The Big Three and board gender diversity: The effectiveness of shareholder voice

Abstract

In 2017, “The Big Three” institutional investors launched campaigns to increase gender diversity on corporate boards. We estimate that their campaigns led American corporations to add at least 2.5 times as many female directors in 2019 as they had in 2016. Firms increased diversity by identifying candidates beyond managers’ existing networks and by placing less emphasis on candidates’ executive experience. Firms also promoted more female directors to key board positions, indicating firms’ responses went beyond tokenism. Our results highlight index investors’ ability to effectuate broad-based governance changes and the impact of investor buy-in in increasing corporate-leadership diversity.

Introduction

There is a growing emphasis on diversity, equity, and inclusion (DEI) in American society. A majority of S&P 500 companies now employ a chief diversity officer (Green, 2021), and since 2017, nearly 2,000 CEOs have pledged to advance DEI within their firms (PwC, 2021). Yet, women continue to be underrepresented in the highest tiers of US leadership, including in business, where women account for only 5% of public company CEOs and 18% of top executives despite accounting for 47% of the labor force and 40% of managers (ILO, 2016). To increase gender diversity in corporate leadership, governments around the world have enacted quotas requiring companies to appoint women to their board of directors. In the US, where as recently as 2016 only 13% of public companies’ directors were women, California adopted a board gender quota—which courts have since overturned—and similar regulations have been proposed in other states. That lawmakers are turning to controversial mandates begs the question: Why don't firms appoint more female leaders on their own, and how might they be encouraged to do so without government intervention?

The uptick in women serving on US boards in recent years may offer insight into these questions. Fig. 1, Panel A, shows the average annual change in the number of female directors on US boards between 2014 and 2019, reflecting the number of women added minus the number that depart from the board. While US firms consistently added 0.08 net female directors in the first half of the period, this number increased in 2017 and tripled by 2019. As a result, women's average representation on corporate boards, shown in Panel B, grew by about 50% over those three years, increasing from 13.1% of directors in 2016 to 19.7% by 2019.

The increase in female directorships coincided with an influence campaign, conducted in public and private by prominent investors, aimed at increasing women's representation on corporate boards. State Street Global Advisors (State Street) launched its “Fearless Girl” campaign in March 2017, and Blackrock and Vanguard followed suit not long after. Together, these three asset managers—often called “The Big Three” because they have more than $15 trillion under management and account for 75% of all indexed mutual fund and ETF assets—applied concerted pressure on public companies to add more women to their boards. Unlike earlier shareholder diversity campaigns that firms largely ignored, The Big Three adopted policies, which they enforced, of voting against directors’ reelection at firms they viewed as making insufficient progress toward a gender-diverse board.¹ In this paper, we use cross-sectional variation in The Big Three's ownership stake to examine the impact of these campaigns and shed light on factors that limit board diversity.

Using a difference-in-differences estimator, we compare the growth in female directorships across firms with varying degrees of pre-existing Big Three holdings before and after The Big Three began their campaigns. Because The Big Three's voting power and influence increase with their ownership stake, firms with greater Big Three holdings are under greater pressure to respond to their campaigns. The analysis includes year fixed effects to account for secular trends in the number of female directors and firm fixed effects to isolate within-firm changes in directorships coinciding with the timing of The Big Three's campaign.

Our estimates imply that The Big Three's campaigns increased female directorships. During the campaign, one standard deviation greater 2016 Big Three ownership is associated with a 76% increase in the net flow of new female board members and an 11% increase in the overall proportion of female directors. This increase is driven by both fewer female director departures and more new additions. The Big Three's campaigns are also associated with firms adding their first female director: one standard deviation greater Big Three ownership is associated with a nearly one-fifth decline in the number of US companies with no female directors over this period.

The growth in female directors appears to be tied to The Big Three's campaigns. For example, the timing of the increase corresponds to the timing of each asset manager's campaign: the share of a firm's equity held by State Street predicts increases in gender diversity starting in 2017 while the holdings of Vanguard and Blackrock, which started their campaigns later, begin predicting more female directors only in 2018. The increase in female directors is also greater among firms targeted by the individual asset managers’ campaigns. State Street focused on firms with no female directors, while BlackRock focused on firms with less than two female directors. The growth in female directorships reflects these two asset managers’ different targeting.

The growth in female directors does not appear to be driven by firm characteristics other than Big Three ownership. One concern is that the observed patterns might instead reflect specific types of firms (larger or consumer-goods companies, for example) coming under greater pressure to add female directors, perhaps in response to the “Me Too” movement. However, our findings are robust to controlling for differential time trends based on firm size, industry, index inclusion, or indexes’ free-float adjustments. The findings are also robust to controlling for corporate culture, which drove an uptick in female directors earlier in the decade (Giannetti and Wang, 2022), and to controlling for California's board gender mandate, which was adopted toward the end of our sample period. Finally, differences in the characteristics of firms with greater Big Three ownership cannot explain our findings on the differential timing and targeting of firms by each of The Big Three institutions.

The magnitude of our estimates suggest the Big Three's impact was substantial. We find that their campaigns account for at least one-third to two-thirds of the overall increase in female director share between 2016 and 2019. This estimate reflects a lower bound because it does not account for the positive spillover effects of The Big Three's campaigns onto firms in which they hold smaller stakes: the campaigns spurred a push to develop a greater pipeline of female directors and led proxy advisory firms and other investors to demand change as well. Such spillover effects are absorbed by our estimation's year fixed effects and are excluded from these estimates.

Big Three ownership is also associated with an increase in female directors’ likelihood of holding key positions on the board. For firms with greater Big Three ownership in 2016, a given female director is more likely to chair a board committee after 2016, including the nominating and audit committees, and more likely to serve on the nominating committee. In this director-level analysis, we include firm-by-year fixed effects to control for board size and other time-varying, firm-specific factors that might affect the likelihood of a director serving in these roles. These findings suggest that the growth in female directors was not mere tokenism (i.e., symbolic appointments that do not meaningfully shift females’ authority): firms made more than perfunctory changes to satisfy The Big Three's demands for increased gender diversity.

To analyze why firms did not add more female directors prior to the Big Three campaigns, we also look at how companies increased gender diversity in response to the campaigns. As Adams (2016, p.383) notes, “we know very little about the causes of female relative underrepresentation on boards.” State Street (2017) justified its campaign by arguing that firms were being too narrow in how they identified board candidates, relying too much on personal connections and candidates’ having executive experience. Because men are better networked with other men and have more executive experience, both criteria can steer director searches away from women.²

Tracing the effects of The Big Three's gender diversity campaigns, we find that relaxing these requirements enabled firms to add more women to their boards. Firms expanded diversity by casting a wider net in their director searches: the new female directors hired were less connected to the CEO and existing board members, and they had less executive experience than the candidates firms would otherwise have selected. For example, one standard deviation greater Big Three ownership is associated with a 67% reduction in the likelihood that a newly added female director is connected to the CEO and a 14% decline in her likelihood of having CEO experience. Firms sourcing female directors from outside their usual network helps explain why female directors are more independent of management (Adams and Ferreira, 2009; Schwartz-Ziv, 2017) and often bring different expertise to the board (Kim and Starks, 2016).

We find that shareholders voted overwhelmingly in support of these new women, awarding them even more votes than newly appointed male directors. This investor support suggests that qualified female director candidates were available before The Big Three's campaigns; they just were not being chosen. Consistent with this interpretation, we also find no increase in female directors’ compensation or busyness after 2016 despite the large increase in their hiring.³

Our results illustrate shareholder advocacy's potential to expand women's participation in corporate leadership more robustly than do government mandates. Unlike California's short-lived quota law, which led to tokenism (Hwang et al., 2020), we find that this investor-led initiative upgraded women's role on boards, including chairing the nominating committee. And in contrast to the response to Norway's quota, firms facing Big Three pressure did not disproportionately hire the same women (so called “golden skirts”; Seierstad and Opsahl, 2011), which could reduce director attention and weaken governance (Fich and Shivdasani, 2006). By bringing more diverse professional networks into the firm's orbit and increasing women's representation on nominating committees, this investor push could lead to a self-reinforcing cycle of increasing female board participation over time (Field et al., 2020; Matsa and Miller, 2011).

Our analysis also contributes to the literature on the barriers to enhancing workforce DEI. Prior research has found that the usual tools for increasing diversity—diversity training, hiring tests, performance ratings, grievance systems—can actually decrease the proportions of women and minorities in management (see Dobbin and Kalev, 2016, for an overview). To boost DEI at a given firm, this literature emphasizes the importance of top executives watching closely and holding managers accountable. Our analysis of The Big Three's campaigns reveals a similar dynamic between shareholders and top executives. These results lend credence to a view among policymakers and activists that business community buy-in is important to expand DEI. As put by German Minister Kristina Schröder, “We will only succeed in bringing about the necessary changes by gaining the business world's support, not by fighting against it” (CNBC, 2010).

Finally, our results contribute to the ongoing debate about the impact of indexed investment strategies on corporate governance. The Big Three now collectively hold about 20% of the outstanding equity in large US public companies, increasing the importance of their providing effective stewardship. Many argue that these institutions lack the incentives or resources required to monitor firms effectively (e.g., Schmidt and Fahlenbrach, 2017; Bebchuk and Hirst, 2019; Gilje et al., 2020; Heath et al., 2022), while others argue the opposite (Appel et al., 2016, 2019; Fisch et al., 2018; Kahan and Rock, 2019; Azar et al., 2021; Lewellen and Lewellen, 2022). Our findings show that indexed investors can and do meaningfully influence firms’ governance structures. By targeting an easy-to-monitor outcome and deploying a broad-based campaign that requires little firm-specific information, these large investors can bring about significant governance changes without large resource outlays. This influence and “check the box” governance approach, however, raises potential concerns. To the extent that the optimal governance structure varies across firms (e.g., Coles et al., 2008; Duchin et al., 2010), a focus on issues that are easy to monitor at scale could lead to one-size-fits-all policies that are not always beneficial for individual firms. Such concerns are magnified if self-dealing, attracting fund flows, or staving off regulation motivate The Big Three's activism (Barzuza et al., 2020; Fisch, 2022; Kahan and Rock, 2020).

The remainder of this paper is organized as follows. Section 2 details the growing importance of The Big Three in US companies’ ownership structures and describes their recent campaign for greater gender diversity on corporate boards. Section 3 describes our data, and Section 4 presents our empirical specification and main findings. Section 5 analyzes how companies increased gender diversity in response to the campaigns, and Section 6 concludes.