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In the last decade, reforms have been implemented worldwide to improve gender diversity in corporate boardrooms. “Boardroom diversity is a key social performance issue, and boardroom reforms represent major social and governance policy initiatives,” say HKUST’s Mingyi Hung and Emily Jing Wang, working with colleagues. Their forward-thinking study sheds light on how boardroom gender diversity reforms can empower investors to drive governance change.

Investors play a key role in engaging with these corporate boards. In particular, the researchers say, “institutional investors, who are dominant players in global capital markets, play an important role in driving governance practices and drive firms’ environmental, social, and governance (ESG) performance.” However, we still have little evidence of how investors’ monitoring role is influenced by boardroom reforms.

Boardroom gender diversity reforms may facilitate institutional investors’ monitoring of corporate diversity for two reasons. “First,” the researchers say, “the reforms can facilitate private communications among managers and investors by setting a reference point for the belief in fair representation of gender on corporate boards.” Institutions can also leverage the public pressure associated with the reforms in their private negotiations with managers. Second, the authors note, “the reforms can make it easier for institutional investors to collaborate with other investors and stakeholders.” This is important for successful ESG engagement.

“Relative to domestic investors, foreign investors have less access to local networks and knowledge,” note the researchers. Therefore, they hypothesized that the impact of gender diversity reforms is greatest for foreign institutional investors. As foreign institutional investors face information asymmetry and high monitoring costs, they tend to “allocate a disproportionately large fraction of their capital to equities in their home country,” the researchers say. “If the reforms facilitate foreign institutional investors’ negotiation with managers and coordination with other stakeholders, they will empower these investors to drive the changes.”

To test these assumptions, the researchers collected data on boardroom gender diversity reforms from numerous sources and used a generalized difference-in-differences design to test the change in the relationship between institutional ownership and female directorships following boardroom gender diversity reforms worldwide. Consistent with their main hypothesis, they found that reforms in 25 countries strengthened the association between institutional ownership and female directorships for foreign investors. “This result is driven by foreign institutional investors from countries with a high social equity norm and by foreign pension funds and independent institutions,” they say.

These findings—which are highly generalizable, as they were obtained in a global setting—highlight the value of such reforms for both shareholders and firms. “Boardroom gender diversity reforms facilitate the boardroom engagement of foreign institutional investors and empower them to drive changes,” the researchers say, and “are beneficial to shareholders, especially for foreign institutional investors.” The researchers also found that firms that complied with the reforms experienced improved valuation and profitability.

“Overall,” the researchers say, “our findings suggest that boardroom gender diversity reforms empower socially conscious foreign institutional investors to drive value-enhancing governance change.” Furthermore, their findings suggest that these reforms are beneficial to shareholders, especially foreign institutional investors.