Young Businesswoman Addressing Boardroom Meeting

The representation of women on corporate boards continues to improve, but corporate Canada still has a ways to go when it comes to advancing gender diversity at the leadership level.

In an award-winning paper, Carleton University researchers have found that size matters when it comes to the relationship between board gender diversity and the firm’s performance.

“Our results reveal that women directors have a higher significant impact on the performance of smaller firms compared to larger ones,” said Carleton University finance professor Sana Mohnsi, co-author of Board Gender Diversity and Firm Performance: The Role of Firm Size, released in August 2021.

The other co-author is Alia Shata, a student of Mohsni’s at Carleton University’s Sprott School of Business.

The paper examined 371 firms listed on the S&P/TSX composite index from 2010 to 2019, measuring firm performance using return on assets and return on equity, as well as measuring board gender diversity.

The results showed a positive relationship between board gender diversity and firm performance. However, the relationship was weaker in larger firms than in smaller firms, which indicates that “smaller firms benefit the most from gender diversity within their boards.”

“The impact of board gender diversity diminishes as firm size increases,” Mohsni said. “So women seem to thrive in smaller firms.”

The paper received the 2021 Hillsdale Investment Management – CFA Society Toronto Research Award.

Mohsni and Shata found that women directors in particular have a greater impact on the performance of smaller firms compared to their larger counterparts. They theorize that smaller companies offer a better environment for women directors to realize their potential.

According to Mohsni and Shata, it comes down to bureaucracy. Larger firms tend to have highly bureaucratic and complex structures, which could lead to a wider distribution of power and make cooperation and consensus more difficult among board members.

“This becomes even more difficult for female board members, who are likely a minority and most of the time are newcomers to what is usually perceived as a boys’ club,” Mohsni said.

Conversely, the paper revealed that smaller firms tend to have simpler and less bureaucratic structures, which facilitates communication among members and strengthens a gender-diverse board’s impact on the corporation’s strategic choices and decision making. Additionally, boards are likely to be smaller at small and medium-sized firms, so each member wields greater power.

Mohsni and Shata’s findings provide a possible explanation for the conflicting results of previous studies on board gender diversity and firm performance.

“If we don’t look at this moderating effect of size, we can make no conclusive results of the relationship between board gender diversity and firm size,” Mohsni said.

“We think the number of women in corporate boards not only represents the ability to achieve social justice and gender equality, but it is also good for the bottom line of the firm and can improve firm performance, which is a great thing.”

Because of the inverse relationship between the size of the firm and the impact of board gender diversity on firm performance, Mohsni and Shata’s recommendation for the investment community is to “exert more pressure on larger firms to change their organizational environment and structure to make it easier for women to have access to board seats and to reach their fullest potential and thrive within these boards.”