In an earlier post we commented on the importance of improving a company’s risk profile and performance by implementing methods and practices to ensure the success of gender diversification policies. Citing an academic study on management diversity entitled “Do Women Stay Out of Trouble,” we pointed out that gender diversification has a financial benefit because, according to the study, women in management are usually more risk-averse and law abiding, thereby protecting firms from various types of lawsuits. But does this mean that all women are risk-averse, or that the presence of women ensure that boards make their decisions in a more comprehensive manner?

A recent study entitled “Female Board Representation and Corporate Acquisition Intensity” has been publicized purely for its results, as opposed to its analytical methods. In a nutshell, the study found that the proportion of women on the boards of U.S. public companies was inversely related to the number of acquisitions by the company. The unfortunate, short-sighted take away from this is that more women in leadership leads to lower M&A activity.

But this study revealed something much more important and helpful to underpin the long-held goal of enhancing diversity on corporate boards. Instead of categorizing women as risk averse, the study uses social identity theory to convey how individuals interact with one another based on how they categorize their individual identity. The authors of the study contend that a board will act differently when it is comprised of individuals who exemplify multiple identity categories than if the board is comprised of a singular category. When there are different types of people making decisions there’s a lower risk of groupthink and a greater chance that decisions will be made in a more comprehensive manner. One of the consequences of more comprehensive decision-making processes is that there is a decrease in the number and dollar-volume of acquisitions – a more scrupulous board will not take up every possible acquisition target.

Hopefully this study will be followed by others that will assess whether a decrease in acquisition activity due to a more diverse board leads to better financial outcomes for firms. Until then, studies such as this one should challenge companies to make their boards more diverse to enhance their decision-making processes.

The author would like to thank William Goldbloom, articling student, for his assistance in preparing this legal update.

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