Female directors as signalling device: Status, legitimacy and gender diversity in corporate governance

The consistent finding that gender diversity in corporate boards is not related to firm performance runs counter to the normative idea that gender diversity equals good corporate governance. It also conflicts with those theories from social psychology that claim diversity to be an antidote to ‘group think’ and helps to increase the problem solving capacity of groups.

In this paper we take a different point of departure and lift the analysis of board diversity from the firm level to the level of the broader corporate elite. We argue that board diversity is best understood in terms of a signalling device. Gender diversity may add to the status and legitimacy of corporations and their boards. We will study the consequences and underlying mechanisms of this proposition both on the level of individual firms as well as on the level of the business community. We use longitudinal data on board compositions in the Netherlands and Europe from 1976 to 2010. The results lend support for the argument that board of directors increasingly serve as ‘showcase’ towards (institutional) investors and society at large. Firms that suffer from legitimacy problems tend to have more female board members. Within the business community, gender diversity seems to be contagious beyond a threshold. We will apply the theoretical insights from group theory to the business community as a whole.