When do women on board of directors reduce bank risk?

Abstract

Purpose This study aims to examine the relationship between female directors and bank risk. In particular, whether such a relationship varies across sound or unsound banks and with or without a critical mass of female directors is tested. Design/methodology/approach Using a sample of 215 listed banks from 40 countries over the period 2008–2016, this study carries out panel data analyses and tests all the model specifications on four different measures of risk (common equity ratio, leverage, NPLs ratio and price volatility). Findings The findings show that increasing the number of female directors does not reduce bank risk when banks are unsound. When banks are sound, female directors have a significant and positive role in reducing risk, only until reaching a critical mass of women. Practical implications This study provides useful corporate governance indications for policymakers and practitioners. Advantages of gender diversity on boards are recognized especially in sound banks, but increasing the number of women directors beyond the critical mass may not lead to lower risk. In fact, ethical or legal pressures aimed at increasing gender diversity on boards (i.e. soft or hard gender quotas) may cause undesired effects on bank risk, especially if female directors are not chosen on merit and skills. Moreover, gender-balanced boards, namely, with a “dual critical mass,” seem to assure more effective decision-making processes. Originality/value This study provides empirical evidence on female board members and risk minimization, differentiating between sound or unsound banks. Furthermore, this study contributes to the literature on the critical mass of women on the board of directors by testing this theory for these two categories of banks.