Are women on boards positively associated with tighter audit committee controls and thereby improved internal control?

There is evidence that gender diversity is associated with tight financial control and tougher monitoring practices, thereby also with improved risk management governance (Adams & Ferreira, 2008). Women are also more likely to enter monitoring committees while men enter other committees for example the committees that are dealing with compensations etc. Men that have entered the audit committee also have greater attendance problems than female colleges (Ibid). Furthermore research also shows that there is a link between feminine traits, gender diversity and more honest governance practices especially in relation to corruption (Sung, 2003). As women are elected to corporate boards in Denmark and Sweden it is expected that they will find their way into roles which is supported by their talent and their traits. The audit committee has the function of overseeing the governance of the board and act as an internal corporate control mechanism. Both of these roles are supported by feminine traits and research has shown that these committees are positively influenced by women participation. In this context a higher than average representation of women in the audit committee would support the argument that traits are important in relation to board behaviour and that women contribute to effective risk and audit management on Swedish and Danish boards.

The process of finding empirical evidence for the claim that gender has influence on audit committee performance is somewhat different for Swedish and Danish companies. The governance structure of Swedish companies is disclosed in a separate report, in most cases called the Governance report. In some cases the report can be found as part of the annual report. In the governance report, companies disclose their organisational structure, financial information about the board members, ownerships structure and the work done in different committees. The audit committee is part of this structure and normally have a separate section where the composition, processes and a recapitulation of the work done is disclosed. The governance structure is not always as transparent in Danish companies as seen in Sweden. Even though the companies disclose the same information it is less structured and there are more sources that one that has to investigate in order to get an overview of committees, composition and processes. Most of the information is, however, disclosed in the annual report. In cases where the structure was not totally clear I used other sources such as corporate website and greens online database.

The results show that the average size of a audit committee in Denmark is 5.1 (ranging from 2 to 13 members) while the same for Sweden is 3.4 (ranging from 3 to 7). For four of the Danish companies the whole board were part of the audit committee in practice making the audit committee and the board one and the same. The gender composition in Danish audit committees is 9% for highly diversified while it is 11% for low diversified compared to the 16% women on Danish boards in total. Compared to the overall average including all Danish companies in the survey the average female representation was 12 % making both high and low diversified companies below average. This indicates that women are not represented to a significant degree in the Danish audit committees. The average number of women in the Swedish companies in the survey is 32% indicating a significant gender impact compared to the total percentage of women on Swedish boards, which is 23,9%. Companies considered low diversified have significant lower than average women on the audit and the numbers indicates that women do not find their way in to the committee if there is an overrepresentation of men on the board.

In Denmark, companies have only recently been required to create an audit committee, which should function as a control body of the internal audit. The legislation is part of a general tightening of controls that have followed in the wake of several great financial scandals abroad and domestically. The Danish regulations are especially influenced by the practices in USA where audit committees have been in place for a longer period as an integrated part of the Securities and Exchange Commission (SEC) regulation (Collier et al., 2003). The short time that the legislation has been in place can explain why companies in Denmark have audit committees where the number of members’ range 2 to 12 and in some cases encompasses the whole board. As there are no rules on the size or composition of the committee the board can decide to elect the whole board as the audit committee. While this can be viewed as complying with the law, the practice is not a representation of “the intend” of having an independent review committee, that can supervise and improve the decision making process of the board in total.

The results from the audit committee gender representation from Denmark show that the differences in relation between the highly and low diversified are not significant. A contributing factor to this could be that the Danish legislation on the establishment of audit committees is not very old and therefore not an established practice on Danish boards. As boards get more acquainted with how the audit committee can be used and what competencies is needed for it members I would expect that more women will be represented as time passes. Another factor can be contributed to the fact that since Danish boards have fewer women in general it makes them less likely that women would be part of the audit committee. In contrast to Danish performance is the representation seen in Swedish boards significant different, where women have can be found to have taken almost half the seats on the audit committee. Swedish boards have more women on their boards than Danish ones but this alone cannot explain the 45% women on the audit committees. A possible explanation can be found in the traits of women and male behaviour.

As I have shown is there research that suggest that women on monitoring committees have better attendance and performance that their male colleagues (Adams & Ferreira, 2008). The reason why women have improved attendance can be explained by the trait of collective thinking. Women are associated with taking ownership of processes and creating working environments, which includes more stakeholders in problem solving (Yukel, 2010:468). In order to be seen as legitimate in the eyes of the collective, and maybe themselves as well, women tend to put more emphasis on own attendance. Men on the other hand will tend be more concerned with own opportunities and development of their career and will not look up on attendance as a way to advance their career. Male traits could lead them in the direction of careerism and informalism in order to develop their own opportunities rather than the aims collective as a first priority.

One of the major functions of the audit committee is to reduce the risks that the corporation is subjected too. It is therefore imperative that the members display behaviour, which strives to meet this goal. As women are associated with being more risk averse (Jianakoplos & Bernasek, 1998) it is more likely that they will be in groups where this trait can be utilized. The reason is that women over time will find a place on the board where they have the most impact and in this case it is the audit committee. As time passes and corporate boards distribute different roles to its members there will under ideal circumstances be a situation where the members’ talents and competencies will determine what function they will have. As Swedish companies have since 1st of January 2006[1] have been compelled to formulate audit committees as part of their structures, it is also more likely that women would have found their way into this committee given their unique traits.

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Are women in senior management and board position positively associated with higher than average economic performance?

Evaluating financial performance in relation to gender can be a tricky task. Not only is there numerous ways that a researcher can decide what good performance means but even when we are comparing apples with apples we get into trouble when we try to say something in general about the data.

So what I’m trying to say is that the choices that I have made in-order to investigate gender and financial performance might differ from what you might choose as the best indicator.

The methodology of the article is fairly simple I have looked at corporate Boards and Executive management in the Danish and Swedish most traded companies 40 companies in total. From a statistical analysis, which I will not go into detail, here have I separate the companies into three groups Low diversity, Medium diversity and High diversity relative to the country. This meant that I could produce this chart of high and low diversification among the top management and board members. F.eks. as a highly diversified company in Sweden one which have more than two women on the board and more than two women in top management, while the diversification is a little different in Danish companies. The reason for the difference between countries is mainly due to different legislation and cultures related to gender.

Organisational level Highly diversity Low diversity
SE Boards >2 <2
SE Top Management >2 <1
DK Boards >1 <1
DK Top Management >1 =0 

Together, these two measurements of corporate performance will give an indication on how companies perform with different approaches to gender composition. The data is comprised of two indicators for each country one on EBIT and one on. This gives an indication of how well the companies are able to achieve a profit and earnings per share issued in relation to gender diversity and compared with an overall average.

The EBIT analysis shows that companies with low diversity in their boards and top management have a lower than average ability to produces a profit over the period. While companies with a more diversified leadership team will do better. However, gendered companies have lower or very close to average EBIT performance on the short term e.g. 2006 for Swedish and 2005 and 2006 for Danish companies. In the last period which coincides with the financial crisis and recession gender diversified companies do significantly better when it come to earnings.

When it comes to the companies’ ability to show performance in relation to shareholders the picture is somewhat different. Companies in Sweden considered as low diversified are doing better than average on the long term (e.g. 2008) and even out-performing the diversified companies. In Denmark both high and low diversified companies are able to show and EPS, which is consistent with or a little better than the average. Here the highly diversified companies are able to show earnings which are little better than the low diversified.

Companies that stand out in Sweden are Hennes & Mauritz (H&M)[1] in Sweden that shown a consistent increase in performance since 2004 (EBIT show a consistent raise to 1.93 in 2008) and who has four women in both the board and in top management. H&M women accounts for 40 % of the total board members making it one of the highest performing companies in the survey both in terms of EBIT and gender mix. Also in terms of EPS is H&M among the highest performers having more than doubled its earnings per share in the period to 2.1 compared to 2004. Among the low diversified is Scania[2] doing almost as good as H&M while Assa Abloy[3] more than halved its EBIT in 2008 compared to the 2004 results to 0.4. In terms of EPS Scania was again the best performer at 2.06 while Tele2 was doing worse than in 2004 consistently over the period and was at 0.89 in 2008.

In Denmark several of the highly diversified companies have more than doubled their EBIT (Carlsberg, D/S Norden and Rockwool)[4] but there are also several companies that have lost terrain such as Danisco[5] who lost over 40% to 0.59. Among the low diversified is DSV[6] the best performer at index 1.43 while Lundbeck[7] is the worst performing at index 0.92. Several of highly diversified companies have an EPS around index 2.0 and above (Carlsberg, D/S Norden, Roskwool and Sydbank). Most of the companies among the low diversified have increased their EPS in the range of 1.3 to 2.24 in the period.

These results can be interpreted in relation to a stereotypical understanding or the traits of men and women. When analysing the results of the highly diversified companies they can be explain using the trait of adaptability and being risk averse (Cadsby & Maynes, 2007, Daruvala, 2007). As the market leading up to the financial crisis changed rapidly and new opportunities arose were companies that were willing to adapt their business model to these changes were also able to harvest new opportunities. Hereby they could increase their earnings rapidly and produce above average EBIT results in 2007. When the crisis started in the mid 2008 the ability to adapt to changes in the business environment again became a competitive parameter. Businesses could use the trait of adaptability and use it in dampening the impact of the rapid decrease of trade on the global market place. At the same time have more gender diverse companies have been accepting less risk in their financial transaction and thereby experienced fewer losses. Companies that was receptive to changes in the market could thereby react effective and utilise opportunities before their competitors. The same companies were also able to use their knowledge to assess the risks that they were exposed to more efficiently and take action in time to reduce their loses when the market changed. The combination of being adaptable and risk averse help companies that are willing to embrace these characteristics, as they become highly competitive and able to react to changes in the marketplace.

Like the feminine traits can explain the results of the highly diversified companies (during the financial crisis) the same approach can be used in understanding the results of the low diversified companies. Male stereotypical behaviour prescribes that men are more likely to demonstrate traits that are associated with informalism and paternalism which in-turn create more rigid forms of organisations (Maddock & Parkin, 1993). This means that male dominated companies would be slower to react to changes in the environment, and they will be less likely to have connections with more distant stakeholders. A strong connection to a mentor can reaffirm that changes in the market should not be taken notice of because the mentor himself does not understand the significance of the change. The changes in EBIT among the low diversified companies are inline with this perspective as they missed the opportunities that arise in the market and were slower to adopt their business model resulting in lower than average performance.

Gender arguments can also be used to explain the changes in EPS. Companies that have a higher proportion of women have fewer tendencies to focus on shareholders as the only stakeholder than male dominated boards and top management. Women will be more likely to incorporate more distant stakeholder into the business decision process because of the trait of being collective thinking. This trait favours the company overall survival and wellbeing rather than keeping one stakeholder content, e.g. shareholder. Collective thinking favour long-term sustainability of the corporation rather than dealing with the immediate crisis and relying on keeping the shareholders content. In highly diversified companies shareholders are being cared for when earnings are high, but when the crisis hits the focus is on the company and its long-term survival and the EPS is reduced dramatically. Keeping in mind that the EBIT was considerable higher among highly diversified companies the results can be interpreted as these companies less diversified organisations are consolidating and focusing on retaining enough liquidity to maintain the level of EPS. In times where businesses have to change in order to maintain profitability the masculine trait of entrepreneurialism becomes valuable. Being able and willing to take risk is what traditionally have been the characteristics that have differentiated companies and the same applies here. However, the situation that companies is facing can be made worse if management and board is unable to evaluate the risk that they are taking and more or less guessing what the future will bring. This could be an ok situation if everybody did the same and nobody had a clear advantage thereby creating a situation where there was no clear advantage to anyone. However, a higher degree of stakeholder engagement will facilitate an improvement in quality decision-making and thereby an improved risk calculation. This means that companies that are able to display feminine traits have a clear advantage compared to companies who have to rely on their ability to guess and take risks, which might or might not pay off.

Integrating or delegating the CSR effort what should companies do?

For most companies CSR is believed to be an expense rather than a investment. This has resulted in quite different approaches to the CSR effort. Some have chosen to integrate their work inside the communication or Human Resource department while others have independent and dedicated to the task at hand. Yet others have opted for an outsourcing approach were they let their regular financial auditor, like KPMG or PWC or smaller consulting companies like Identitas or CSR Gender group do their reporting as part of their consulting services.

One would often think that integration would be the best approach that companies can take to their CSR reporting structure, but if you have no resources this might not be the case. There are actually some merits to outsourcing or teaming up with a business partner.

For one there is standardization of reporting. I have looked over hundreds of CSR reports of all types and there seem to be a infinite number of ways that one can write and report on the subjects within Environment, Social impact and Governance issues. Most of the major consulting firms will use a standard approach, either invented by them or using one of the majors reporting frameworks like Global Reporting Initiative (GRI) or one, or more of the standards issued by ISO. Standardisation enables analysts to compare and evaluate individual companies with each other across a wide range of indicators.

Secondly there is the subject of expertise and knowledge. Most business does not have CSR as part of their core business, they produce other types of products or service, which might or might not be related to such activities. The point is that most business does not have the capacity to create a sustainability report, which reflect a relative true image of the company’s behaviour. When organisations try to create reports for which they have no or very little understanding about their impact, at most these reports becomes fragments of reality and in worst case they are more or less conscious efforts at manipulation. So getting the right expertise in place can actual help the CSR reporting effort even though these resources are not part of the business itself.

Third, there is some merit to the focus on the core business. Some proponents of CSR almost make one believe that the only reason of business is to contribute to a better world that the product and organisation is secondary to this higher aim. However, any manager or business professional will tell you that the Reason E’tre for business lay in its product and not it’s organisation or how it conduct itself. This might come as a chock to some but without a clear product or service the organisation will not exist for very long and therefor have no way to behave either good or bad. This means that if you are managing organisations that produce technical systems for the medico industry you might not know that much about ethics or how to access your impact on society or the environment. So the best thing you might do, is actually to contact somebody who can help you with making this assessment and a external consultant might be the one you are looking for.

Corporate culture might be in the way of change. We all know that change in organisations does not come easy so you might want to have somebody who has no connection or previous history within the company to facilitate this change. Somehow it is just easier for a external consultant to ask the logistics manager if he receives any kickbacks from the main forwarders working contracts for the company than it is for the local communication specialist to do the same. The consultants role and work description is clear in most organisations that they enter and it is legitimate for them to investigate all the ins and outs of the organisations without there motives being put into question. So, for some companies it can actually help the process by having somebody from the outside either as an interim manager or consultant.

I think the lesson is that business “should do what it is good at” and if that includes CSR reporting, and organisational and cultural change management then they should do that. Organisations engaged in CSR activities should have a hard look at their core business and either establishes a strong connection with their reason for being or ask themselves if it is better concentrate on something else. If they come to the conclusion that they are not able or willing to engage in CSR activities, but that it is part of their license to operate they should think about what is best do a half ass job at it or find a suitable business partner to  facilitate the process.

In the News

Anja Nordlund from CSR Gender Group got interviewed for the Swedish business magazine Passion for Business. She comments on how working strategically with diversity can strengthen business performance especially within the field of CSR and specifically in relation to effective risk management. You can read the article here.

Toy can read more about the CSR Gender Group at this link.