The board of directors plays a crucial role in strategies adoption and the firm's future direction design. In addition, it is an essential corporate governance mechanism. In literature, it is well accepted that the board of directors is a scarce, valuable, and inimitable resource favoring the creation of sustainable competitive advantage. However, its effectiveness remains largely dependent on its size and member's composition. For instance, its decisions would be influenced by its size, member's background, level of education, ages, as well as by its "degree of feminization." Indeed, gender diversity is seen as one of the mechanisms of corporate governance and a key element in policymaking.

<sup>1</sup> BoardEx Global Gender Balance Report 2021. https://www.boardex. com/2020-global-gender-diversity-analysis-women-on-boards/

The majority of European countries, (among them France, Italy, and Norway),2 have adopted during the last decade legislation imposing greater representation of the female gender on the board of directors. The main objective of these policies was to combat gender inequality, which largely dominates board composition. Since then, the question on the implications of board gender diversity on a company's outputs has aroused much interest among researchers and academics. However, although several studies have found that women, compared to men, are psychologically more risk averse [1–3], it is not clear that the presence of women on boards of directors leads to better performance even less and reduces overall firm risk.

Indeed, many empirical studies have attempted to study the impact of gender diversity on firm financial performance in general and on firm global risk in particular [4–8], the results did not allow ruling on a stable relationship between gender diversity on board of directors and firm risk. Indeed, while some research does not show any effect, asserting that women directors do not necessarily mitigate firm risk [7, 9] but their presence can increase the supervisory function of the board of directors, some other research has shown that the proportion of board members female is associated with an increased risk [10–12]. In contrast, other studies essentially mobilizing the resource dependency theory [13], feminist theory [14], and social identity theory [15] have shown a negative impact of the female gender on risk taking and firm financial stability. For instance, a low variability in stock market returns has been observed in companies with mixed membership on boards of directors [16]. Similarly, Hutchinson et al. [17] have shown that the feminization of the board of directors moderates the excessive risk-taking of the company. Finally, other research has established that the proportion of women on boards needs to reach a "critical mass" to have an impact on the risk [18].

The present study aims to contribute to the literature dealing with gender diversity on firm global performance by examining, in particular, the impact of gender diversity on firm risk in two ways. First, on a theoretical level, it seeks to strengthen the hypothesis of a negative link between diversity in the composition of boards of directors and corporate risk. Second, on an empirical level, this study, conducted in the French context, seeks to enrich the debate on the consequences of gender diversity on firm global performance, especially since the conclusions drawn by previous research remain mixed. The choice of the French case and the analysis period (2011–2018) are certainly not arbitrary. Indeed, it coincides with the adoption of the Copé-Zimmermann law (2011), which imposes quotas for women on boards of directors and supervisory boards. Besides, according to the Global Gender Balance Report (2021), France took the top spot with 44% of board positions held by women.

The remainder of this chapter is organized as follows: In Section 2 discusses the theoretical foundations of the impact of board gender diversity on the firm risk and justify the hypothesis of a negative impact. Section 3 presents the proposed methodology of empirical validation. Finally, Section 4 discusses the results and conclusions as well as the managerial implications of this research.

#### **2. Literature review and hypothesis development**

The link between board gender diversity and firm risk may be apprehended from many theoretical lenses.

Agency theory highlights the divergence of interests between managers and shareholders. It argues that managers, because of their opportunism, can be driven

<sup>2</sup> Copé-Zimmermann law (2011) which imposes quotas for women on boards of directors and supervisory boards.

#### *Board Gender Diversity and Firm Risk DOI: http://dx.doi.org/10.5772/intechopen.100189*

into practices of self-interest's maximizing to the detriment of those of shareholders [19]. This situation is often facilitated by weak internal control exercised by homogeneous boards of directors. Thus, due to overconfidence and weak control, male managers, are likely to be engaged in risky investments, discretionary spending, and excessive indebtedness. Moreover, several studies have shown that women's presence on boards of directors reinforces the monitoring mechanisms, makes it possible to resolve agency conflicts, and moderates risky decision-making. For example, Mirza et al. [20] have shown that, by playing their supervisory role in the board, women improve resource allocation and limit the problem of overinvestment problems. Jizi and Nehme [21] noted that female presence on boards makes it possible to mitigate firm risk by reducing stock return volatility. In recent research, Zhou [22] was able to demonstrate on a sample of 2825 Chinese companies and 21,420 firm-yearly observations that women managers will reduce firm risk distress by a quarter by going through better cash management. The author also emphasizes that the presence of women directors enjoys better access to bank loans with greater frequency to reduce insolvency risk.

According to gender socialization theory [23], women have distinct traits, values, and interests because of the personalities they develop during childhood. Women show more altruism and compassion and care more about others. Female managers are also more attached to ethical codes [24] and less tempted by corruption [25].

Regarding risk preferences, women would be more hostile to risk than men, especially in financial decisions. This could be explained by the fact that men are overconfident and rely on their personal experiences and their own risk assessments, leading them to make riskier decisions than women who are less self-confident and tend to dodge risky decisions [26].

Upper echelon theory [27] suggests that strategic choices are determined and influenced by the values and cognitive bases of the dominant actors in the organization. Thus, preferences and decisions are likely to be predicted by managerial background characteristics. According to [28], decisions made by directors are impacted by their psychological traits. Women on boards, known for their sensitivity to risk, would favor less risky policies. Under this perspective, Jeong and Harrison [29] argue that differences in business performance can be explained by the reduction in strategic risk-taking adopted by women. Li and Zeng [30] were able to highlight the importance of the female gender in the financial decision-making process and the stock return crash risk prevention. Likewise, Perryman et al. [31] found that companies with greater gender diversity in top management teams have lower market risk and offer better performance.

According to the social identity theory [15] a person's idea of their own identity is based on their membership in a group. Any behavior will change depending on the identity of the group to which a person belongs. The presence of women on boards of directors, who are less willing to take risks, may have an impact on decision-making processes.

Human capital theory [32] postulates that board diversity may produce benefits in terms of efficiency and control. Board members with heterogeneous skills, preferences, and backgrounds constitute a valuable, unique, inimitable, and hardly transferable resource. Human capital theory joins resource dependence theory [33] suggesting that directors bring benefits to the organization (information, networks, preferential resources, and legitimacy). According to Ferreira [34], gender diverse board has access to a larger pool of resources. It is, therefore, expected that board women presence would influence firm financial performance and firm risk levels. Mobilizing these theoretical approaches, Farag and Mallin [35] concluded that the vulnerability of banks to crises is likely to be reduced by a critical mass of female representation. De Cabo et al. [36] observed that low-risk European banks have

a higher proportion of women on boards of directors. Saeed et al. [37] found that board gender diversity is inversely related to business risk in emerging and developed countries. In contrast, Talavera et al. [38] could not find a significant association between found no significant association between women directors and firm risk. Yang et al. [39] found a negative effect of mandated female representation on firm performance and firm risk.

Based on the above theoretical and empirical literature, we assume the existence of significant negative impact women presence on board on the corporate Global risk. Hence, we formulate our main hypothesis as follows:

**H**: gender diversity on the board of directors has a negative effect on firm global risk.
