Board gender diversity has received increasing attention within corporate governance discussions in recent decades, and latterly from a political perspective. Norway was the first country to introduce a female representation quota, kickstarting an international push for fairer female representation – even in relatively conservative places such as Japan, Korea and China. Lots of research has been conducted to understand the benefits and/or the downsides of having a more diverse board. Inevitably, there has also been a backlash – for instance, the stock exchange set to launch in Texas (TXSE) will be less demanding1 in this regard.
Here we examine the relationship between board gender diversity and stock idiosyncratic risk (that is, the risk that is related to company specifics and cannot be explained by systematic risks, which is the overall risk that affects all assets). Our analysis shows that companies with insufficient board gender diversity practices exhibit higher idiosyncratic risks compared to those with sufficient gender diversity on their boards. The results hold consistently across global developed markets. Following this insight, implications for portfolio management and means of mitigating the risks associated with insufficient board gender diversity are discussed.
Key Takeaways
- Empirical research shows that companies with insufficient board gender diversity have higher idiosyncratic risk – and these results are robust and consistent over time and across markets
- Sophisticated portfolio construction or voting and engagement can be solutions to help mitigate unintended idiosyncratic risk relating to board gender diversity
- Good progress has been made in the ‘Improving Board Gender Diversity in Asia’ project initiated by the Responsible Investment team in 2023
Introduction
Board gender diversity has received increasing attention within corporate governance discussions in recent decades, and latterly from a political perspective. Norway was the first country to introduce a female representation quota, kickstarting an international push for fairer female representation – even in relatively conservative places such as Japan, Korea and China. Lots of research has been conducted to understand the benefits and/or the downsides of having a more diverse board. Inevitably, there has also been a backlash – for instance, the stock exchange set to launch in Texas (TXSE) will be less demanding1 in this regard.
Here we examine the relationship between board gender diversity and stock idiosyncratic risk (that is, the risk that is related to company specifics and cannot be explained by systematic risks, which is the overall risk that affects all assets). Our analysis shows that companies with insufficient board gender diversity practices exhibit higher idiosyncratic risks compared to those with sufficient gender diversity on their boards. The results hold consistently across global developed markets. Following this insight, implications for portfolio management and means of mitigating the risks associated with insufficient board gender diversity are discussed.
1 The Economist, “Want to avoid woke stockmarket rules? List in Texas”, 8 June 2024