Does board diversity enhance M&A decision-making?

The effect of board composition on approving mergers and acquisitions (M&A) has received little attention in governance literature.

Female board representation and corporate acquisition intensity
Strategic Management Journal, February 2016

The effect of board composition on approving mergers and acquisitions (M&A) has received little attention in governance literature. Global M&A activity boomed last year as cheap debt and falling equity prices encouraged boards to approve deals.

But academic research has consistently shown that M&A is more likely to destroy, rather than create, value over time. Too many companies overpay for assets, overestimate the synergies from merging organisations, or fail on merger implementation.

So why do boards approve M&A deals that, in hindsight, destroy shareholder value, and what role does board composition play in approving M&A plans presented by management? Would greater gender diversity on boards enhance decision-making for M&A?

Guoli Chen of INSEAD, Craig Crossland of the University of Notre Dame, and Sterling Huang of the Singapore Management University considered the issue of gender characteristics and M&A in a recent paper.

Gender characteristics and M&E

Their research hypothesised that greater female representation on boards would be associated with fewer and smaller acquisitions. The authors expected that boards with one or more female directors would take longer to reach a decision to approve an acquisition (compared to an all-male board) and were more likely to shelve a proposed acquisition idea.

To test this hypothesis, the authors analysed 2,998 acquisitions undertaken by 1,542 firms in the US S&P 1500 index from 1998 to 2010. The data confirmed their hypothesis. The authors wrote: “We found robust evidence that greater female board representation was negatively associated with overall firm acquisitiveness and target acquisitions size.”

A change in female presentation on boards from low to high (one standard deviation above the mean number of females on boards) was associated with an 18 per cent decrease in organisation acquisitiveness and a 12 per cent decrease in acquisition size.

Simply put, boards with better gender diversity approved fewer mergers and acquisitions and deals approved were smaller. Having more women on boards, and greater diversity of thought, ensured companies took a more considered approach to M&A.

The research is further evidence of the benefits of gender diversity on boards and how diverse perspectives in organisations lead to more comprehensive and thorough decision-making.

But the authors raise a cautionary note: if their hypothesis is correct, and the number of women on boards rises in coming years, fewer M&As could be approved and deals could be smaller, potentially leading to a loss of competitiveness in companies that rely on acquisitions for growth.

Shareholders who have watched too much M&A activity destroy value over the years – and too many male-dominated boards approve it – might be glad of that fact.

Over the next few months, the Governance Leadership Centre will examine the role of boards in M&A across different stages of a transaction. The series will address key questions that boards need to ask at each stage in the M&A lifecycle and what boards should pay attention to improve the chances of M&A success and create sustainable value for shareholders. Please visit our website next month for more details on this series and our upcoming webinar.