Are Female Board Members Breaking the Banks?

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The conventional wisdom — not to mention a good deal of research — suggests that women are less inclined than men to take big risks with money. That’s why a new discussion paper prepared by three economists for the German Bundesbank is generating so much, well, discussion. Adding women to the highly male-dominated boards of directors in the banking industry hasn’t led to more fiscal prudence, the researchers argue, but less.

Many in the media are treating this as something of a woman-bites-dog story. “Women Executives Will Destroy the World, Say Male Economists,” the Huffington Post declares in a sarcastic headline, dismissing the research as “highly suspect.” The Financial Times’ Alphaville column tops that with a headline reading: “Bundesbank Comes Out Against Women, War on All Good Things Continues. Puppies and Ice Cream Targeted Next.”

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The paper that has generated all this hyperventilation is surprisingly dry and technical, filled with baroque equations and words like heteroskedasticity. Crunching data from the German banking sector from 1994–2010, the researchers conclude that

board changes that increase the representation of female executives are not conducive to reducing bank risk. Rather, a higher proportion of female board members significantly increases risk taking.

Why is this? Part of the reason is the not-exactly-surprising fact that the female executives added to bank boards tend to have less executive experience than the male execs who are already there, the researchers note. As Richard Edgar of ITV News observes, this isn’t exactly a compelling argument against adding women to boards:

[I]f the problem is a lack of experience, the more experience the women now on company boards get, the less this effect will be seen. The answer is more women onto boards, not fewer.

But the issue isn’t only lack of experience, the researchers argue. Adding women to formerly all-male (or at least heavily male) boards is likely to disrupt old ways of doing things.

[G]roup heterogeneity disturbs communication in organizations which can restrict the exchange of ideas among board members that is needed to arrive at well founded decisions. Additionally, if group members come from heterogeneous backgrounds in terms of experience and values, this might increase the potential for conflict inside the group and hinder decision-making.

In other words, allowing girls into an all-boys clubhouse tends to make the old boys a bit nervous.

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This is hardly a surprise. Indeed, it would be strange if adding women to boards didn’t shake things up a bit. Change is, by its very nature, disruptive; the only way to avoid it in this case would be to keep bank boards male-only enclaves forever.

Meanwhile, there’s another big reason to take this discussion paper with a grain of salt. The fact that adding women to boards has been disruptive in the past does not mean that it will be similarly disruptive in the future. Eventually, the old boys that still dominate the boards will get used to women being there.

In Europe, the issue of women on boards of directors is a much bigger political issue than in the U.S. In Belgium and the Netherlands, the government requires that a certain percentage of executive positions in large companies be filled by women; Germany is considering similar legislation. The Bundesbank researchers hope that their research findings will play a role in the ongoing debates over quotas. We can only hope those who look to their research will be, well, cautious about drawing any big conclusions from it.

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