Appoint one female director, save $4.3 million: Why women on boards make corporations greener
An Australian study has found that a companies with a balanced mix of male and female board members are more mindful of protecting the environment and less likely to be sued for environmental law violations.
The University of Adelaide study examined 1,893 environmental lawsuits filed against any of the firms listed on the Standard and Poor’s 1500 composite index in the United States from 2000 to 2015.
Study author Dr Chelsea Liu, a senior lecturer at the university’s Adelaide Business School, said that that for every additional woman appointed to a corporate board, the company experienced an average 1.5 per cent reduction in litigation risk.
“The average cost of an environmental lawsuit is estimated to be 2.26 per cent of a company’s market value, which translates into a dollar value of US$204.3 million based on the current average market capitalisation of the S&P1500 firms in my sample,” Liu said, referencing a 2005 paper by Jonathan M. Karpoff, John R. Lott, Jr. and Eric W. Wehrly.
“This means that reducing the litigation risk by 1.5 per cent (by appointing a female director) would be the equivalent of saving US$3.1 million.”
Her findings should sound alarm bells for major corporations given that during the same time period as Liu’s research accounting firm EY found that only 16 per cent of S&P 1500 board seats are held by women.
Liu also found that female chief executives and female directors have complementary roles in a boardroom.
“Female directors make a bigger difference in reducing environmental lawsuits in companies run by male chief executives, compared with those companies that have female chief executives,” she said.
Conversely, when Lui divided the firms into two groups with higher versus lower levels of female board representation, she found that a female chief executive only makes any difference to environmental lawsuit risk when the board is male-dominated.
“Gender diversity is what’s important — female representation on boards is most important where the CEO is male, and less important if the CEO is female,” Liu said.
Liu said the explanation for the findings lies in gender socialisation and diversity theories.
“This can be attributed to ‘diversity theory’, which says that a group of people from more diverse backgrounds — gender, race etc. — tend to make better collective decisions, because they canvas a wider range of perspectives.
“Having a range of perspectives can result in improved corporate environmental policy, which in turn can reduce exposure to environmental lawsuits,” she said.
“Gender socialisation and ethics theories suggest that girls are brought up to be more caring towards others which can enhance environmental decision-making in the boardroom.
“Previous research also found that female executives are less overconfident and more willing to seek expert advice than their male counterparts.”
Liu, however, warned that having more women than men on the board is not always better.
“If the proportion of female directors exceeds half, then any additional women appointed will reduce gender diversity. Given that diversity is key to good decision-making, maintaining a balance of men and women on the board is important,” she said.
Liu said the research, published in the Journal of Corporate Finance, provides a business-case for increasing corporate gender diversity.
“With corporate environmental responsibility becoming a more important social issue, these findings can have significant implications for policymakers, investors and managers,” Liu said.
“Environmental violations not only have a significant impact on societies, but they can also cause devastating losses of shareholder value.”
Originally published at theleadsouthaustralia.com.au on August 31, 2018.