Gender Diversity on the Board - BI Norwegian Business School

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GRA 19001 Master Thesis the firm, and will act more responsibly as a board member. On the other hand, agency theory suggests that self-monitoring does not work, and hence the CEO should not be part of the board which is supposed to monitor him (Bøhren & Strøm, 2009). Norwegian nonlisted firms more often have their CEO as the chairman (Berzins, Bøhren, & Rydland, 2008). However, the fact that we are more interested in large nonlisted firms, where CEO as the chairman is less common, we do not pay much attention to this. Several factors determine a board’s effectiveness as a decision-maker. Board size and diversity affect the decisiveness-mechanism. If the board is large, one gets more input and a wider opportunity set. However, there exists a tradeoff between this opportunity set and potential conflicts in decision-making (Buchanan & Tullock, 1962). In smaller boards decision-time decreases, but more conventional decisions are made (Gjølberg & Nordhaug, 1996). Hence, board design is critical for the board’s ability to make good decisions. In this context, the question is whether the board should be big and diverse, such that all information is available, or if the board should be small and homogenous such that decisions are made quickly and effectively. This decisiveness-mechanism will be our main focus throughout our thesis. As mentioned, gender-mix could be one way of creating diversity, without necessarily increasing board size. Carter et. al (2003) states that diversity is believed to produce a more effective problem-solving. Although heterogeneity may lead to more conflicts during the process, the variety of perspectives causes decision-makers to evaluate more alternatives, and more carefully explore their consequences. Hence, gender diversity can increase board independence, both in terms of better monitoring and a wider opportunity set. The empirical paper of Adams and Ferreira (2008) find that diverse boards might be better monitors; directors (both male and female) attend more meetings, schedule more meetings, and a larger fraction of their compensation is equity based. In other theoretical papers it is argued that too much board monitoring can decrease shareholder value (e.g. Almazan and Suarez (2003) and Adams and Ferreira (2007)). There exists a conflict between monitoring and advice. Since the board’s role is to monitor and give advice to the management, the CEO faces a tradeoff in disclosing information to the board. If he reveals his information, he gets better advice. However, a 8
GRA 19001 Master Thesis more informed board will monitor him more intensively. Adams and Ferreira (2007) show that if independent directors have stronger monitoring incentives than dependent directors, more independence may hurt the stockholders. This happens because CEO responds to increased board independence by providing less information. This indicates that diversity is only considered valuable when firms need additional board monitoring. So, value is created only where greater independence is valuable. Although several empirical papers address governance mechanisms, few concern gender diversity on corporate boards. However, there are papers we consider relevant for our thesis. These are presented below. Bøhren and Strøm (2009) study all Norwegian listed firms from 1989 to 2002. They find that owners on the board and directors with multiple directorships relate positively to performance. Increased diversity produced by larger board size, more gender mix, and more employee directors all correlate negatively with performance. No significant link exists between independence and performance, supporting the notion that although more independence increases monitoring incentives, it reduces the management’s willingness to share relevant information with the monitors. Berzins, Bøhren and Rydland (2008) look into corporate finance and governance in firms with limited liability using the CCGR database. Contrary to other studies of private firms theirs is based on extensive information about these firms, which has previously been considered lacking. As they state themselves, their study is unique because it constructs and analyzes a high-quality data base for an unusually wide range of corporate finance and governance in the population of listed and nonlisted Norwegian firms with limited liability over the period 1994-2005. As our study is based on the same database we take special interest in their findings. Berzins, Bøhren and Rydland (2008) find that most large owners in nonlisted firms are also on the board or on the management team, and more so when the largest owner is a person, when the firm is small, and when it is newly established. They also find that the largest inside owner mostly controls the stockholder meeting, and the CEO is often the largest stockholder. Thus, the separation between ownership and control is normally non-existent, regardless of firm size. Then A1 is negligible, while A2 is potentially big. 9
Page 1 and 2: Malin Berg Mathisen Linda Waldal BI
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