Board dynamics and the power of three

Change has been made at board tables across Aotearoa over recent years with more women in governance roles. But could there be a reason to add one or two more? Researchers from Lincoln University have identified other benefits that women bring to the table that run deeper than a numbers game. 

Professor Christopher Gan is head of the Financial and Business Systems department at Lincoln University and an adjunct professor in the finance and economics department at Universitas Airlangga, Indonesia. In collaboration with former PHD student Dr Sanaullah Farooq, he’s been working on a research paper that examines the link between boardroom gender diversity (BGD) and investment inefficiency (IE).

Examining data from the UK (2005-2018), the New Zealand researchers wanted to determine the level of impact women make on boards. The UK Financial Reporting Council mandates listed companies declare their board diversity in their annual reporting, which includes measurable objectives on diversity and their progress in achieving this.

Professor Gan and Dr Farooq’s results revealed that companies saw significant improvement in their investment efficiency by having at least ‘three women’ on the board.

“Women tend to be a bit more cautious and do their homework to make sure that the decision will be balanced, whereas we found their male counterparts were more aggressive – they chase risk, which fits under the philosophy of finance – high risk equals high return.”

Professor Gan says when a company wants to borrow in the capital market or issue stocks and bonds, women bring greater transparency around disclosure and dig deeper on the details. 

“This is very important because their male counterparts are so engrossed chasing the numbers that they tend to overlook some of the parameters that will impact this number and drive performance. In hindsight, men are blinded by that. But women go beyond the boundary and say, OK, ‘this is what's going to happen’.”

Professor Gan is quick to note that while ‘three’ isn’t the magic number, it bolsters the voice of women on boards, creating safety in numbers and the likelihood of being heard.

“They bring a fresh perspective and better discussions, especially in the investment parameter where the market is volatile,” Professor Gan says.

Gan argues that if boards tap into the ‘power of three’ their boards they will reap the benefits of greater transparency: women are less tolerant of poor managerial performance; they will dig deeper on the problems and solutions; and will be less likely to adhere to ‘old boys corporate culture’, which gets in the way of the board seeing the bigger picture. 

Professor Gan says women also lead companies away from risk, especially the type of agency/ management culture where “managers have a tendency to hire and maximise their personal interests first, and the firm’s, second”.

“This creates a dangerous scenario,” Professor Gan says.

Understanding that culture also impacts decision making and boardroom behaviour, Professor Gan is now looking to conduct similar research in Thailand and other parts of Asia to see where the parallels lie between east and west.

“Japan is a good example of a male-dominated culture…women tend to be more passive across a number of industries as well as universities there. Koreans are similar, in that they have a chaebol industry (big corporate conglomerates run by one individual or family) that are male-dominated with very few women on the board,” Professor Gan says.

In these countries, Professor Gan says ‘cultural tightening’ is difficult to dismantle or challenge, but his hope is that this will change. Yet religion and culture will always seep into boardroom practices.

“There is still a lot more work to do… in Asia, they are slowly beginning to realise that women play an important role and bring in diverse decision making. It's not like it's an overnight thing. That's why there's still a lot of research to see what barriers that are still there preventing a bigger composition of women on boards, especially in the Asian corporate markets,” Professor Gan says.

Find out more about Professor Gan’s research here.