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Studies Find Mixed Impact of Women on Corporate Boards

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By Michael Cohn
July 23, 2013

Several recent studies suggest that women are better qualified than men to oversee corporate finances, although the results at the board level are unclear.

One study in the scholarly journal, Accounting Horizons, published by the American Accounting Association, found that women CFOs produce more reliable financial statements than their male counterparts, while another in the same publication found that a female presence on corporate boards greatly reduces the chance of financial restatements.

The findings seem to bolster the case for greater female representation on corporate board. Several European countries have passed laws to increase the number of women on boards, and last November the European Commission approved a plan requiring companies listed in the European Union to reserve 40 percent of their board seats for women by 2020.

But, on the other hand, research to be presented at the annual meeting of the American Accounting Association (August 3-7 in Anaheim, Calif.) raises doubts that such a mandate, whether in the EU or elsewhere, would improve company financial reporting and suggests that, initially at least, its effects could be counterproductive.

The study, based on developments over a decade in Norway, the only country that has the same quota requirement as the one lately enacted by the EU, finds that its adoption was accompanied by a decline in the quality of corporate financial reporting. While the negative effect dissipated within a few years, no evidence emerges that subsequent reporting has been better or worse than that of the pre-mandate era, even though the study "leaves an open window for further research on the long-run effects of the gender quota on accounting quality."

The authors of the new report, Mariano Scapin, Juan Manuel Garcia Lara, and Jose Penalva Zuasti of Carlos III University in Madrid, observed that “after the gender quota new female board members...are younger, have lower executive experience, and have more education compared to the exiting male board members that they replace...These new qualitatively different boards may have lower monitoring skills than boards before the quota. … Since European governments are currently considering imposing gender quotas, our results show that such affirmative action could have negative effects, though possibly only in the short run, in terms of corporate governance and, consequently, on shareholders' interests.”

After being announced informally by a cabinet minister in February 2002, the Norwegian board quota system, establishing a target of 40 percent female representation in a major class of companies, was enacted by the nation’s parliament in December 2003, initially on a voluntary basis. When only 13.1 percent of the affected firms had met the envisioned goal by July 2005 (at which time female board membership stood at 16 percent), the quota was made compulsory, with companies required to comply by January 2008 or face liquidation.

By April 2008, approximately six years after the informal announcement of the quota, all Norwegian public limited companies (the class affected by the mandate) had met the 40 percent requirement.

In general, companies responded to the mandate by replacing male directors with women. In the 81 companies sampled in the study, the average age of newly recruited women was 46, compared to 53 among exiting males; about 6 percent of the new women directors were major shareholders, compared to 24 percent among departing males. Approximately 38 percent of the female newcomers had CEO experience, compared to 75 percent of the exiting males. In contrast, 52 percent of the recruited women had graduate-level education, compared to 38 percent of the departing men.

To gauge how changing board gender profiles affected the quality of firms’ financial reporting, the researchers analyzed the relationship between the extent of gender change in boards over the period 2001-2010 and the amount of accruals in company financial statements.

The study found that the more change in board membership companies had to make to achieve the mandated 40 percent quota, the higher their levels of unexpected accruals—that is, levels exceeding what would be expected on the basis of a company's previous year's financials. Because accruals are more subject to manipulation than cash flow, according to the researchers, unexpectedly high levels tend to be regarded as suspicious signs of questionable accounting and of earnings management.

Such results, the study’s authors wrote, suggest “that, after the passage of the gender quota, earnings management is more pronounced in firms for which the impact of the passage of the quota was larger.”

The researchers also probed whether “the effects of the gender quota persist over time or are clustered around the years when boards are experiencing higher changes.” They found the latter to be the case. While during the periods 2005-2008 and 2005-2009, gender quota had a statistically significant negative effect over monitoring, this was no longer true for the period 2009-2010, when shareholders had more time to look for board members and members elected earlier to meet the mandated gender quota had more experience.

The study, entitled “Accounting quality effects of imposing gender quotas on boards of directors,” will be among hundreds of scholarly presentations at the American Accounting Association meeting, which is expected to draw more than 3,000 scholars and practitioners to Anaheim from August 3 to 7.

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