Cautious Mergers

By Michael Hardy | Fall 2016

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Researcher Craig Crossland found distinct differences in how a gender-diversified corporate board makes decisions. But when you start to look at outcomes … that’s where it gets complicated.

 Since 1811, when New York state passed the first law governing the practice of electing a board of directors to oversee a company, those corporate boards have been composed almost entirely of men. Even today, only about 17 percent of Fortune 500 directors are women.

But that may be changing, as corporations come under increasing pressure from the public and the government to diversify their boards. In the U.S., 2020 Women on Boards, a national campaign dedicated to increasing the percentage of women on corporate boards to 20 percent by 2020, recently reported that 42 percent of all Fortune 1,000 companies have met or surpassed  the goal. 

Appointing more women to corporate boards may be good politics; however, is it good for business? And how does adding women to a male-dominated board affect corporate decision making?

Those are the questions that Mendoza Management & Organization Associate Professor Craig Crossland and his two co-authors set out to examine in a recent paper, “Female Board Representation and Acquisition Intensity,” in The Strategic Management Journal.

“One of the challenges is that everyone goes straight to the issue of performance — is the firm better or worse off with more female leadership?” Crossland said. “It’s very difficult to make any sort of causal inferences about that, to say that if we added more men or more women whether we would expect performance to be better or worse. There are just so many other factors that it’s hard to link those two things.”

Instead of directly addressing that question, Crossland and his co-authors chose to focus on how female board representation affected strategic decisions, specifically when it comes to mergers and acquisitions. After studying 2,998 acquisitions undertaken by 1,542 American firms between 1998 and 2010, they concluded that greater female board representation correlated with fewer acquisitions and acquisitions of a smaller size.

Why would firms with higher female board representation be less acquisitive?

One hypothesis is that the difference has to do with fundamental personality differences between men and women. Research suggests that women are less likely to engage in risk-taking behavior than men.

But Crossland rejects that theory. Instead, he draws on social identity theory to argue that adding female perspectives to an all-male board is likely to result in longer and more contentious deliberations over major decisions, such as whether to acquire a rival company.

“What social identity theory tells us is that homogenous groups reach decisions more quickly, that they don’t argue as much, that there’s more groupthink,” he explained. “That doesn’t mean the decisions are better — in many cases the decisions are worse. But it means there’s less consideration.”

From this perspective, the relevant factor isn’t the personality of individual directors, but rather the diversity of the board as a whole. The more diverse the board, the longer and more contentious the decision-making process will be. Of course, there is more than one type of diversity. Preliminary research carried out by Crossland suggests that adding people of color to corporate boards has a similar effect to adding women — more disagreement, slower decisions, fewer acquisitions.

Crossland and his co-authors stay neutral on the question of whether being less acquisitive is a good or bad thing. But Crossland noted recent studies suggesting that most corporate mergers and acquisitions don’t work out. “The majority of research says that acquisitions tend to be bad ideas most of the time. There are counterexamples, such as Google buying YouTube. But for every one like that, there are a lot of AOL Time Warners.”

That’s not to say there aren’t downsides to being more deliberative. After all, a contentious board increases what economists call “coordination costs.”

“There are situations where you want to move fast,” Crossland said. “You want to get in before a rival bidder, or the company isn’t going to be on the block very long, so to get a good deal you have to get in quickly. And that could be a problem. On the other hand, if you’ve got a deal that turns out to be a dud when you dig into it, you want a board that is quite cautious, quite thorough.”

If Crossland is right, his argument has an interesting corollary. If greater homogeneity leads to more consensus and more acquisitiveness, then an all-female board would presumably be just as acquisitive as an all-male board. Unfortunately, it’s hard to test that hypothesis, since there are so few female-dominated boards. Crossland is aware of just one — cosmetics giant Avon.

“But if you imagine an alternate universe where you see a predominance of female directors, if our theory is correct, there should be a tipping point. As it becomes more homogenous in the opposite direction, there should be more groupthink, less contention, less argument, those sorts of things,” he said.

Crossland acknowledges that corporate boards don’t always have purely altruistic motives for increasing their diversity.

“Big companies these days get a lot of pushback if they have all-male boards, so some firms are going to want to change the representation of their boards just for the optics. And which firms are likely to do that? Well, if you’re doing well, if you’re sitting on a nice cushion, you feel more comfortable doing that.” This might explain the strong positive correlation between female board representation and overall better corporate performance that has been well-documented by other researchers.

Although he feels confident in his conclusion that greater female board representation leads to more contentious deliberations and ultimately fewer acquisitions, Crossland warned that the issue of board diversity is much more complex than is customarily acknowledged by the media.

“I always say, if you see research trumpeting that some characteristic leads to better or worse outcomes, proceed very cautiously.”