The winners of the 2021 Hillsdale Investment Management – CFA Society Toronto Investment Research Award are Sana Mohsni and Alia Shata of Carleton University for their research paper, Board Gender Diversity and Firm Performance:
The Role of Firm Size. 

The winning researchers studied the moderating role of firm size on the relationship between board gender diversity and firm performance. They examined 371 Canadian firms listed on the S&P/TSX Composite Index during the period of 2010 to 2019 and used several measures of board gender diversity, as well as return on assets (ROA) and return on equity (ROE) as measures of firm performance.  

Firm size is key to effective board diversity

Mohsni and Shata’s results showed that larger firm size tended to reduce the positive relationship between board gender diversity and firm performance and that women directors have a more significant impact on the performance of smaller firms compared to larger ones. The authors suggest that, unlike larger firms, smaller firms may offer a better environment for women directors to exert their full potential.

Their findings provide a possible explanation for the conflicting results of previous studies on board gender diversity and firm performance. They suggest that the benefits of gender diversity on the board may be limited for some firms, and that an organization’s context must be considered to better assess and reap the
benefits of gender diversity.

Winning co-author Sana Mohsni told The Analyst, “Practising investment managers and analysts interested in gender diversity and good governance should target smaller firms with high diversity initiatives. They can also put pressure on larger firms to create work environments that enable women directors to achieve their highest potential, because women directors are good for the bottom line.” 

Evidence that firm size reduces the positive impact of board gender diversity on firm performance means that larger firms must take measures to exploit the benefits of appointing women directors to the board and better utilize their skills, knowledge, and ideas. Larger firms may need to reassess their organizational structures and communication methods to improve discussion among the board of directors and facilitate better decision making and the integration of women directors.

The research results indicate that board gender diversity has a positive effect on firm performance, which is strongest in financial services, consumer staples, utilities, and real estate, and that the effect is negative and significant in industrials. The results also indicate that the moderating negative effect of firm size is strongest in financial services, consumer staples, utilities, and real estate and that the negative relationship between board gender diversity
and firm performance in industrials is accentuated in larger firms.

Making change, not empty policies

In addition, Mohsni and Shata’s findings indicate that imposing policies to increase gender diversity on boards in large firms may adversely impact firm performance. Women who are included on boards due to the enforcement of policies or quotas may be perceived as less competent or may in fact be less qualified due to a shortage of women candidates to select from, and in turn this may undermine the effectiveness of these initiatives.

Since 2014, the Ontario Securities Commission’s comply-or-explain board gender diversity policy—which requires firms to annually disclose the number and percentage of women on boards—has had a negative effect on the relationship between board gender diversity and firm performance, and the moderating effect of firm size has persisted following the implementation of the rule.

Mohsni and Shata’s study examined the impact of board gender diversity on firm performance only in the Canadian context. However, institutional and cultural systems are important when examining the effect of board gender diversity on firm performance, and therefore, cross-country studies are essential to better understand the role of firm size in relation to the impact of board gender diversity on a firm in broader contexts.

The authors suggest there is much more room for further research into the effects of diversity on performance. Their report considers only the gender diversity of boards, but other types of board diversity (e.g., ethnicity and age) may have an impact on firm performance, and the role of these factors may also be moderated by firm size. In addition, the authors focus on measures of financial performance, but they note that nonfinancial measures of performance (e.g., social and ecological performance) are becoming highly important and are therefore also worthy of further examination.

Balancing corporate obligations with success

Boards today are increasingly held accountable for issues related to corporate social responsibility and sustainability, and even though there is a growing body of literature suggesting that the inclusion of women directors can influence various board decisions, the impact of firm size in such contexts is not well understood and represents another subject for future research.

Chris Guthrie, CEO of Hillsdale Investment Management (co-sponsors of the award), commented that the winning research paper tells us that we should all begin to measure the benefits of diversity as carefully as we measure ROA and ROE, even aiming to perhaps calculate a “return on diversity” (ROD) measure. 

There are many opinions about the impact of diversity on firm performance. Diversity, it is argued, induces better understandings of the marketplace, improves a firm’s reputation, and enables a broader view of the business environment. However, some suggest that as a group becomes more diverse in its perspectives and skills, communication is adversely affected, and the group becomes more difficult to manage and less efficient at reaching consensus and decisions. 

Given these conflicting theories, the impact of board diversity on firm governance and value appears to be an empirical question that only precise analysis and testing can properly answer. In the view of the panel of judges and of Hillsdale Investment Management, this is precisely the kind of painstaking, statistically rigorous work that Sana Mohsni and Alia Shata have done to strengthen our understanding of the effects of gender diversity. Hillsdale Investment Management and CFA Society Toronto extend to them our thanks and congratulations. 

The Hillsdale Investment Management – CFA Society Toronto Investment Research Award is open to global researchers conducting research related to Canadian capital markets, including both academics (e.g., professors and students) and practitioners. Author(s) of the winning research paper are awarded CA$10,000. Research papers are reviewed by a panel of CFA charterholding investment experts to ensure they are in line with the rigorous values and standards embodied in the CFA designation.