Abstract.
Gender diversity in boardroom composition has generated a lot of attention in the field of corporate governance. Research shows that the involvement of women in boards has risen in the past, and their impact on their influence on financial performance poses a mixed reaction. Where some existing literature denotes that there is a positive relationship between women’s participation on the board of directors and financial performance, while other studies depict a negative correlation. This paper aims to critically evaluate the relationship between women’s participation on boards of directors and financial performance, the researcher will draw evidence from existing literature, theories, and examples to assess this. The first section is that the paper will explore the theoretical framework that relates to these themes like diverse perspective and social identity theory, which suggests that gender diversity enhances decision-making and perceptions which influences the financial performance of the entity. However, there is a counterargument posted by the agency theory that cautions against attributing financial results to gender diversity, and asserts that expertise in the appointments of board members and qualifications are critical as opposed to gender.
Introduction.
In the recent past, the board of directors’ composition has received criticism and evaluation with a particular focus on women’s participation in boards and their impacts on the organization’s financial results. As entities strive to involve women on their boards, the question is whether their appointments influence financial performance. According to Gordini & Cordeiro, (2016). argue that diverse hoard composition brings in an effective decision-making process as a result of incorporating a wider range of skills, abilities, knowledge, and experience.
Diverse perspective theory and social identity theory state gender diversity contributes to better innovation, problem-solving, and positive perceptions, and this influences the financial performance of an entity. However, evidence relating to this assertion is not conclusive as a result of mixed reactions. It is from this I aim to assess the relationship between women’s participation in boards and financial performance. In the second section, I will outline existing literature on women’s participation in boards and their impacts on financial performance. In the third part, I will present the results and findings, and lastly, I will present the conclusion.
Background Literature and Analysis.
Literature on boardroom diversity and financial performance presents different aspects and arguments. Proponent of gender diversity asserts that diverse boards lead to better decision-making processes, due to the inclusion of different viewpoints and experiences (Monks, & Minow 2012). This finding is supported by the theories of diver’s perspective that argue that diverse teams are likely to consider a broader range of aspects, which leads to better problem-solving and innovations. In addition to this, the social identity theory suggests that the presence of women on board signals inclusivity and improves stakeholder perception which later benefits business reputation and financial performance (Miller & Le Breton–Miller 2011).
According to shareholder theory asserts that it is the responsibility of corporate boards to act in the best interest of shareholders (Jackson,2011). From this aspect, the inclusion of women on the board is seen as a means of promoting effective governance and shareholder values (Garner,2017). This is because Women on boards show characteristics of good corporate governance like transparency, accountability, and risk management (Tricker, 2015). It aligns with the interest of shareholders whose aims are to maximize returns on their investments and reduce. According to Nicolò, et al, (2022), women tend to be more vigilant and proactive in identifying and mitigating risks and reducing the likelihood of costs crisis compared to men gender (Carrasco, et al., 2015). Additionally, entities that value women in board composition are perceived to be more ethical, and socially responsible which enhances the attractiveness of customers, investors, and other stakeholders (Adams & Ferreira, 2009). This positively influences the reputation of the entity, which later enhances brand loyalty, trust, and long-term financial performance (Kabara et al.,2022).
Case Study.
The real-world scenario has proven compelling reasons why gender diversity (Women’s participation on board) influences financial performance. Royal Bank of Scotland has implemented a series of gender diversity that aimed at increasing the representation of women on its board and in leadership positions (Agyemang-Mintah& Schadewitz 2019). The appointment of Alison Rose as CEO of RBS in 2019 who became the first woman to lead the largest UK bank is evident. Through her leadership, RBS saw an improvement in employee morale, customer satisfaction, and financial performance. This serves as a catalyst that women’s participation on board enhances financial performance. In 2014 CalSTRS the largest pension fund in the United States, urged Apple Inc. to increase women’s involvement on the board. Apple appointed two women, Susan Wagner and Andrea Jung to its board. The company’s financial performance continued to increase with the company achieving record revenues and profits (Li & Qiao 2023).
Nevertheless, agency theory puts a lot of emphasis on the importance of qualification and expertise in board appointments, regardless of gender (Jensen & Meckling, 1976). According to this aspect, the primary goal of corporate governance is to align the interests of managers with those of shareholders and board composition should prioritize the competence of individuals as opposed to gender. This is because focusing on gender diversity tends to overlook other factors that drive financial performance like board independence and dynamics, this means that the impacts of gender diversity on financial performance are Overrated (Kabara, et al., 2022).
Key findings
Despite theoretical arguments, it is evident that their a significant relationship between gender diversity and financial performance. Firstly, the participation of women on the board of management brings in a broader talent pool and expertise. This allows the company to leverage wider skills, experiences, and perspectives to enhance financial performance. It means that by including women on boards, the companies benefit from their unique expertise and experiences making it easier for the board to make informed decisions that drive financial performance. Secondly, the results from the literature review showed that women are connected with improved risk management and a stronger corporate reputation. In that women are more vigilant and proactive in the identification of risks and mitigating them hence reducing the likelihood of costly crises. Additionally, companies that include women on the board of directors are perceived to be socially responsible and ethical, hence they get attracted to investors and customers, these positive perceptions lead to brand loyalty and trust which later boost financial performance. Lastly, it was evident that involving women on the board of directors results in a culture of innovation and creativity. Women represent a portion of the consumer market and possess unique information about consumer preferences, behavior, and trends. When included in the board they can understand and respond to market dynamics by making suggestions on what decisions to be made, and this enhances financial performance.
Conclusion.
The debate surrounding the participation of women on the board of directors to enhance financial performance is very complex. While some researchers argue that their involvement has a significant impact on financial performance, since it leads to better decision-making, enhances stakeholders’ perceptions, and improves corporate governance. The perspective is supported by theoretical aspects like diverse theory, and social identity theory. Other critics argue that financial performance is based on qualifications, expertise, and other factors, not gender diversity. However, there is a need to review gender diversity on corporate boards as it has shown a significant impact on the financial performance of an entity.
References
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Agyemang-Mintah., and Schadewitz, (2019). Gender diversity and firm value: evidence from UK financial institutions. International Journal of Accounting & Information Management, 27(1), 2-26.
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