Gender diversity is more than just a buzzword. It's an essential business practice, especially when it comes to the makeup of a financial institution's board.
Need proof? Research shows that more diverse boards, including boards with women, introduce a wider range of perspectives, experiences, and ideas that result in increased performance.
That's a huge advantage when it comes to having a well-run institution.
Let’s take a closer look at four ways including more women on financial institution’s boards improves performance.
Related: What Examiners Are Looking for: Board Oversight
1. Lower compliance and fraud risk.
Want to save money on compliance violations and internal fraud? Consider putting more women on the board.
Banks with female directors on the board get fined by regulators less often and have lower fines, saving banks $7.84 million a year, on average, according to researchers at the Cass Business School at City University of London and published in Harvard Business Review.
Researchers studied all European banks fined by U.S. regulators between 2008 and 2018. That’s nearly $500 billion in fines for violations ranging from economic sanctions and money laundering to UDAAP, fraud and employment discrimination.
The study found the effect even stronger when there are also female executives. (The researchers eliminated other factors like bank size and board size, tenure, age, and nationalities, among others.)
Researchers don’t know if it’s the result of women behaving more ethically or being more risk averse but suspect it’s a combination of the two factors.
2. Avoid bad decisions fueled by CEO overconfidence.
CEO overconfidence can lead to overestimating returns and underestimating risk—a dangerous mindset for any financial institution. Yet there are controls to help limit this risk, including more women on the board.
3. Better weather crises.
Banking crises are inevitable, but some institutions manage them better than others -- including those with significant numbers of women on the board.
Researchers studying the impact of gender diversity on bank boards in Europe found that more diverse boards were less likely to need a public bailout between 2005 and 2017 and those that did needed fewer funds as a percentage of assets, according to The Journal of Corporate Finance. The study also found connections between gender diversity and higher ROA.
Similarly, a Federal Reserve analysis found that once 20 percent of board members are women, financial institutions correspond to higher risk-adjusted returns.
Related: Board Members: Keep an Eye on Internal Controls
4. Gender diversity prevents groupthink
Boards are required to provide a credible challenge to management. They are not there to rubber stamp management’s wishes, but to evaluate information and ask thoughtful questions. It’s a system of checks and balances.
How can a financial institution add controls to ensure its board is more likely to speak up and less likely to just go along? Try adding more women to your board.
Board diversity is a useful control for good management at the board level. It makes the board more likely to provide a credible challenge and helps prevent groupthink. Too often a tightknit group becomes an echo chamber, reinforcing each other’s ideas instead of challenging them.
Related: Pivot! How to Build a Strategic Plan that Evolves With Your Financial Institution
When individuals with different perspectives are introduced, it opens the door to different ways of thinking. While this may make conversation and compromise more time-consuming or controversial, research suggests that it’s worth the extra work.
It’s also a reminder how risk controls can be found in unexpected places. When identifying and mitigating risk, don’t just rely on the tried-and-true controls you’ve always used. Be creative and think about new ways to mitigate old risks. In a competitive banking landscape, institutions that are imaginative and proactive have an advantage—and that includes adding new voices when possible.
Want to be part of a strong management team?
Our whitepaper The ‘M’ in CAMELS shows you exactly what your institution needs to earn a strong management rating.
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