1. The Performance Effects of Gender Diversity on Bank Boards
Ann L. Owen Judit Temesvary
Hamilton College Federal Reserve Board
May 14, 2018
The views expressed in this presentation are those of the authors and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System.

2. Research question Our research question: Specifically:
What is the relationship between the gender diversity of banks’ boards and bank performance?
Specifically:
How does gender diversity of banks’ boards relate to banks’ efficiency and profitability?
How do these relationships change as gender diversity of boards increases?
Under what circumstances does gender diversity affect performance?

3. Motivation Underrepresentation of women in leadership positions
Studies on performance effects of female participation on boards (including in the banking industry) show mixed results
Positive effects on performance: Gul et al., 2011; Campbell and Minguez- Vera, 2008; Noland et al., 2016; Kang et al., 2009; Schmid and Urban, 2016
Negative effects: Ahern and Dittmar, 2012; Adams and Ferreira, 2009
Little or no impact: Farrell and Hersch, 2004; Ferrari et al., 2016

4. Preview of results
Impact of gender diversity on performance depends on bank and board traits:
Better managed banks are more likely to reap positive benefits from greater gender diversity. Higher capital ratios proxy for quality of management (Mehran and Thakor, 2011; Bhat and Desai, 2016)
There is a threshold effect: the share of women on bank boards must reach around 13 to 17 percent before performance benefits accrue
Some suggestive evidence that more gender diverse boards provide both better monitoring and better strategic advice to banks

5. Implications and contributions
Provides a reason for inconclusive and conflicting results from existing literature
Banks’ continued (voluntary) expansion of board gender diversity is likely to bring overall performance benefits, provided that the banks are well managed
Context matters

6. Why and how does gender diversity matter?
Characteristics of the female board members
Contribute specific functional (task-related) expertise (Kim and Starks, 2016)
Women who get elected to boards are chosen due to exceptional performance (Schmid And Urban, 2016)
Better monitors (Adams and Ferreira, 2009)
Gender diversity is a board characteristic
Increases the diversity of opinions and mitigates “groupthink”
May lead to conflict within the board (Berger et al, 2014)
An indicator of more meritocratic selection of board members (Besley, Folke, Persson, and Rickne, 2017)

7. Data: Bank performance and board diversity
We use a newly compiled dataset on the gender composition and demographic characteristics of 87 U.S. bank holding companies over
Combine board data from Boardex with bank performance measures derived from from Compustat and Bankscope
Bank performance measures:
Efficiency: Revenue to Expense Ratio
Profitability: Return on Assets
Risk-adjusted profitability: Sharpe Ratio
Market-based assessment: annual stock price growth
Board diversity measures: lower values = less gender diversity
Female Share of Board – sample average 12.5%, but ¾ of boards < 17%
Blau Index (Blau, 1977)
𝐵= 1− 𝑔=1 𝐺 𝑃 𝑔 2 ×100

8. Data: Board demographics and experience
Average Age and Wealth of Board Members
Average Bank Board Tenure:
Number of years on bank boards: around 6 years on average
Average Board Experience:
Number of bank boards which board member has served on: 5 boards on average
Overall Board Tenure:
Number of years on boards of publicly listed (non-bank) companies – around 9 years on average
Spreads of all three measures:
Measures dispersion by accounting for mean – median difference

9. Data: Controls for bank characteristics
Loan to deposit Ratio:
Measure of liquidity conditions
Acquisition dummy:
Captures M&A activity
Risk-weighted capital ratio:
“Quality of management”
Board size:
Overall number of bank board members: ranges from 6 to 32, mean of 13

10. Estimation methodology
Main specification:
𝑌 𝑡 𝑏 = 𝛼 0 + 𝛼 1 𝑋 𝑡−1 𝑏 + 𝛼 2 ( 𝑋 𝑡−1 𝑏 ) 2 + 𝐶 𝑡−1 𝑏 ×[ 𝛼 3 𝑋 𝑡−1 𝑏 + 𝛼 4 (𝑋 𝑡−1 𝑏 ) 2 ]
+ 𝛼 5 𝑍 𝑡−1 𝑏 + 𝛼 6 𝑆 𝑡−1 𝑏 +𝛼 7 𝑇 𝑡 + 𝛼 8 𝐵 𝑏 +𝜀 𝑡 𝑏
𝑋 𝑡−1 𝑏 : Blau index 𝑍 𝑡−1 𝑏 : Board characteristics
𝑆 𝑡−1 𝑏 : Bank balance sheet traits 𝐵 𝑏 & 𝑇 𝑡 : Bank & year FE’s
IV specification (first-stage):
𝑋 𝑡 𝑏 = 𝛽 0 + 𝛽 1 𝐼 𝑡 𝑏 + 𝛽 2 𝑋 1999 𝑏 × 𝑇 𝑡 + 𝛽 3 𝑍 𝑡−1 𝑏 + 𝛽 4 𝑆 𝑡−1 𝑏 +𝛽 5 𝑇 𝑡 + 𝛽 6 𝐵 𝑏 +ʋ 𝑡 𝑏

11. Main Results Summary
Relationship between gender diversity and bank performance depends on the existing level of diversity, and varies with the risk-weighted capital ratio
Generally, performance declines with additional diversity at low levels of existing diversity, but improves at higher levels of diversity
Revenue to expense ratio increases with gender diversity once the share of women on boards reaches around 17 percent
Return on Assets increases with gender diversity at well-capitalized banks, once the share of women on boards reaches around 13 percent
Sharpe Ratio increases with gender diversity at well-capitalized banks, once the share of women on boards reaches around 20 percent
Marginal effects for the impact of stock price growth are only significant at the extremes

12. Results: Gender Diversity and Bank Performance

13. Other board characteristics
Banks with boards whose members have served on many boards fare better
Supports the idea that diversity of experience is positive for bank performance

14. Gender diversity and regulatory enforcement actions
Greater gender diversity is associated with fewer Federal Reserve enforcement actions
The lower number of enforcement actions is a result of a lower probability of any enforcement action
The type of enforcement actions which decline are related to financial health
No evidence that enforcement actions related to illegal activity are reduced

15. Gender Diversity and regulatory enforcement actions

16. Board gender diversity during the financial crisis
Increased gender diversity is especially impactful during the crisis
This result, combined with results on regulatory actions, suggests that increased gender diversity improves both decision-making and board oversight.

17. During the Crisis

18. Conclusion The impact of gender diversity is context dependent
This work emphasizes the importance of studying the impact of gender diversity in a nuanced way
More research needs to done on why this effect exists
An indicator of more meritocratic selection process for board members?
An indicator of better monitoring?
An indicator of better strategic advice?
Banks’ continued voluntary expansion of board gender diversity is likely to bring overall performance benefits, provided that the banks are well managed (capitalized)

19. Additional Materials: Endogeneity
Endogeneity of board gender diversity is an important concern
Why is it important:
Board diversity might respond to existing stress (Fich, 2005; Mateos de Cabo et al., 2012)
Board experience likely correlated with gender diversity (Kim and Starks, 2016)
Women may self-select into better firms (Farrell and Hersch, 2004)
What we do about it:
1. IV Strategy
Share of independent directors:
Correlated with gender diversity but not bank performance (Pi and Timme, 1993; de Andres and Vallelado, 2008; Muller-Kahle and Lewellyn, 2011; Aebi et al, 2012; Adams & Mehran, 2012)
Initial Blau index (1999) times year fixed effects (Ahern and Ditmar, 2012)
2. Use Lagged Values (Anderson et al, 2006)

20. Additional materials: First stage results for IV regressions