Impact of Women Directors & Board Independence on Family Firm Performance: Evidence from India.

AuthorBallal, Juili Milind


In 2013 India became the first developing country in the world to enforce a mandatory quota for listed companies to have at least one Woman Director on the board1. This policy change through Companies Act, 2013 was brought in to address the issue of underrepresentation of women on corporate boards (Chapple& Humphrey, 2014). The presence of Women Directors is advocated in 16 countries, out of which 14 countries have a specific mandatory quota for females (Terjesen et al., 2016). In addition to the Women Directors, the Companies Act, 2013 also enforced a quota of having at least one-third Independent Directors on the board of listed companies. The extant literature states that both Women Directors (for example, Campbell & Antonio, 2008; Carter et al., 2010) and Independent Directors (for example, Dalton et al., 1998) can have a significant effect on firm performance.

Prior studies on the effect of Women Directors and Independent Directors on firm performance have yielded mixed results. Some studies (for example, Catalyst, 2004; Erhardt et al., 2003) posit that there is a positive relationship between Women Directors and firm performance, on the other hand, some (for example, Bohren & Strom, 2007; Adams & Ferreira, 2009; Ahern & Dittmar, 2012) contend that there is a negative relationship. Further, there are studies (for example., Kim & Lim, 2010; Pombo & Gutierrez, 2011; Terjesen et al, 2016) that evince a positive effect of Independent Directors on firm performance, while others (for example, Bebchuk & Cohen 2005; Shan & McIver, 2011; Faleye et al., 2011) observe that there is a negative association. The mixed results hint that there is need to collect more evidence to establish the relationship between Women Directors and firm performance as well as Independent Directors and firm performance.

Thus, in this study, we aim to evaluate the effect of Companies Act, 20 13 on firm performance by analyzing the data on Women Directors and Independent Directors before and after the announcement of mandatory requirement was made, thus filling in the gap stated by Das and Dey (2016). We also investigate whether the mandatory requirement has had a positive effect or a negative impact on firm performance. Therefore, we compare the five-year period each, before (2010-14) and after (2015-19) the announcement in August 2013. In this article, we focus on family firms only since their corporate governance has garnered tremendous attention in financial economics literature (Villalonga et al., 2015). Additionally, in family businesses it is likely that women family members or female relatives are involved in the board of directors due to family ties to artificially enhance the gender diversity, in order to comply with the norm (Samara et al., 2019). However, these women might not bring fresh perspectives since they belong to or are related to the same family (Aggarwal et al., 2019). The presence of women insiders in the board may be mere tokenism (Sanan, 2016). Also, it is common among the family firms to appoint people, who are on friendly or contractual terms with the founding family as independent directors (Garda-Ramos & Garda-Olalla, 2011). Thus, these directors are not completely independent. Therefore, in this article, we would investigate the impact of women directors and independent directors on firm performance and check if the mandated quota is a boon or bane. Two main contributions of this study are: first, we heed the call from Das and Dey (2016) to undertake a comparative analysis between before and after effects of Companies Act, 2013 and second, we enhance the corporate governance literature in family firms by examining the role of women family directors and independent directors in firm performance.

Women Directors & Firm Performance

According to the gender role theory (Eagly, 1987), an individual's gender determines his/her behavior and its effectiveness with respect to influence. Furthermore, the theory suggests that males' and females' behaviors are assessed in terms of how they converge or diverge from expectations of the respective gender. Individuals who use tactics that are aligned to their gender tend to be perceived better by others (Eagly et al., 1995). Gender role theory describes how men and women have different behaviors with respect to communication, including influence tactics. For instance, women are expected to do more feminine roles such as sympathy and gentility (Eagly, 1987). Conversely, men are expected to take up more assertive and aggressive roles. Another gender role associated with women is flexibility which leads to a greater ability to manage ambiguous situations (Rosener, 1995). Gender roles are particularly significant in male-dominated areas (Alderfer & Smith, 1982) such as the board of directors where esteem is critical to effectiveness (Forbes & Milliken, 1999).

Further, based on the resource dependency theory, women directors provide unique and valuable resources and relationships to the board. With respect to networking, female managers outperform male managers as they generally boast of more diverse networks (Ibarra, 1992; 1993). In addition, women may have a better understanding of certain markets and consumers than men (Arfken et al., 2004). This could be because female directors are more likely to have diverse backgrounds other than business (Hillman et al., 2002; Singh et al, 2008). This diversity of perspectives offered by the women on board can improve overall creativity and innovation that is required for problem solving.

Women directors tend to bring fresh perspectives (Smith, 2006) on complicated issues which help to overcome informational biases in strategy formulation and problem solving (Francoeur et al., 2008). Virtanen (2012) in a study on Finnish companies reported that female board members compared to their male counterparts were more likely to take active roles on the company boards. Women are more likely to ask questions (Bilimoria & Wheeler, 2000), debate issues (Ingley & Van der Walt, 2005), exhibit participative leadership and collaboration skills (Eagly & Johnson, 1990), and follow ethical standards in the organization (Pan & Sparks, 2012). Female board members are more active as they come prepared for meetings (Pathan & Faff, 2013) and attend more board meetings than their male counterparts (Adams & Ferreira, 2009). Gul et al. (2011) found out that boards with higher proportion of women directors have greater levels of public disclosure, accurate management reporting that enhances earnings quality (Srindhi et al., 2011), and higher number of board development evaluations and programs (Nielsen & Huse, 2010). A woman's ability to influence board decisions increases with increasing number of female directors on the board, particularly boards with more than one woman (Fondas & Sassalos, 2000) or three women (Konrad & Kramer, 2006; Torchia et al., 2011).

Studies on gender diversity and firm performance yield mixed results (Catalyst, 2004; Erhardt et al., 2003; Farrell & Hersch, 2005; Bohren & Strom, 2007; Adams & Ferreira, 2009). Farrell and Hersch (2005) conclude that women on the board result in neither creation nor destruction of value. Some studies find that gender diversity adversely impacts the board's decision-making process (Bohren & Strom, 2007; Adams & Ferreira, 2009) due to increased conflict and lack of cohesion. Pearce and Zahra (1991) in their work on whether and how boards with female directors differ from that with only male members posit that a representation of diverse interests, including the number of females, is an important characteristic of an effective board. Bilimoria (2000) suggests that Women...

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