INSIGHTS FROM:Ting Xu
WRITTEN BY:Asif Mehedi
Newswise — Gender diversity in the board room is a key driver of corporate innovation, according to new research from the University of Virginia Darden School of Business.
Ting Xu, professor at the Darden School of Business, and Dale Griffin and Kai Li, professors at the University of British Columbia Sauder School of Business, have found evidence1 in a large global dataset that companies with a better balance of women and men on their boards produce more patents — and they do so spending less on research and development for an average patent. Their patents are also more novel and exploratory.
“An implicit but widely held view is that female leaders are not good at motivating innovation,” said Darden professor Ting Xu. “Because — the argument goes — unlike their male counterparts, female leaders are not risk-seeking or overconfident, qualities commonly associated with radical innovation. Our research challenges this view.”
DECADES OF SLOW PROGRESS
As recently as 20 years ago, few policymakers or corporate leaders perceived women's relative absence in the boardroom as cause for concern. Since then, however, many have found gender disparity to be a problem: When boards systemically overlook a source of diverse, vital perspectives, their decisions could be suboptimal over the long run — for both business and society.
Among the first countries to address this issue head-on was Norway. In 2003, its parliament passed a revolutionary bill — the first of its kind in any country — mandating a sharp increase in women’s share of corporate board seats in Norwegian public companies, from less than 10 percent to a minimum of 40 percent within five years. This led the way for other, mostly European, governments to enact similar measures.
Since that time, the number of female board members has risen around the world, but the progress has been sluggish and uneven. Today countries and regions differ considerably — with European countries, by and large, topping the list for board gender diversity, Asian countries at the bottom and the United States somewhere in the middle (see interactive visual at top of page).
The current study’s authors found that the odds of a board including female members are high when it’s located in a country with narrow gender gaps2, a large proportion of women in the workforce and a less masculine national culture.3
In their quest for evidence regarding the impact of board gender diversity on innovation, the researchers constructed a global, longitudinal dataset. The dataset included board composition and patent data of 12,244 companies spread across 45 countries. They then studied the link, as it had unfolded over time in these companies, between board gender diversity and innovation.
The researchers found for a given company, an increase in board gender diversity was followed after two or more years by an improvement in innovation outcomes, implying a causal relationship between the two phenomena. Moreover, the improvement was larger over longer time horizons, which bolstered their thesis.4
Xu, Griffin and Li also used the 2003 Norwegian legislation as a natural experiment. An analysis of the pre- and post-reform data provided further evidence of the same causal relationship.
CHALLENGES OF INNOVATION — AND THE IMPACT OF GENDER
It is well-understood that companies become more valuable through their long-term investments, such as in innovation. But investments in innovation come with inherent risks. Therfore, it’s a constant challenge for companies to mitigate risks without sacrificing value.
When investing in innovation, overconfident managers may take on projects that are too costly or have little chance of success. Likewise, managers focused on short-term profits may discard innovation projects that would take a long time to pay off — despite potential value and impact.
Xu, Griffin and Li hypothesized that a gender-diverse board would minimize overconfidence and improve long-term focus, resulting in a balanced risk attitude to board decisions.
Prior research in social psychology and management5 has already identified specific differences in how men and women make decisions — differences rooted in qualities such as overconfidence, attitude toward risk, short-term versus long-term focus, and personal values. These gender differences — along with other well-studied links between diversity and creativity — underpin the conceptual framework of Xu, Griffin and Li's analysis.
HOW DO GENDER-DIVERSE BOARDS INFLUENCE INNOVATION?
“People may wonder how these improvements take place,” Xu observed, “since directors don’t generate patents themselves. We show that female directors influence both formal and informal contracts within an organization, and this results in innovation-spurring conditions.” More specifically:
- Female directors offer more tolerance for failure and long-term orientation in CEOs’ employment and compensation contracts.
- They instill an innovative culture.
- They attract more diverse inventor-employees.
UNLOCKING VALUE IN THE UNITED STATES
Commenting on the optimal balance of gender in the board room, Xu said, “Most boards have few female directors. This means we can’t yet observe the point beyond which adding more female directors might hurt innovation.” Women’s severe underrepresentation, he added, implies there is still much value to unlock.
To unlock that value in the United States6, he said, “Policymakers should prioritize high-tech sectors and hotbeds of innovation. Silicon Valley companies, with their vast potential to innovate, stand to gain much from pursuing board gender diversity. More women on boards would also help them pull down gender barriers entrenched in the ‘tech culture’ there.”
Xu, Griffin and Li’s research has revealed corporate innovation to be a crucial conduit for value creation. They’ve also made a persuasive case that firms make better use of the innovation conduit when their boards include both women and men.
Ting Xu co-authored “Board Gender Diversity and Corporate Innovation: International Evidence,” forthcoming at the Journal of Financial and Quantitative Analysis, with Dale W. Griffin and Kai Li, both of the University of British Columbia.
This article was developed with the support of Darden’s Batten Institute for Entrepreneurship and Innovation, at which Asif Mehedi is associate director of research and faculty support.
- 1.Their article, “Board Gender Diversity and Corporate Innovation: International Evidence,” is forthcoming in the Journal of Financial and Quantitative Analysis. A pre-print version can be read at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3266080
- 2.According to World Economic Forum’s Gender Gap Index, which measures a country’s “progress towards gender parity across four thematic dimensions: Economic Participation and Opportunity, Educational Attainment, Health and Survival, and Political Empowerment.”
- 3.Masculinity is one of several national cultural dimensions conceptualized and measured by Dutch social psychologist Geert Hofstede.
- 4.All models in the study incorporated a broad array of firm- and country-level variables to ensure that they controlled for the effects coming from other drivers of innovation. Also, to further establish a causal connection, the researchers used male directors’ social networks as an instrumental variable, one that influenced the number of female board members, and through this, eventually, innovation outcomes.
- 5.For example, see: Rachel Croson and Uri Gneezy, “Gender Differences in Preferences,” Journal of Economic Literature 47, No. 2 (June 2009): 448–74.
- 6.In June 2019, women held 20.4 percent of board seats in the largest 3,000 U.S. public companies.