When Twitter recently filed for an IPO, it disclosed a traditional all-male board. Asked about the absence of female directors, CEO Richard Costolo tweeted, “The whole thing has to be about more than checking a box and saying ‘we did it!'” Costolo's response shows a deep lack of understanding of the issue.
Unfortunately, in this respect, he is not alone. But a growing body of scientific evidence points to the benefits of gender-balanced boards. These benefits range from improved board oversight to higher profitability and a spillover on the top management team.
Good corporate governance starts with coming to the meetings. A comprehensive U.S. study shows that female directors have better attendance records than male directors. Men's attendance problems are worse in all-male boards. Gender-diverse boards are more likely to fire the CEO when the firm performs poorly, suggesting that they are tougher monitors.
A token woman is not enough, however. A recent study from Israel shows that boards with at least three women present in the meeting are twice as likely to request further information from management and to take an initiative. Both men and women are more active in these meetings. Importantly, boards with at least three female directors are more likely to fire the CEO for poor firm performance and their firms are more profitable.
Gender-diverse boards may also have a spillover effect on the composition of the top management team. A U.S. study finds that the previous year's share of female directors predicts the fraction of female executives, but not the reverse. In other words, changes in board composition precede changes in executive membership.
A common excuse for the absence of women on boards is their lack of CEO experience. There is evidence that the stock market reacts favorably to the appointment of an outside CEO. However, there is no further reaction when the board adds its second or third CEO. Nor does the appointment of an outside CEO lead to improved corporate performance. The board is a team, where diversity allows the members to contribute with different skills and perspectives.
Annoyed with the slow pace of change, the Norwegian government mandated a quota in 2006, requiring boards of publicly listed firms to be gender balanced. Interestingly, the stock market was neutral to the legislative decisions that led up to the quota. Investors did not really seem to care.
Several countries, like Italy, France and Netherlands, have followed suit and adopted board gender quotas. In 2012, the European Commission proposed a new directive mandating that boards of large publicly traded firms should have at least 40 percent of each gender.
The representation of women on U.S. corporate boards remains low. Only 12 percent of Russell 3000 directors are female and one-third of the boards are all male. Twitter's recent filing shows that it might take many years to change this. The important question now is how we can make shareholders and legislators understand the benefits of gender diversity and a critical mass of women on corporate boards.
Karin S. Thorburn is a visiting professor at the Tuck School of Business at Dartmouth University and research chair professor of finance at the Norwegian School of Economics.