Board diversity reforms: Do they matter for EU bank performance?

• Published date: 01 March 2020
• DOI: http://doi.org/10.1111/eufm.12238
• Date: 01 March 2020

Eur Financ Manag. 2020;26:416–454.wileyonlinelibrary.com/journal/eufm416

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© 2019 John Wiley & Sons Ltd.

DOI: 10.1111/eufm.12238

ORIGINAL ARTICLE

Board diversity reforms: Do they matter for EU

bank performance?

Francesca Arnaboldi

1,2

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Barbara Casu

3

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Elena Kalotychou

4

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Anna Sarkisyan

5

1

Dipartimento di Scienze Giuridiche

Beccaria, Università degli Studi di

Milano, Milano, Italy

2

CEFIN, Università degli Studi di

Modena e Reggio Emilia, Modena, Italy

3

Cass Business School, Faculty of

Finance, City, University of London,

London, United Kingdom

4

Department of Commerce, Finance and

Shipping, Faculty of Management and

Economics, Cyprus University of

Technology, Limassol, Cyprus

5

Essex Business School, University of

Essex, Colchester, United Kingdom

Correspondence

Francesca Arnaboldi, Università degli

Studi di Milano, Via Festa del Perdono 7,

20122 Milano, Italy.

Email: farnaboldi@unimi.it

Abstract

We examine the impact of governance reforms related to

board diversity on the performance of European Union

banks. Using a difference‐in‐difference approach, we

document that reforms increase bank stock returns and

their volatility within the first 3 years after their enact-

ment. The type of reform matters, with quotas increasing

return volatility. The effectiveness of reforms depends on a

country’s institutional environment. The impact of reforms

on return volatility is found to be beneficial in countries

more open to diversity, with common law system and with

greater economic freedom. Finally, reforms play a bigger

role in banks that have ex ante less heterogeneous boards.

KEYWORDS

bank performance, board diversity reforms, corporate governance

codes

JEL CLASSIFICATION

G21; G30

Members of boards of directors did not come from sufficiently diverse backgrounds.

(European Commission, 2010, p. 6)

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The authors would like to thank the Editor, John Doukas, and two anonymous referees for their suggestions, which

have greatly improved the paper. We would also like to thank Ali Mirzaei, Fatima Cardias Williams, Elena Beccalli,

Ettore Croci and the participants at the 2018 EFMA Conference at Università Cattolica del Sacro Cuore, Milan; the

FEBS Conference at the University of Rome III, Rome; and the 2018 Wolpertinger Conference at Università di Modena

e Reggio Emilia, Modena, for their insightful and constructive comments. This work forms part of an on‐going research

project on “Governance, risk and performance in European banking”. The authors gratefully acknowledge financial

support from Cass Business School, City, University of London, Pump Priming Scheme.

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INTRODUCTION

In the aftermath of the global financial crisis, policymakers and bank regulators started raising

questions about the effectiveness of boards of financial institutions, as it became apparent that

this key decision‐making body did not fulfil its major role to exert monitoring over senior

management and failed to identify, understand, and challenge risk‐taking practices. Several

shortcomings were identified in post‐crisis analyses, the most common of which concerned the

composition of the board of directors. The European Commission (2010) noted ‘a lack of

diversity and balance in terms of gender, social, cultural and educational background’and

called for strong and legally binding action from member states and European Union (EU)

institutions to ensure diversity in boardrooms. Thus, a series of initiatives ensued to promote

gender equality and diversity on the boards of publicly listed companies, which resulted in

changes to national corporate governance codes in a number of countries. At the EU level, CRD

IV (a 2013 legislative package covering prudential rules for banks) includes enhanced corporate

governance rules, incorporating requirements to promote diversity in board composition.

Did the corporate governance reforms aiming at increasing the diversity of bank boards

impact on bank performance? This paper addresses this question by employing an identification

strategy that allows us to study the impact of board reforms using between‐country variation in

the timing and the type of reforms pursued, reform approach, as well as the type of diversity

supported and the country’s institutional background.

The board of directors is primarily responsible for monitoring managerial performance and

therefore ensuring adequate returns for shareholders. To achieve these objectives, the board also has

the authority to replace the firm’s management when underperforming. The prevailing consensus is

that more diverse boards would positively affect the corporate governance of companies, leading to

better performance. Diversity has a number of potential benefits: board members can be selected from

a wider pool of talent, which can offer a broader range of perspectives, access different resources and

wider connections. Diversity is often seen as key to creativity and innovation (Hillman, 2014). On the

other hand, diversity can lead to conflict, slow down decision‐making, and lead to conflict of interest

as different board members may be pursuing different agendas (Ferreira, 2011). Veltrop, Hermes,

Postma, and de Haan (2015) argue that diversity can have a detrimental effect on board effectiveness

if it fosters social categorization, resulting in groups or factions opposed to each other. In this context,

gender diversity has received a great deal of interest, as a gender gap persists in the financial industry

and there is growing evidence of a glass ceiling (IMF, 2018). However, whether the gender diversity of

the board matters for firm performance is more controversial. Pletzer, Nikolova, Kedzior, and Voelpel

(2015) present a systematic review of the literature and conclude that the relationship is consistently

small and nonsignificant. In other words, female representation on corporate boards is not associated,

positively or negatively, with firm performance.Thisresultreinforcestheviewthatwomenare

neither better nor worse than men in leadership positions or at managing risks and that promoting

less gender biased hiring may lead to a mixed‐gender board performing better because of the benefits

of a multiplicity of views and skills rather than simply because of women’s presence (Nelson, 2015).

It is important to point out that, despite the policy consensus on the need for encouraging

diversity, the approaches taken at the national level have varied widely, with some countries

introducing mandatory quotas for gender and employee representatives, others promoting

diversity more generally as an encouraged best practice. Recent evidence suggests that

affirmative actions aimed at improving the participation of women and minorities in high

profile roles have had little impact. IMF (2018) research highlights that, globally, women hold

less than 20% of board seats of banks. In addition, sanctions for noncompliance with corporate

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governance rules vary among EU member states. A well‐researched example is the Norwegian

gender quota case requiring all public limited companies to have at least 40% of women on their

boards of directors. After voluntary compliance failed, the requirement became regulation, with

liquidation as a penalty for noncompliance. The merits of gender quotas have been intensely

debated in the literature; a number of recent studies of the Norwegian case find evidence

suggesting that it led to younger and less experienced boards and to a deterioration in firms’

operating performance (Ahern & Dittmar, 2012; Bøhren & Staubo, 2016). Since the financial

crisis, a number of European countries, including Belgium, France, Italy, the Netherlands,

Spain, and Germany, have promoted legislation aiming to increase gender diversity on

corporate boards via the imposition of quotas. This drive has been reinforced by the European

Commission (2012) proposals to achieve a 40% participation rate for the under‐represented

gender in nonexecutive board member positions in publicly listed companies by 2020. However,

the regulatory framework of EU member states is still very fragmented, with some countries,

such as the UK, arguing against mandatory quotas.

In this paper, we evaluate the role of reforms that aim at promoting diversity on bank

performance measured by stock returns. To obtain a clearer picture of the impact of reforms, we

also consider the standard deviation of stock returns as a proxy for performance variability, or

risk (Beltratti & Stulz, 2012). We model the impact of bank board reforms on bank returns and

risk separately, as they are not necessarily linked. The impact of board reforms can manifest

through different channels. A successful regulatory reform would result in higher returns and

lower risk. However, a more diverse board could lead to both higher and lower returns. A more

diverse board could increase returns through more creativity and innovative ideas. Equally, it

could decrease returns if decisions take longer because of more conflict between board

members. Similarly, increased diversity could lead to a better oversight and therefore decrease

risk. On the other hand, board diversity could be achieved by electing younger or less qualified

board members and, as a result, it could lead to increased volatility. In addition, it can be argued

that any regulation that urges firms to enact changes to the way they are managed imposes

some costs, both pecuniary and operational. These costs can affect firm performance, both in

terms of lower returns and/or increased volatility of returns. Therefore, the impact of board

reform on bank risk and return is an empirical question.

Departing from the current literature, which tends to exclude financial firms, we focus on

the impact of board‐related reforms on the performance of EU‐listed banks. Bank governance is

considered to be different from that of non‐financial firms primarily because of the existence of

deposit insurance, implicit government guarantees, and prudential regulation (Laeven, 2013).

Although there is a growing body of literature on the role of board diversity, including gender

diversity (Adams & Ferreira, 2009; Berger, Kick, & Schaeck, 2014; García‐Meca, García‐

Sánchez, & Martínez‐Ferrero, 2015; Hagendorff & Keasey, 2012; Sila, Gonzalez, & Hagendorff,

2016), to the best of our knowledge, this paper is the first to examine the effectiveness of

reforms aiming at promoting diversity. We start our analysis with a thorough review of all the

changes in corporate governance relating to board diversity in all EU member states. We

analyze a comprehensive set of sources, including the industry codes of best practice, corporate

governance codes, national legislation as well as EU and international organization reports on

corporate governance. We consider all types of board diversity reforms, from recommendations

to foster best practice to legislative changes imposing mandatory quotas. This enables us to

build a novel dataset of all diversity‐related changes and assess their realized impact on the

composition of listed firms’board of directors and their effectiveness. Appendix 1 summarizes

all our sources and details the reforms considered in the analysis.

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