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Gender-diverse boards reduce bank misconduct, fines, new study reveals

Gender-diverse boards on banks can reduce misconduct episodes and the costly fines that accompany them, according to new research from Cass Business School, part of London's City University.

Greater female representation "significantly" decreases the frequency of misconduct fines, the equivalent of saving roughly $17.9 million per bank per year, according to the paper.

Misconduct episodes are often intimately linked with governance failures, the report said. Regulators have often responded to failings in existing bank governance with initiatives to reinforce internal governance, often with an emphasis on boosting diversity.

"The underlying idea is that the tone at the top shapes a firm's conduct and ethical climate and that more diverse boards, with an increased presence of women, would positively affect the governance of companies," the paper noted.

Researchers set out to test this theory by looking at a sample of 83 publicly listed banks operating in 21 European countries between 2007 and 2018 to see if there was any link between the percentage of women on their boards and the frequency and size of fines for misconduct levied by U.S. regulatory agencies.

Because domestic regulators could be less impartial when it comes to imposing sanctions on banks on their own turf due to political connections, the researchers decided to look at U.S. fines levied on European banks in isolation in order to achieve a cleaner sample.

In the model used by the researchers, a one-unit increase in the proportion of women on the board reduces the frequency of fines by a fraction of 0.27.

When Harry fired Sally

Higher representation of women on boards may result in less risky behavior and greater compliance with rules and regulations, but this is not necessarily because women are more inherently "ethical" than males.

"You can interpret this result as supportive of more ethical behavior of women, but overall our analysis points to women being more concerned about the consequences of this misconduct, in line with the gender punishment gap idea, i.e. [that] women are more penalized than men for their wrongdoings," Angela Gallo, lecturer in finance at Cass Business School, and one of the report's authors, said in an interview.

Gallo cites an earlier study of financial advisers by the National Bureau of Economic Research, titled "When Harry Fired Sally: the Double Standard in Punishing Misconduct," which shows that females were 20% more likely to lose their jobs than males and 30% less likely to find a new job following an incident of misconduct.

The 146 misconduct incidents covered in the Cass study include failures of anti-money laundering controls, market manipulation, investor and consumer protection violations, tax violations, discrimination against employees, and improper accounting and data submission.

Regulatory bodies handing out the fines included the U.S. Federal Reserve, the Officer of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau.

The average fine received by banks included in the research was $61.7 million.

U.S. regulators have been particularly tough on foreign financial institutions in the years following the financial crisis, with European banks fined 4x more than their U.S. counterparts, representing 77% of the total of all fines handed out by U.S. regulators since 2008, the paper said, citing research from a 2018 paper by Dublin-based consultancy Fenergo.

Adding to the argument

Gallo said the research adds to the argument that board diversity makes for better bank performance.

"We have cases of misconduct reported on the news almost every single day — this despite the huge regulatory efforts to improve internal controls and governance put in place after the scandals of the financial crisis, which also included increasing board diversity," she told S&P Global Market Intelligence.

"While gender diversity is motivated by earlier studies showing that it improves firm performance, it is often criticized for lack of robust evidence. We point to another key contribution of women directors that can be better identified."