Gender Diversity in Compensation Committees

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Article
Journal of Accounting,

Auditing & Finance
2016, Vol. 31(4) 415–427

�The Author(s) 2016
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Gender Diversity in
Compensation Committees

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DOI: 10.1177/0148558X16655704

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Sascha Strobl1, Dasaratha V. Rama2, and Suchismita Mishra2

Abstract

Gender diversity in corporate boards and the functioning of compensation committees are
two issues that have caught the attention of legislators and regulators in many countries.
Using data from 5,630 observations from public companies in the United States, we find
that firm and board characteristics are associated with the presence of females on the com-
pensation committee. However, female presence on the compensation committee is not
significantly associated with CEO pay (as a proportion of shareholder wealth increase). We
then discuss issues related to research on gender diversity in corporate boards, and offer
some suggestions for future research on diversity in corporate boards.

Keywords

compensation committee, gender, diversity, executive compensation, board committees

Introduction

In this article, we examine the gender diversity of compensation committees, and whether

such diversity is associated with the relative magnitude of CEO compensation. We then

derive an agenda for future research about diversity in corporate boards, with a particular

focus on compensation and audit committees. We are motivated by recent efforts of legisla-

tors in many countries seeking to increase the proportion of women in corporate boards,

through persuasion and/or legislative quotas.

The non-profit group Catalyst, which seeks to promote women in business and leader-

ship, notes that less than 20% of board seats in the S&P 500 companies are held by women

(Catalyst, 2015); the proportion is even lower among smaller firms, and the lack of female

representation in corporate boardrooms is a global phenomenon (Deloitte, 2013). This has

led to legislative gender quotas on corporate boards in some countries. Norway led the way

in 2003 with a requirement that at least 40% of the directors of public companies must be

female. Subsequently, a diverse array of countries such as France, Spain, Italy, Malaysia,

India, and the UAE have implemented gender quotas for boards of public companies

(Deloitte, 2013; ‘‘The Spread of Gender,’’ 2014). Similar legislation has been proposed

1University of Vaasa, Finland
2Florida International University, Miami, FL, USA

Corresponding Author:
Dasaratha V. Rama, School of Accounting, Florida International University, Miami, FL 33199, USA.
Email: ramad@fiu.edu

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mailto:ramad@fiu.edu

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416 Journal of Accounting, Auditing & Finance

elsewhere, including Brazil, Canada, Germany, Israel, and the Philippines, while govern-

ments in Australia, Sweden, and the United Kingdom have encouraged companies to volun-

tarily increase female representation on corporate boards or risk having quotas imposed at

a later date (Ernst & Young, 2014; ‘‘The Spread of Gender,’’ 2014). In the United States,

the Securities and Exchange Commission (SEC; 2009) has issued a rule requiring compa-

nies to disclose the role of diversity in considering candidates for director nominations.

Evidence related to any relationship between board diversity and performance has both

public policy and governance consequences. If there is consistent evidence that there is a

positive association between board diversity and firm performance, then there is a business

case for diversity. In the absence of such evidence, arguments for diversity must be made

on other grounds. And, if diversity leads to lower performance then the costs of diversity

must be considered in any discussion about making boards more diverse.

In theory, gender diversity on boards can have positive implications for firms. Diversity in

the boardroom can lead to consideration of alternative viewpoints (Zahra & Pearce, 1989); board

diversity also increases the external legitimacy, and can make the firm more attractive to talented

employees (Hambrick, Werder, & Zajac, 2008). Conversely, diversity can also increase conflict,

worsen communication, and reduce trust (‘‘The Downside of Diversity,’’ 2014). Empirical evi-

dence about the performance effects of gender diversity on boards is mixed. Adams, de Haan,

Terjesen, and vanEes (2015, p.78) note that the mixed findings related to diversity and firm per-

formance can be attributed to ‘‘differences across studies in measures of performance, methodol-

ogies, time horizons, omitted variable biases and other contextual issues.’’

In evaluations of board performance, it may be more appropriate to focus on the compo-

sition of the sub-committees of the board because most board decisions are made within

smaller groups or committees (Kesner, 1988). In the context of accounting, two board com-

mittees are particularly relevant: audit and compensation committees. The former is an

integral part of the financial reporting process, while the latter often uses accounting num-

bers in setting targets related to executive compensation contracts (and, thus, influences

managerial judgments related to accounting). Both of these committees have a crucial role

in the corporate governance process.

Some studies have examined the association between gender diversity and the functioning

of audit committees.1 Srinidhi, Gul, and Tsui (2011), using data from 2001 to 2007 and after

controlling for self-selection, find that firms with female directors on the audit committee

exhibit higher earnings quality (as measured by lower discretionary accruals and lower pro-

pensity to manage earnings and beat benchmarks by a small amount). Similarly, Thiruvadi

and Huang (2011) show, using data from 320 S&P SmallCap 600 firms, that the presence of

a female director on the audit committee is associated with lower discretionary accruals. In

contrast, Sun, Liu, and Lan (2011) find, using a sample of 525 observations over the period

2003 to 2005, that there is no association between the proportion of female directors on audit

committees and performance-matched discretionary accruals. In terms of audit committee

processes, Thiruvadi (2012) shows that audit committees with at least one female director are

likely to meet more often than all-male audit committees while Ittonen, Miettinen, and

Vähämaa (2010) find that firms with female audit committee chairs have lower fees.

However, empirical research about diversity in compensation committees is sparse. Two

prior studies find that female directors are less likely to be appointed to the compensation

committee (Adams & Ferreira, 2009; Bilimoria & Piderit, 1994). We extend this line of

research by examining (i) the factors associated with a gender-diverse compensation commit-

tee and (ii) the association between the presence of female directors on the compensation

committee and (a) executive pay, and (b) subsequent restatement of financial statements.

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Strobl et al. 417

Compensation Committees and Gender Diversity

The performance of compensation committees of public companies has come under

increased scrutiny from the public and regulators in recent years. Some common criticisms

of compensation committees are that top executives are overpaid and that such compensation

often has little association with performance (Landy, 2008; Morgenson, 2013).2 A significant

part of the blame for the global financial crisis is attributed by some to the outsized compen-

sation and skewed incentive structures of corporate executives (Bebchuk, 2012; Ritholtz,

2009). Such concerns have also been reflected in recent actions by legislators and regulators.

Sections 951 to 954 of Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 includes multiple provisions related to executive compensation of public companies,

including the independence of compensation committees and their use of compensation con-

sultants, as well as more detailed disclosures about pay-for-performance and the ratio of

CEO pay relative to other employees. Subsequently, the SEC (2012) promulgated new rules

related to the stock exchange listing standards for compensation committees.

Much of the blame for outsized executive compensation is attributed to docile and ineffec-

tive compensation committees. In theory, a strong and independent nominations committee

should select effective and independent directors, a subset of whom would become members

of the compensation committee; this should ensure that the executives are adequately, but not

excessively, compensated. In practice, however, the CEO is dominant in many public compa-

nies and has a strong influence on who is selected for the board and also who is appointed

on the compensation committee (Bear, Rahman, & Post, 2010). Compensation committees

use compensation consultants to set the pay of the executive; however, a former Chancellor

of the Exchequer noted in testimony to the U.K. Parliament that ‘‘remuneration consultants

. . . are a profession that makes prostitution seem thoroughly respectable’’ (Lawson, 2013).

Westphal and Zajac (1995) find that CEOs are likely to select directors who are demo-

graphically similar to them, which in turn can lead to a board that is more likely to support

the CEO (including, executive compensation related matters). In contrast, greater diversity

on the board can lead to more effective monitoring (Bear et al., 2010).

Prior studies show that gender diversity on the board is associated with higher levels of

monitoring by the directors. Nielsen and Huse (2010) find that higher proportions of

female directors are positively related to board strategic control. Adams and Ferreira

(2009) show that gender-diverse boards are associated with better attendance records, and

that CEO turnover is more sensitive to stock performance in such firms.3 Thus, based on

prior empirical evidence that gender-diverse boards are associated with greater monitoring,

we conjecture that female directors will tend to emphasize more on pay-for-performance;

hence, gender diversity on the compensation committee makes it less likely that there will

be excessive executive pay.4 This leads to our hypothesis (in the alternative form):

Hypothesis: Companies that have gender-diverse compensation committees will be

less likely to have excessive executive pay.

Method and Data

Our primary data source is The Corporate Library’s directorship database for the years

2006 to 2008. We obtain our financial and stock price data from the Compustat and CRSP

databases. To minimize the influence of outliers, we winsorize all continuous variables at

the first and 99th percentiles.

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418 Journal of Accounting, Auditing & Finance

We use the following model to examine the determinants of factors associated with the

presence of a female on the compensation committee:

FEM = a + b13LMV + b23PROUT + b33BDNUM + b43CCNUM
ð1Þ

+ b53LTPERF + b63INSTOWN + b73NYSE + b83OM + e:

The dependent variable, FEM, is measured in two different ways. First, we use a dichot-

omous variable, FEMD, which takes the value of 1 if there is at least one female on the

compensation committee and 0 otherwise; we use a logistic regression model for this analy-

sis. Second, we use a continuous measure, FEMP, which is the proportion of females on

the compensation committee; we use an ordinary least squares (OLS) regression for this

analysis. In our analyses, we control for clustering by firms.

Our independent variables are based on results from prior studies. As larger firms are

more likely to have a diverse board (Carter, D’Souza, Simpkins, & Simpson, 2003;

Hillman, Shropshire, & Cannella, 2007), we expect the coefficient on LMV (log of market

value) to be positive. Carter et al. (2003) find that the proportion of women and minorities

on boards increases as the number of outsiders on the board increases; extending this logic,

we expect a positive coefficient for PROUT (proportion of outside directors on the compen-

sation committee). Higher the number of directors on the board, the greater the likelihood

that there will be females on the board; this in turn increases the likelihood of female repre-

sentation on the compensation committee. Similarly, the greater the number of directors on

the compensation committee, the higher is the likelihood of a female director being present

on the committee. Hence, we include BDNUM and CCNUM in our model.

Coffey and Fryxell (1991) argue that the influence of institutional investors may make it

more likely that companies will adopt diversity practices; hence, we expect a positive coef-

ficient on INSTOWN. Pressure from governance activists is more likely when a firm has

not been performing well in the recent past. Such arguments suggest that female directors

on the compensation committee would be less likely in firms with better long-term perfor-

mance (LTPERF). We include an indicator variable for NYSE listing because there are sig-

nificant differences between NYSE- and non-NYSE-listed firms along many governance

dimensions (Wintoki, 2007). Finally, we expect that women are more likely to be appointed

to the board and committees of the board in firms that are incorporated in more liberal

states. We measure this using the proportion of votes for Barack Obama minus the propor-

tion of votes for John McCain during the U.S. presidential election of 2008 (OM).

Next, we use the following model to examine the relation between gender-diverse com-

pensation committees and executive compensation:

PAYPER = a + b13LMV + b23PROUT + b33BDNUM + b43CCNUM

+ b53INSTOWN + b63NYSE + b73OM + b83AGE
ð2Þ

+ b93TENURE + b103Book Market + b113Volatility

+ b123FEMCC + b133Industry Dummies + e:

The dependent variable, PAYPER, is the ratio of annual change in market value of the

company over the total compensation of the CEO. This ratio measures the ‘‘bang for the

buck’’ for shareholders from a given dollar of CEO compensation; higher values are

‘‘better’’ from the perspective of shareholders (who are represented by the compensation

committee). As in most corporate governance research, we control for firm size. We also

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Strobl et al. 419

control for compensation committee composition (PROUT) and board size (BDNUM), as

these two factors can drive the extent to which the compensation committee and the board

are proactive and look out for shareholder interests. We control for institutional ownership

(INSTOWN) as institutions are more likely to exert pressure on the board. As in the earlier

regression for compensation committee membership, we include controls for the stock

exchange (NYSE) and the political climate of the state of location of the company (OM).

AGE and TENURE measure the average age and tenure of the compensation committee

directors. We also include Book-to-Market ratio and return volatility as additional controls,

apart from industry dummies based on the Fama-French classification. FEMCC is our vari-

able of interest, and we use two different measures for this variable: FEMD and FEMP,

which are defined as before.

Results

Table 1 provides descriptive evidence about the sample. Overall, 34% of the observations

have at least one female director on the compensation committee. In terms of individual

directors, just over 10% of the compensation committee directors are female. The average

number of directors on the full board and compensation committee are 15 and 3.76, respec-

tively. Outside directors account, on average, for 93% of compensation committees. The

average age of compensation committee directors is 61.31, and the average tenure of such

directors is 8.47 years. 5

In untabulated results, we find that women account for about 11% of the total number of

directors and the overall number of compensation committee directors for the firms in our

sample.6 Thus, the dearth of female directors, documented in many prior studies, continues

to be the case in our sample. However, the data also indicate that given a board member-

ship, a female is at least as likely to be on the compensation committees as her male coun-

terparts. In addition, we also find that, compared with their male colleagues, female

directors on compensation committees in our sample are younger (60.1 vs. 61.6 years old),

have shorter tenure as directors (8.0 vs. 8.5 years), and are more likely to be outsiders

(94.6% vs. 93.4%). These findings reinforce results from prior research that female direc-

tors are different from their male counterparts in many other demographic characteristics.

Table 2 presents the results from the regressions to examine factors associated with the

presence of female directors on the compensation committee. The first (logistic) regression

has FEMD as the dependent variable, while the second (OLS) regression has FEMP as the

dependent variable. All of our control variables, except institutional ownership, are signifi-

cant at conventional levels in both regressions. The results indicate that females are more

likely to be present on the compensation committee of firms when the firm (a) is larger,

(b) has a higher proportion of outsiders on the board, (c) has more directors on the board, (d)

has more members on the compensation committee, (e) has worse long-term performance, (f)

is listed in the NYSE, and (h) is incorporated in a state that is politically more liberal.

In Table 3, we present the results related to our hypothesis. Both of the regressions in

Table 3 are statistically significant. Considering the governance-related variables, we find

that (a) the coefficient of BDNUM is negative and significant, indicating that larger boards

are less likely to be ‘‘efficient’’ in terms of protecting shareholder interests; and (b) the

coefficient of TENURE is negative and significant, indicating that compensation commit-

tees that have long director tenure are more likely to be associated with higher executive

compensation.7 However, the gender variable is not significant in either regression.

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420 Journal of Accounting, Auditing & Finance

Table 1. Descriptive Statistics. This table presents the mean; standard deviation; first, second and
third quartile of our variables. PAYPER is the ratio of the change in market equity to total
compensation of the CEO for each year in our sample (times 1,000). FEMD is the presence of at least
one female on the compensation committee; FEMPR is the proportion of female directors on the
compensation committee; LMV is the natural log of the market value of the equity (in millions of
dollars); PROUT is the proportion of outside members on the board; BDNUM is the number of directors
on the board; CCNUM is the number of directors on the compensation committee; LTPERF is the
average stock return of the past 5 years; INSTOWN is the proportion of shares outstanding owned by
institutions; NYSE is 1 if a stock is listed at the NYSE and 0 otherwise; OM is the proportion of votes for
President Obama minus the proportion of votes for Senator John McCain in 2008 in the state in which
the company is headquartered; AGE and TENURE are the average values of the age and tenure of the
compensation committee directors; BOOK-MARKET and VOLATILITY are the Book to Market Ratio and
idiosyncratic return volatility for each firm in our sample, respectively. The sample includes 5,630 firm-
years from 2006-2008 of firms included in The Corporate Library’s directorship database.

Variable M SD 25th percentile Median 75th percentile

PAYPER 0.73 8.96 21.21 0.08 2.00
FEMD 0.34 — — — —
FEMPR 0.10 0.16 0.00 0.00 0.25
LMV 7.43 1.48 6.30 7.25 8.35
PROUT 0.93 0.15 1.00 1.00 1.00
BDNUM 15.00 4.04 12.00 14.00 17.00
CCNUM 3.76 1.28 3.00 3.00 4.00
LTPERF 0.20 0.15 0.09 0.17 0.27
INSTOWN 0.52 0.31 0.29 0.48 0.70
NYSE 0.56 — — — —
OM 0.03 0.20 20.15 0.06 0.24
AGE 61.31 5.25 58.25 61.50 64.50
TENURE 8.47 4.29 5.33 7.67 10.67
BOOK-MARKET 0.43 0.31 0.20 0.39 0.60
VOLATILITY 0.01 0.01 0.00 0.01 0.02

Further Tests

As an additional test, we use the CEO efficiency ranking from Forbes magazine in 2009

and use the reverse of this ranking (i.e., higher values represent a better compensation com-

mittee) as the dependent variable. When we combine the Forbes data with our dataset, we

are able to obtain all relevant data for 172 firms. In this analysis, we use the average values

(over the 3 years) of the independent variables in regression model (Equation 2) above.

Once again, we find that the gender variables are not significant in the model.

While the audit committee is primarily responsible for the quality of financial reporting,

the actions of the compensation committee can have an indirect effect on financial report-

ing quality. If a compensation committee is effective, then the magnitude of the possible

executive compensation would not be excessive and executives should be less likely to

manipulate financial statements (to achieve compensation related goals) which then have to

be restated.8 Hence, we examine subsequent restatements of financial statements. We find

that the subsequent restatement rates are 12.4% and 12.9% for the observations with and

without a female director on the compensation committee; the difference is not statistically

significant.

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Strobl et al. 421

Table 2. Presence of Female Directors on Compensation Committees. This table presents the
results of two regressions. The dependent variable in the first regression, FEMD, is the presence of at
least one female on the compensation committee; it is FEMPR, the proportion of female directors on
the compensation committee, in the second regression. LMV is the log transformation of the market
value of the equity (in millions of dollars); PROUT is the proportion of outside directors on the
compensation committee; BDNUM is the number of directors on the board; CCNUM is the number of
directors on the compensation committee; LTPERF is the average stock return of the past 5 years;
INSTOWN is the proportion of shares outstanding owned by institutions; NYSE is 1 if a stock is listed
at the NYSE and 0 otherwise; OM is the proportion of votes for President Obama minus the
proportion of votes for Senator John McCain in 2008 in the state in which the company is
headquartered. The sample includes 5,630 firm-years from 2006-2008 of firms included in The
Corporate Library’s directorship database. Both regressions are significant at p \ .001.

Dependent variable = FEMD Dependent variable = FEMPR

Variable Coefficient p value Coefficient p value

Intercept 24.20 .000 20.078 .002
LMV 0.10 .005 0.008 .003
PROUT 0.74 .000 0.045 .001
BDNUM 0.06 .000 0.004 .000
CCNUM 0.34 .000 0.007 .000
LTPERF 21.12 .000 20.064 .000
INSTOWN 20.19 .271 0.000 .980
NYSE 0.23 .001 0.011 .024
OM 0.60 .000 0.030 .006

Pseudo R2 = 14.6% Adjusted R2 = 4.6%

Overall, the results indicate that gender diversity on the compensation committee is not

associated with CEO pay or subsequent restatements. Any null result is, of course, subject

to questions about the power of the test. However, we note that our sample size is quite

large, and we obtain similar inferences with multiple dependent variables as well as two

different measures of the independent variable of interest. Finally, our inferences remain

unchanged when we use a two-stage regression approach to control for endogeneity.

Discussion

Many studies have highlighted the fact that women are underrepresented on corporate

boards. This has led to politicians intervening, indirectly through persuasion or directly

through legislative quotas, to increase female representation on corporate boards. Norway

was the first country, in 2003, to mandate quotas for female directors. Subsequently, many

countries spanning the development and cultural spectrum have acted to implement gender

quotas for corporate boards. In the United States, since 2009, the SEC has required compa-

nies to disclose the role of diversity in considering candidates for director nominations. In

addition, activist investors and board monitoring and rating agencies (such as Institutional
Shareholder Services and Thirty Percent Coalition) have sought to put pressure on public

companies to include more women and other minorities in boards of directors.

SEC Commissioner Aguilar (2010), in a speech justifying the SEC’s 2009 rule related to

board diversity, cited a study by CalPERS that diverse boards perform better than boards

without diversity in terms of shareholder value. However, there are also many studies that

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422 Journal of Accounting, Auditing & Finance

Table 3. Female Directors on Compensation Committees and Executive Compensation. This table
presents the results of two multivariate OLS regressions. The dependent variable, PAYPER, in each
regression is the ratio of the change in market equity to total compensation of the CEO (times 1,000)
for each year in our sample. LMV is the log transformation of the market value of the equity (in
millions of dollars); PROUT is the proportion of outside directors on the compensation committee;
BDNUM is the number of directors on the board; CCNUM is the number of directors on the
compensation committee; LTPERF is the average stock return of the past 5 years; INSTOWN is the
proportion of shares outstanding owned by institutions; NYSE is 1 if a stock is listed at the NYSE and
0 otherwise; OM is the proportion of votes for President Obama minus the proportion of votes for
Senator John McCain in 2008 in the state in which the company is headquartered; AGE and TENURE
are the average values of the age and tenure of the compensation committee; Book-Market is the ratio
of book to market equity; Volatility is the idiosyncratic daily return volatility averaged over each
month; Industry-Dummies are dummy variables for the Fama-French 48 industry classification. The
sample includes 5,630 firm-years from 2006-2008 of firms included in The Corporate Library’s
directorship database. Both regressions are significant at p \ .01.

Dependent variable = PAYPER Dependent variable = PAYPER

Variable Coefficient p value Coefficient p value

Intercept 3.57 .639 3.46 .649
LMV 1.20 .057 1.20 .056
PROUT 23.78 .044 23.78 .044
BDNUM 20.45 .002 20.45 .002
CCNUM 0.08 .775 0.09 .757
INSTOWN 0.26 .885 0.26 .887
NYSE 21.23 .098 21.23 .097
OM 2.68 .135 2.67 .139
AGE 0.09 .181 0.09 .170
TENURE 20.20 .014 20.21 .014
Book-Market 22.81 .012 22.82 .012
Volatility 286.31 .000 286.06 .000
FEMD 0.208 .789 — —
FEMPR — — 0.915 .680
Industry-Dummies Included Included

Adjusted R2 = 4.3% Adjusted R2 = 4.3%

show there is no (or negative) association between board diversity and subsequent perfor-

mance (Gupta, Lam, Sami, & Zhou, 2015; Post & Byron, 2015). The use of research for

social changes only increases the necessity for careful consideration of data and method

related issues, in addition to detailed discussion of alternative explanations and limitations.

Prior research suggests that female directors are quite different from their male counter-

parts in the boardroom, along many dimensions. For example, studies show that compared

with male directors, female directors are more likely to be (a) outsiders (Adams & Ferreira,

2009) and (b) more educated (Hillman, Cannella, & Harris, 2002). While research on cor-

porate governance in general is subject to endogeneity problems (Hermalin & Weisbach,

1998), this may be particularly relevant for diversity: To the extent there are both corporate

and personal characteristics that are associated with board/committee diversity, it is diffi-

cult to separate out the consequences of board/committee diversity from other causes. For

example, de Cabo, Gimeno, and Nieto (2012) find that female directors are less likely at

riskier banks. Similarly, Adams and Ferreira (2009) find that female directors are more

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Strobl et al. 423

likely to be outsiders than their male counterparts. Hence, care must be taken to disentangle

the effects of gender from other underlying differences. The study by Srinidhi et al. (2011)

is an example of carefully considering self-selection issues and using multiple measures to

address the effects of diversity on audit committees; however, such careful approach to

design, analysis, and inference remains the exception.

As more countries seek the legislative route for gender diversity, a natural temptation is

to view such legislative quotas as exogenous shocks where endogeneity-related concerns

become less of an issue (Ferreira, 2015). However, here again caution is warranted. For

example, some studies have examined the introduction of such quotas on Norwegian firms’

performance (Ahern & Dittmar, 2012; Matsa & Miller, 2013). Nevertheless, a problem

with such studies is that, unlike in the case of SOX, most legal developments take time; an

initial version of the Norwegian quota law was enacted in 2003, but penalties were intro-

duced only in 2005 and with an additional 2-year grace period to comply. Thus, a clean

test becomes difficult given the many other confounding events during lengthy transition

periods.

Norwegian data also show that forced diversity can be counterproductive. In Norway,

the gender quota rule was applicable only for public limited companies. Perhaps not sur-

prisingly, the number of publicly listed Norwegian companies decreased from 564 in 2003

to only 179, 5 years later (Dizik, 2015). Can we ignore the costs of going-private? How do

we measure costs associated with going-private? Another problem relates to ‘‘golden

skirts’’—the phenomenon of a few highly sought after women sitting on multiple board

seats, but busy-boarding does not enhance the quality of monitoring. In other words, legis-

lative and regulatory action must consider both the benefits and costs associated with laws

or regulations. As the ‘‘The Downside of Diversity’’ (2014) notes, ‘‘diversity can bring

risks as well as benefits and perils as well as perks’’; this is especially true for diversity

that is driven by legislative and/or regulatory actions. This in turn requires well-designed

empirical studies that address both sides of the equation.

There are many studies (primarily in management) that seek to examine the association

between diversity and firm performance. However, given that there are too many other

variables that can affect firm performance, perhaps it is more useful to focus on the effects

of diversity on the corporate governance process, rather than seeking to detect causality

between board diversity and firm performance. In this context, it is useful to remember that

many substantive board actions happen not at the level of the full board but at sub-commit-

tees of the board. This means that there are some unique research opportunities for account-

ing researchers—by focusing on the audit and compensation committees. Furthermore,

while some recent studies have examined the effects of audit committee diversity on a vari-

ety of measures that proxy for financial reporting quality as well as the interaction between

the committee and auditors, research related to the compensation committee is sparse.

More generally, a quick search indicates that there are numerous papers that have appeared

in premier accounting journals with the phrase ‘‘audit committee’’ in the title of the article,

but there is none with the phrase ‘‘compensation committee’’ in the title.

Research related to compensation committees is particularly useful because the composi-

tion and performance of corporate compensation committees has come under increased

scrutiny in recent years, fueled in part by complaints about outsized executive pay. Such

concerns have led to actions by both legislators and regulators; both SOX and the Dodd-

Frank Act include sections related to executive compensation and the composition of com-

pensation committees of public companies, while the SEC (2012) has promulgated new

rules related to the standards for compensation committees.

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424 Journal of Accounting, Auditing & Finance

In this study, we find that women continue to be significantly underrepresented on cor-

porate boards. However, contrary to findings reported in earlier studies, we find that female

directors are at least as likely as their male counterparts to serve as members of compensa-

tion committees. This suggests that the bias against female presence on the compensation

committee, documented in prior studies examining earlier periods, may have given way to

gender neutrality. We find that gender diversity on the compensation committee is associ-

ated with company characteristics, including size, exchange listing, ownership, and long-

term performance. However, our findings also suggest that female presence on the compen-

sation committee is not significant in influencing CEO compensation, nor is such presence

associated with subsequent restatements of financial statements. Overall, it does not appear

that the presence of females on the compensation committee leads to significant differences

in the compensation of executives.

Our findings also suggest potential areas for future research. We find that there are very

few instances where there is more than one female on the compensation committee. This

has implications for the working of the committee, as representatives of underrepresented

groups (such as women and minorities) may be more willing to open up and project their

views when there is more than one of them in a group (Torchia, Calabro, & Huse, 2011).

We conclude by noting two other diversity-related areas that are worthy of attention

from researchers. First, it would be interesting to examine the reaction of executives and

boards in countries that have legislated gender quotas for corporate boards, as also the var-

iations in such reactions across countries. As noted earlier, many public companies in

Norway reacted to the legislation by becoming private. A different type of reaction

occurred in India after the legal requirement, enacted in 2013, that all exchange listed com-

panies must have at least one female director. Galani (2015) notes, ‘‘[s]ome Indian compa-

nies have broken the spirit of the rule by making token appointments. Reliance Industries,

the country’s largest conglomerate by market value, has installed the wife of Chairman

Mukesh Ambani as a director’’ while ‘‘[t]he stepmother of tycoon Vijay Mallya now sits

on the board of a company in which he has a large stake.’’

Second, there are many aspects to diversity and gender is only one factor. Research

related to other aspects of board and committee diversity, including race and nationality, is

sparse or non-existent. This in turn raises many interesting questions, which are opportuni-

ties for future research, about the effects of diversity on the performance of corporate

boards. For example, are the effects of different forms of diversity different, and if so,

how? Is one form of diversity more beneficial (or, costly) than the other? How do different

forms of diversity interact in the functioning of boards and committees? How do different

forms of diversity, and the pressure to have such diverse representation in boards, vary

across countries and cultures? Empirical evidence about such issues would be quite useful

for both academics and policy makers.

Acknowledgment

The authors thank an anonymous reviewer for many useful comments on an earlier version of the

article.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/

or publication of this article.

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ramad
Highlight

Strobl et al. 425

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this

article.

Notes

1. In this article, our focus is on director gender. Many prior studies have shown that female CFOs

are associated with a variety of positive outcomes including (a) better quality financial reporting

(Barua, Davidson, Rama, & Thiruvadi, 2010; Francis, Hasan, Park, & Wu, 2015), (b) fewer

acquisitions and issuance of debt (Huang & Kisgen, 2013), and (c) better pricing, longer maturi-

ties, and lower likelihood of having to provide collaterals in bank loans (Francis, Hasan, & Wu,

2013).

2. A comparison of CEO compensation and the average wage of the American worker noted that

the ratio of the former to the latter had increased from 42 in 1980 to 344 in 2007 (Landy, 2008).

3. Adams and Ferreira (2009) find that the fraction of female directors on the overall board is not

associated with CEO pay.

4. An alternative argument is that female directors are more risk-averse and tend to select more

risk-averse CEOs who demand lower pay. This argument also suggests that companies with

gender-diverse compensation committees will be less likely to have excessive executive pay.

5. None of the pairwise correlations between the control variables exceed 0.50, suggesting that

multi-collinearity is not a significant concern.

6. Note that ‘‘the proportion of female compensation committee directors’’ is distinct from ‘‘the

average proportion of female directors on compensation committee’’ referred to in the prior

paragraph.

7. As may be expected, relatively higher executive compensation is more likely in growing firms

and in volatile firms. Somewhat surprisingly, the coefficient of PROUT is negative and

significant.

8. The counter-argument is that a strong compensation committee will set tough standards which

increase the pressure on executives to manipulate financial statements.

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