CORPORATE GOVERNANCE CASE FOR BOARD GENDER DIVERSITY: EVIDENCE FROM DELAWARE CASES.

• Author: Kamalnath, Akshaya

1. INTRODUCTION

   Gender diversity on company boards is becoming an increasingly important issue. The theoretical basis for the desirability of gender diversity regulations can be understood under three categories: to exploit "social benefits" of addressing inequality; to exploit "business benefits" including increased profits and stock prices; and to exploit "corporate governance benefits" or more effective board functioning. (1) The third category, "corporate governance" benefits, is often subsumed within the business benefits umbrella and not regarded as a separate category or basis for bringing gender diversity on company boards. (2) Since corporate governance is the main task of the board of directors, the corporate governance case for board gender diversity needs to be developed further. (3) It is the aim of this article to examine whether there is a corporate governance case for board gender diversity.

   To do this, the article first draws on literature to explain the corporate governance case, and next tests the corporate governance case in the context of Delaware company boards through a qualitative content analysis of relevant judgements. (4) Based on the findings of the study, the article argues that gender diverse boards might be able to address certain impediments, but also makes other recommendations to complement board gender diversity efforts--to enable the board to perform its monitoring duties effectively. Thus, the article studies the relevance of the prior studies about the corporate governance benefits of board gender diversity in practical settings. Also, this is the first study to employ qualitative content analysis of judicial decisions to answer the question of whether there is a corporate governance case for board gender diversity.

   The article is divided into six parts. After providing a brief introduction in this Part I, Part II reviews literature relevant for the corporate governance case for board gender diversity. Part III then describes the methodology used in the study presented in Part IV. Part IV sets out an empirical study attempting to find evidence for the corporate governance case. Part V summarizes the main findings of the empirical study and comments on their broad policy implications.

2. EXTRACTING THE CORPORATE GOVERNANCE CASE FROM THE BUSINESS CASE

   Regulators across the world have emphasized the business benefits rather than the equality benefits--and less often the corporate governance benefits--so as to appeal to businesses. (5) While this might be strategic, it is also true that the business benefits arguments base their claims on empirical evidence that is not always consistent. (6) The inconsistency in such studies might be attributable to differences in data sets. (7) However, these studies still do not explain how gender diversity might enhance the functioning of boards. In other words, causation is not explained.

   To explain causation, the corporate governance arguments are the most significant since they directly relate to the board's role in the corporation. (8) Since the board is responsible for governance of the company, any reforms to board composition should be based on the effect of such reforms on corporate governance. Since the board consists of a group of directors, the dynamics of the group becomes important. Scholars have explained how diverse boards can perform better than homogeneous boards, using theories of groupthink and explaining how a "critical mass" of minority or women directors would ensure that the full benefits of diversity are reaped. (9) There is also some interesting empirical work that has gone beyond merely checking for the effect of board diversity on firm performance. (10) Analyzing these studies along with the theoretical and qualitative literature gives us a comprehensive insight into how board diversity might improve board effectiveness.

   1. Improved Decision-Making, Groupthink and Critical Mass

      In general, commentators take the view that diverse boards make better decisions because diverse board members bring diverse views. (11) Studies show that educational diversity in problem solving groups improves performance and that teams with occupational diversity solve problems faster and more effectively. (12) It has been found that in team exercises, individuals prepare better for an exercise with a gender diverse group, a wider range of data inputs are likely to be debated, and the diverse group, in the end, is more likely to generate the correct answer to the problem. (13)

      This is consistent with the views of Norwegian directors, interviewed in a qualitative study by Aaron A. Dhir. (14) He emphasized that gender diverse boards brought diverse views and perspectives which provided a broader basis for decision-making. (15) Quantitative studies also suggest that an increase in the number of female directors is associated with an amplified discussion of "tough issues." (16) One explanation for this is since female directors must overcome many systemic barriers to attain board positions, they tend to be highly motivated and prepared for meetings. (17) Another explanation is that female directors typically come from outside groups and networks that most directors belong to, which makes them "outsiders," therefore giving them a different perspective. (18) In support of these explanations, a study shows that women do not shy away from the "tough issues" in the boardroom because of what is called liminality. (19) In particular, "[l]iminal [persons] are those in transition between out-group and in-group status." (20) According to this study, since women directors have had to overcome barriers to reach board positions, they are better equipped to address difficult issues as compared to male directors, who are bound by loyalty "norms." (21) The authors of this study, however, also opine that once women directors transition into in-group, they would also be reluctant to raise difficult issues. (22) Thus, insofar as liminality is responsible for women directors' effect of improved board discussion, this would be a temporary advantage.

      The flip side of women directors being able to discuss tough issues is that it makes boards less cooperative. (23) Studies have also found that homogenous boards are more cooperative and experience fewer emotional conflicts. (24) However, under the monitoring model of the board, cooperation might not be as important as the ability to be able to question and assess management decisions. (25) A strand of literature draws from theories of groupthink to argue that diverse boards would be better monitors of management. (26) Groupthink, in essence, is a "concurrence-seeking tendency" often seen in members of cohesive groups, and this tendency "fosters overoptimism, lack of vigilance," and an irrational belief in the group's morality. (27) Groupthink results in defective decision-making by the group, even when individual members of the group are both qualified and conscientious. (28) Drawing from this, Erica Beecher-Monas has argued that diversity could make boards psychologically independent of the CEO because diversity in the group will make groupthink less likely. (29)

      However, for diverse candidates to be able to contribute and make a difference to the board, it has been argued that such diverse candidates should have a "critical mass," in other words, the minimum number required to ensure that the woman/minority director does not experience the effects of tokenism. (30) A study by Sumru Erkut, Vicki W. Kramer, and Alison M. Konrad has found that a minimum number of three women directors are required to constitute the critical mass. (31) Only when this critical mass is reached can these women directors contribute normally, without having to face the effects of tokenism. (32) A study which interviewed several women directors from Fortune 1000 companies, who were the sole woman directors of their boards, said they "felt visible as lone women." (33) One interviewee said, "[i]f you are alone, the spotlight is on you." (34) The same study quotes a male CEO as saying that when there are three women on the board, no one woman is considered to represent an entire gender. (35) He went on to say--about the three women directors on the board of his company--that "[t]he three women don't always agree with each other, and that is healthy for the men to see. They are independent." (36) However, a contrary conclusion was drawn in another study conducted by Lissa Lamkin Broome, John M. Conley, and Kimberly D. Krawiec, where the authors identify a theme of interviewees saying they were comfortable being the first and only woman or minority directors on the board. (37) The critical mass theory was further tested in the Norwegian context in 2011 by Mariateresa Torchia, Andrea Calabro, and Morten Huse, who conducted a study by analyzing the effect of boards with one, two, or at least three women directors on organizational innovation. (38) They found that once the number of women directors increased "from a few tokens (one woman, two women) to a consistent minority ('at least three women'), they are able to effectively influence the level of organizational innovation." (39)

      Putting these various studies and arguments together, what emerges is that diverse boards are likely to result in enhanced decision making because diverse people would be likely to bring diverse views about the issues being considered. Further, gender diverse boards are likely to be better monitors, because diversity might help counter the incidence of groupthink and because of women directors' current status as outsiders. Overall, by improving board decision making and monitoring, board diversity can help boards function more effectively.

   2. Effect of Board Gender Diversity on Corporate Governance--Empirical Work

      Various aspects of the theoretical arguments reviewed in the previous section on board effectiveness, have been tested empirically by different...