The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance Helena Isidro • Ma ´rcia Sobral Received: 23 July 2013 / Accepted: 19 July 2014 Ó Springer Science+Business Media Dordrecht 2014 Abstract The European Commission has recently pro- posed the introduction of legally binding quotas for women on corporate boards of European companies. This proposal has put the spotlight on the question of whether increasing female representation on the board brings economic ben- efits to the firm. In order to shed light on the issue, this study investigates the direct and indirect effects of women on the board on firm value. We use a simultaneous equa- tion model to estimate the effects of women on the board on firm value, financial performance, and compliance with ethical and social principles adopted by the firm. We find no evidence that a higher female representation on the board directly affects firm’s value. However, we find indirect effects. Women on the board are positively related with financial performance (measured in terms of return on assets and return on sales) and with ethical and social compliance, which in turn are positively related with firm value. The findings in this study suggest that greater female representation on corporate boards of large European firms can increase firm value indirectly. Further, part of the indirect effect comes from stronger compliance with ethi- cal principles, something that is not captured by account- ing-based financial performance. Keywords Board of directors  Corporate governance  Ethics  Financial performance  Firm value  Gender diversity  Social responsibility Introduction In these economic difficult times, the case for getting more women on company boards has never been stronger (EU Justice Vice-President Viviane Reding in inter- view to CNN, 11 February 2011) In November 2012, the European Commission announced the intention to introduce a 40 % quota for the under-rep- resented gender (women) among non-executive directors of European firms listed on stock exchanges (European Com- mission 2012a). This proposal has ignited the debate about women on the board. While several regulators in Europe, including the European Commission, are adopting legal quotas to put women in directors’ seats, many voices rise against the quotas route. Those in favor of the quota regime argue that introducing quotas is a way to put an end to a damaging and unjustified imbalance (editorial of the news- paper The Independent, 7 May 2013), and to break the glass ceiling that continues to bar female talent from top positions in Europe’s biggest companies (European Commission 2012a). Those against it claim that a quota system could lead to tokenism (Bev Davis, in The Independent 7 May 2013) and undermine women with the sense that you can not get there on merit (Helena Morrissey, CEO of Newton Investment Management, in an interview with Bloomberg 24 May 2011). Most of the arguments in favor of gender diversity on boards rely on the idea that greater representation of women improves firm value. However, academic studies provide mixed conclusions regarding the relationship between women on the board and firm value. Some studies find that firms with gender-diverse boards perform better due to the unique pool of resources and human capital that women bring to the business (Campbell and Mı ´nguez-Vera 2008; H. Isidro (&) ISCTE IUL Instituto Universita ´rio de Lisboa, BRU-IUL, Avenida Forc ¸as Armadas, 1649-026 Lisbon, Portugal e-mail: helena.isidro@iscte.pt M. Sobral Deloitte, Lisbon, Portugal e-mail: marcia_sobral@hotmail.com 123 J Bus Ethics DOI 10.1007/s10551-014-2302-9