Forget stock tips and market trends. The key to building a company’s enduring financial success could be who sits around the boardroom table.
Having women on boards isn’t only the right thing to do, it may also be a financial game-changer.
New research by Department of Accounting lecturer Dharmendra Naidu and colleague Dr Kumari Ranjeeni has revealed a compelling link between boardroom gender diversity and higher long-term shareholder returns.
It all comes down to how sensitive information is handled.
“Information is valuable to both investors and competitors because it helps in making better investment decisions and competitive strategies, respectively,” said Dr Naidu.
“If proprietary information is released, the company may benefit in the short-term capital market, but competitors may also benefit by using the information to develop a competitive strategy, so it can be costly for the company in the long-term.”
Their ground-breaking research shows that how boards navigate this tightrope depends on who is in the room.
Keeping secrets can be good for business
The study, based on meticulous analysis of a matched sample of United States-listed companies between 1998 and 2016, uncovered a key difference in how gender-diverse boards approach information sharing.
Unlike all-male boards, which are more likely to release information for short-term financial gain, company boards with a mix of men and women take a more strategic approach.
They prioritise safeguarding proprietary information.
“Prior research has shown that women are more ethical and risk-averse than men, making them more likely to carefully guard sensitive information,” Dr Naidu said.
“We argue that gender-diverse boards ethically and carefully redact proprietary information that must be disclosed, as well as voluntarily disclosing lower levels of proprietary information, than all-male boards.”
This protects the firm’s competitive edge, ultimately rewarding shareholders with a net gain of about 10 per cent in stock price over three years.
“Hence, for the long term, our research shows it is better to protect proprietary information,” he said.
Short-term pain, long-term gain
While the study highlighted the clear advantages of board gender diversity, it also revealed some challenges.
Withholding certain details in public disclosures could lead to higher short-term costs.
“That’s because releasing proprietary information may be beneficial for a firm in capital markets, as it can lead to positive investor reactions,” he said.
However, while some firms might continue to opt for immediate gains, Dr Naidu said he hoped the research would convince others of the significant benefits of female directors.
He said by prioritising confidentiality for the right reasons, gender-diverse boards also fostered loyalty, an important pillar of sustainable success.
“Corporate directors’ fiduciary duties include loyalty and care, and the duty of loyalty requires them to maintain confidentiality of company’s information,” he said.
“Disclosure of proprietary information, especially those that can affect a company’s sustainable success can be considered unethical.”
Quotas and confidentiality: Research drives real-world change
The research has significant implications for regulators, firms, and shareholders – particularly in fostering the ethical redaction of proprietary information.
“Recently, in the U.S., the Securities and Exchange Commission allowed firms to redact information from material contracts without applying confidential treatment orders,” he said.
“This increases concerns, because firms may redact information to hide bad news, and research has shown that hoarding bad news leads to stock price crash.”
The findings also support the implementation of board gender quotas.
“Our research is important because board gender quotas are being mandated in many countries – we hope it will encourage other regulators to consider doing so,” he said.
Beyond the numbers: Dismantling stereotypes
Recognising the impact of unconscious biases, the duo is already diving deeper, exploring ways to combat gender stereotypes.
Their upcoming work aims to raise awareness about the critical role women play in boardrooms, paving the way for a more inclusive future for businesses worldwide.
“Our forthcoming research publication shows how investors detrimentally undervalue firms with female directors due to gender role stereotypes,” he said.
The study will argue that awareness is the key to dismantling harmful and limiting stereotypes.
“We show that gender stereotypes are significantly lower after an increase in societal awareness about the benefits of female directors,” he said.
The conclusion is simple, yet powerful.
“It demonstrates that female directors matter,” he said.
Dr Kumari Ranjeeni is an academic and researcher currently affiliated with Pra2Njeeni.
