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Business & Finance Series: Research Spotlight

Gender-diverse boardrooms reduce bank misconduct penalties by $7.48m per year, study finds

Cass research shows that greater female representation in the boardroom attracts fewer fines from authorities in misconduct cases.
by Hamish Armstrong (Senior Communications Officer)

New research co-authored by academics at Cass Business School shows that banks with a strong female presence on the board of directors incur fewer financial penalties for wrongdoing.

The study, titled Gender Diversity and Bank Misconduct, whose authors include Professor of Banking and Finance Barbara Casu Lukac and Lecturer in Finance, Dr Angela Gallo, investigates the impact of the gender diversity of boards on financial and general misconduct by banks.

With cases of such misconduct, including AML, financial misselling and tax violations, rising following the 2007/08 financial crisis, bank regulators have introduced reforms aimed at tackling governance issues.

One of these reforms includes measures to increase gender diversity in the boardroom.

As the report explains: “Bank misconduct has significant implications not only for individual financial institutions, as large regulatory fines can harm their soundness, but also for society as misconduct events reduce trust in the financial system. Therefore, it is important to understand the role of board gender diversity in reducing bank misconduct, as its implications are systemic in nature and contribute to strengthening financial stability.”

The study examined data between 2007 and 2018 from 83 publicly listed banks in 21 European countries, and analysed a total of 146 incidents of misconduct and subsequent penalties from US regulatory authorities.

Analysis uncovered data suggesting that banks with strong diversity at the top were more compliant, and tended to avoid the same level of financial punishment compared to those with male-dominated boardrooms, with significant equivalent savings of $7.48 million per year.

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Dr Gallo explained that although there are positive signs of authorities actively trying to increase diversity at senior levels, regulators need to focus on the actual roles and level of decision-making of women, rather than just the representative number at board level. Dr Gallo said:

The next part of any reform should try to ensure that diversity is associated with inclusion. In other words, women sitting on the board should also be given equal opportunities to actively participate and contribute to its activities, and are not taken for granted. This lack of inclusion could explain, for instance, why women often leave their seats on a board after just a short period of time.

“The misconduct-reducing effect of gender diversity is more influential when there are at least three women on a board of directors which, in a way, provides further evidence that greater inclusion is needed for diversity to be more effective.”

The research also tested other aspects of diversity alongside gender, including age, nationality and employee representation, but found no evidence that these additional variables are associated with decreasing levels of bank misconduct.

The report attributes the importance of gender diversity to the fact that ‘women bring a special set of skills to corporate boards’, including their tendencies to be more risk-averse than male counterparts in committing wrongdoings, for fears of more severe professional and social consequences (the so-called ‘gender punishment gap’).

In spite of this, Dr Gallo still believes that a cultural adjustment is needed to address issues of inequality at boardroom level before banks fully embrace the findings of this and similar studies on the benefits of gender diversity.

“Changes in terms of equality and diversity will need to be paired with a real shift in culture before they become effective rather than nominal,” she continued. “Unfortunately, changes in culture can be very slow and also have a non-linear trajectory, which is still holding women back.”

Read the full paper Gender Diversity and Bank Misconduct here.

Find out more about the Centre for Banking Research at Cass.

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