**3.1 Individual level**

Today, people still struggle with their sexual orientation, and they often face prejudice based on their stereotype. According to McKinsey's women in the workplace 2020 report, the underrepresentation of women and women of color in senior management cannot be explained by attrition alone. Black women are more likely to have been laid off or furloughed during the COVID-19 crisis [23]. Also, gender stereotyping fosters bias against women in managerial selection, placement, and promotion, and training decisions [24].

Stereotyping is a cognitive process in that it involves associating a characteristic with a group (for example, see [25, 26]). It does not represent an abnormality in human social behaviors and values because it is simply the nature of people to develop ideas about other people and their behaviors based on our understanding and expectations of self. Stereotyping can be taught or reinforced to people through many different social interactions and influences.

Traditionally, the most appreciated leaders possess characteristics commonly associated with masculinity, such as competitiveness, self-confidence, ambition, and aggressiveness (for example, see [27, 28]). Unsurprisingly, male leaders dominate the world of business. Yet, in the past, researchers have shown that many masculine traits did not always benefit the companies. Some researchers argue that female leaders have important traits, such as warmth and empathy that are useful during a crisis. Consequently, the tendency to prefer female leaders over male leaders is likely to increase under conditions of organizational crisis (for example, see [6, 29]).

Female executives lead differently than male executives (for example, see [5, 30, 31]). Female executives tend to be collaborative and enhance participative decision making (for example, see [32, 33]). They are often described as using the style to motivate followers to change self-interest into group interest through shared concern for key goals. In addition, female executives care more about universalism and benevolence than male executives, and less about self-enhancement values such as achievement and power [34]. Women increase emphasis on their cultural capital to negotiate male-dominated networks and maintain their high-status positions through such measures as obtaining advanced educational degrees or modifying speech and behavior [35]. These traits enhance decision-making processes based on the diversity of ideas, brainstorming and consensus that increases cooperation during crises.

It is also argued that female executives behave like men in order to succeed. In contrast to female stereotypes for the population, female directors are more risk loving than their male directors [34]. One well-known research conducted by Adams and Ragunathan [36] suggests that gender stereotypes are influential in finance, constraining women to reach top positions in banking and sustaining a strong masculine culture. They document that banks with more female directors appear to take more risk than banks with fewer female directors. At the same time, the research also indicates that on average the women who make it to the top tend to perform better than men, in particular under uncertainty.

Some believe that female leaders are favored in times of economic challenges, not because they are expected to improve the situation, but because they are seen to be good people to take the blame in case of failure. This phenomenon has been coined the glass cliff or an invisible barrier, which inhibits the progression to higher levels of an organization's hierarchy [29, 37]. People have the perception that the suitable leaders of unsuccessful companies were associated with the female stereotype [38]. Along the same line, some studies show that the negative relationship between women's presence on boards and stock performance is because of investors' stereotypic beliefs about women's lack of competence and unsuitability for leadership [39].

In short, although there are lots of campaigns and social pressure to raise the gender equality and change the perception of people with respect to gender, there is still some evidence indicating that people prejudge others based on their sex and not on their true capability.

#### **3.2 Board level**

There are two main theoretical perspectives in the corporate finance literature underlying the rationale for favorable board gender diversity. The first theory is agency theory. It is based on the assumption that there is a separation of ownership and management that leads to costs associated with resolving conflict of interest between a principle (i.e., shareholders) and an agent (i.e., a manager). To mitigate agency cost, firms apply several corporate governance mechanisms such as law, incentives, shareholders' right, and monitoring [40]. And the board of directors is considered to be one of the important mechanisms for controlling managerial behavior and mitigating the agency problems in the firm. They are usually elected or appointed by shareholders, and they represent shareholders of the company. The board is tasked with making important strategic decisions, providing the leadership to put them into effect, monitoring, and supervising the top management on behalf of shareholders. Many studies have sought to examine the board quality in various aspects, particularly their impact on firm value and other corporate outcomes. Diversity of the board is one aspect used as a proxy for board monitoring effectiveness [4–9].

In social psychology, researchers believe people usually seek to surround themselves with people who share similar background, perspectives, and values, which are then reinforced in intragroup communication. Looking from this perspective, many researchers believe female directors are breaking out of the "old boys club" and thus introducing a more independent perspective [4, 5]. The board with a greater proportion of female directors will be better able to monitor self-interested actions by managers and will thereby minimize agency costs. It has also been observed that female directors are tougher monitors than men. In addition, a female director is more likely to classify as independent than a male director [4]. Firms with a high proportion of female directors tend to be associated with higher chief executive officer (CEO) turnover sensitivity, fewer board attendance problems and better board monitoring [4], and more transparent information disclosure [7]. Plus, female directors are more likely than men to ask questions and raise tough issues [8]. Other work indicates that boards with more female directors have better oversight of management reporting that improves the quality of earnings [9]. In short, female directors improve board monitoring quality and so enhance corporate governance control.

Some also believe that individuals consider themselves and others as either in- or out-group members and are more likely biased toward in-group members, making it more difficult for out-group individuals to join these groups. Consistent with this

#### *Gender Diversity and Corporate Governance DOI: http://dx.doi.org/10.5772/intechopen.101189*

perspective, researchers describe how CEOs, who are mostly men, are more likely to lead boards composed of like others, of similar gender, as well as age, background, and experience. Similarly, the recent findings suggest that male directors categorize female directors as out-group members and may have a negative social bias toward their board appointment and their election to major board committees [41].

Another stream of this literature argues that there may be some critical number of female directors on board that makes a difference, and which could also have an impact on cultures. A female director is considered a minority in the boardroom. She realizes that her behavior is scrutinized, and she will be very careful in choosing when to speak up, while when there are two female directors in the boardroom, they can help to dispel the notion that either of them is raising the women's point of view. Additionally, women feel they are belonging to the same group so they can feel less isolated. Although two female directors are generally more powerful than one, it takes three or more women to achieve the critical mass that can cause a fundamental change in the boardroom and enhance corporate governance [42]. In a similar vein, Post et al. [43] also suggest that the number of female directors matters. Firms with at least three female directors received higher Kinder Lydenberg Domini (KLD) strengths scores.

The relationship between female directors and CEO has also received much attention. From an agency perspective, the separation between director role and CEO could lead to a reduction in opportunity for a powerful CEO to dominate the board [44]. Boards are held responsible for maintaining firm performance and appointing the CEO is one way in which the board is directly tied to firm performance [45]. Female directors have been found to contribute to governance, reducing CEO power due to their independence. A recent finding suggests that firms with female directors are less likely to hold deep-in-the-money options [46]. The representation of female directors could reduce male CEO overconfidence, especially in industries where high overconfidence is more prevalent. Along the same line, the empirical evidence suggests that there is a relationship between the board gender diversity and the likelihood that a firm will appoint a female CEO. The firm with high female-friendliness has a higher likelihood of appointing a female CEO [47].

Thus, from an agency perspective, board gender diversity could lead to higher independence of directors and the balance between executive and non-executive directors on boards. Boards with high gender diversity could provide a better board monitoring function on behalf of the shareholders. Nevertheless, there is some evidence suggesting that the critical mass of at least three female directors also matters. Any number less than the threshold will mostly result in tokenism, where females on boards are seen as tokens with insignificant impact on corporate decision-making [43, 48].

Another important theory relating to arguments in favor of board gender diversity is the resource dependence perspective, which suggests that directors are appointed to boards in order for the firm to acquire critical resources. Part of the resources that directors bring to the boardroom is their human and social capital. Human capital refers to the individual's set of skills, knowledge, and reputation, which are typically developed through investments in education, training, and prior working experience. Such experiences shape directors' thinking, frame of reference, and perception. The greater the diversity of experience, the greater the potential for understanding problems and consequently better board decision making. Consistent with this notion, Carpenter and Westphal [49] demonstrated that the background and experience of board members is crucial for effective monitoring.

Some believe that females tend to devote more time to housework and childcare, which could result in inferior skills compared to males. This belief could imply that the human capital gap widens as males spend more time in the labor

market. However, this belief confronts much criticism from many researchers. The recent empirical evidence shows female directors have accumulated human capital fairly similar to their peers in terms of education, reputation, and board experience [35, 50, 51]. Education is a way to acquire directors' expertise and enhance directors' cognitive skill. Directors with higher education could have a greater impact during board discussions. Prior studies show that a positive relationship between board gender diversity and firm performance is mainly driven by the higher education of female directors [52]. In the United States, female directors are more likely to hold advanced degrees than white males. Similarly, one study by Singh et al. [51] examined multiple human capital dimensions of new appointees to corporate boards in the United Kingdom. They point out that new female directors are more likely to have MBA degrees and international experience than new male directors. Dunn [53] also shows that specialized knowledge skills, such as education, expertise, or business experience, are relevant for a female director appointment. Furthermore, female directors are more likely than males to be support specialists and community influencers [50].

Directors' human capital can be an informational signal to stakeholders about the organization [54]. Firms can enhance their reputation and legitimacy by appointing female directors to the board [11]. The gender diversity in leadership positions communicates that an organization is committed to a tolerant workplace environment in which employees are not discriminated against due to their gender identity. Furthermore, researchers show a higher representation of female directors signals the increased commitment of a firm to a positive working environment and quality employment characteristics [10].

The representation of female directors is linked to organization size, industry type, firm diversification strategy, and the network effects of linkages to other boards with female directors [55, 56]. Female directors are less prevalent in firms that deal with infrastructure, energy, or electronics. In some industries, it is possible to advance a specific business case for increasing female representation in leadership roles, most notably, in companies that have more diverse workforces, or their target market is mostly women [12]. This notion has coined the phrase "women understand women." Having a feminine perspective may be particularly valuable in such industries. Furthermore, it could give a positive signal to stakeholders that the company understands what women want. In contrast, some also believe that only a small number of companies have gone so far as to change management structure for their particular products, services, and business operating environment.

Women are also more aware than men about corporate social responsibility (CSR) [33, 48] and have a better reputation in the eyes of other managers and stock market analysts [57]. Thus, a woman who holds an executive role at a company may raise the firm's reputation, even if the firm has not historically been motivated by corporate social responsibility. In other words, the board gender diversity can send a positive signal to both internal and external stakeholders [10, 11].

Nevertheless, the favorable perception toward female leaders may not be widely accepted in society. There is evidence suggesting that appointing a non-prototypical leader is a signal to stakeholders that they are undertaking change [58]. It is also possible that the appointment of a woman to a senior position is interpreted by investors as a signal of organizational difficulties or decline [54]. Consistent with this notion, research evidences a negative short-run market reaction to the appointment of female executives, suggesting that female executives are less informed than their male counterparts about future corporate performance [59]. However, in the longer term, market participants began to recognize the benefit of female executives for future corporate performance.

#### *Gender Diversity and Corporate Governance DOI: http://dx.doi.org/10.5772/intechopen.101189*

Another valuable attribute that directors can bring to the boardroom is social capital. Social capital or relational capital in the context of governance refers to an individual's ability to bring information about the external environment, other firms' strategies, and prospective managerial talent through their networks and relationships [54]. Directors who broadly network with outside groups will have greater social capital because they have easy access to relevant strategic knowledge and perspectives [49]. Similarly, directors who have an external network tied to relevant organizations can provide better advice and counsel. Ultimately, these ties can impact firm performance.

Directors who are broadly connected to outside groups will have greater social capital because they have quick access to information, diverse ideas, and critical resources [60]. It also enhances directors' experience [49] as well as permits the executive to establish a network or to monitor business relations [61]. In other words, the greater the number of ties a director has to other firms, the greater the information and network benefits for the firms. The empirical evidence suggests that female and minority directors have more multiple board seats than males [56, 62].

In summary, female directors tend to have different education backgrounds, professional experience, and personal networks from those of male directors and may be more aware of corporate social responsibility. As a result, the more gender diverse board may help ensure that more perspectives and issues are considered in the decision-making process, leading the board to achieve better decisions.
