November 09, 2006
Is Corporate Governance Enhanced by Women Directors?
Posted by Lisa Fairfax

A recent study sponsored by TIAA-CREF found that having three or more women on the board enhances corporate governance.  The study was based on interviews with 12 CEOs, 50 women directors, and seven corporate secretaries of Fortune 1000 companies.  The study found that women impact board governance in at least three ways, (1) by bringing different perspectives into boardroom discussions, including the perspectives of multiple stakeholders, (2) raising difficult issues--that is the study found that difficult problems are less likely to be ignored when women are in the board room, and (3) by altering the dynamics in the board room to create more open and collaborative discussions, thereby allowing management to hear board concerns without feeling defensive. 

The study confirms the work of scholars who contend that enhancing boardroom diversity will benefit corporate decision-making.  In this regard, the study builds on work by others who claim that boardroom behavior and dynamics can have an impact on corporate decision-making and hence the bottom-line.  The study also may be viewed (at least tentatively) as supporting the proposition that enhancing board diversity may prevent corporate misdeeds.

However, the study does warn that the positive impact of board diversity cannot be realized unless there is a critical mass of women directors.  Hence, the study found that the number of women on corporate boards make a difference.  While a lone woman or even two women may feel excluded or marginalized for their views, the magic number is three or more women directors because at that point having women on the board becomes a normal state of affairs.  When that occurs, women directors are not viewed as voicing the "woman's perspective," but rather they are treated as individuals with different styles and perspectives.  In this sense, the critical mass of three not only allows women the ability to voice their opinions without fear of backlash, but also ensures that their voices are heard and taken seriously.

I have always been interested in the topic of board diversity, and particularly the impact of that diversity on corporate governance.  Indeed, after the corporate governance scandals, there was a small, but vocal group of people claiming that we should focus on board diversity as a way to counteract the "groupthink"/rubber-stamp mentality that seemed to have plagued corporate boards involved in misdeeds.  I was skeptical, but largely because of the critical mass point.  This study confirms my intuition that critical mass is key.  In that sense, it also confirms my intution that we may be exagerating the impact that diversity can have because there are so few companies with that critical mass.  Thus, while the vast majority of Fortune 500 companies have a woman on their board, according to the study, only 14.7% of the total board seats are held by women and only 76 Fortune 500 companies have three or more board members. 

On the one hand, we should keep in mind that having even one woman directors is important because such directors make significant contributions to the board.  However, to the extent we expect women to alter board-room culture, that cannot occur, if at all, until companies actually have more than one. 

Thanks to Jeffrey Bauman and Elizabeth Brown for bringing the study to my attention.

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