Elizabeth Holmes Is the Exception: More Women on Boards Lead to Less Corporate Wrongdoing

The so-called “opportunity theory” suggests that women are statistically underrepresented in white-collar offenses because they are underrepresented in higher corporate echelons. A forthcoming paper refutes that theory, providing empirical evidence of the positive effects that gender balancing in the boardroom can have on corporate behavior.

Theranos founder Elizabeth Holmes was found guilty last month of fraud by a jury in United States District Court for the Northern District of California in San Jose. One of the least discussed side-effects of Holmes’s downfall was the negative spillover on women in corporate leadership positions. Female entrepreneurs reported difficulties gaining the trust of financiers and attributed their suspiciousness to the looming shadow of Holmes’s high-profile crash. 

The share of women-led unicorn startups is already minuscule, less than two percent. Simply put, Holmes increased the cost of raising capital for women in the corporate world and for women-led projects. This is a regrettable result. In a forthcoming research project titled “Gender and Corporate Crime: Do Women on the Board Reduce Corporate Bad Behavior?”, we find that Holmes was the exception rather than the rule.

Holmes seems to prove the so called “opportunity theory,” a canonical theory in the study of female white-collar offending. According to the opportunity theory, the reason women are statistically underrepresented in white-collar offenses has to do with the fact that they are underrepresented in higher corporate echelons. If women make up only slightly more than 20 percent of the members of boards of directors in S&P 500 companies and hold even fewer chair or CEO positions, they have less access to information and to decision-making processes, they don’t have a supporting network of conspirators, and they have fewer opportunities to engage in massive investor fraud. Accordingly, the opportunity theory suggests that increasing female representation among companies’ top brass will result in more female white-collar offending. 

Considering the relatively low representation of women in top corporate positions, it comes as no surprise that women are less involved in white-collar crimes. In fact, though, empirical data on female participation in white-collar offending is quite scarce. A study of 1,342 defendants who were convicted of white-collar offenses in US federal district courts during the late 1970s found that only 14 percent of them were female. Studies from the 2000s in the United States have found that the percentage of women’s participation in white-collar crime was around 22 percent.

Studies have shown that self-control, empathy, social involvement, integrity, and fairness characterize female executives more than their male counterparts. Women place greater emphasis on ethics and morality in management than men do and use their managerial power to promote social responsibility. Criminology studies reveal that women who do engage in white-collar crime have very different motivations than men, and women commit different types of white-collar offenses than men do. For example, women will be more involved in crimes like embezzlement and less involved in crimes like fraud. A possible explanation for this is that women’s criminal motivation relates to a need to care for others, such as a distressed family, not to benefit themselves.

Our forthcoming study refutes the opportunity theory.It provides empirical evidence of the positive effects on corporate behavior of gender balancing in the boardroom. We examined 660 public corporations listed on the Tel Aviv Stock Exchange (TASE) between 2005 and 2017. During that period, the corporations or their top executives were involved in a total of 149 criminal or administrative violations of the law. Our analysis shows that corporations with a higher representation of women on the board were significantly less likely to be involved in corporate wrongdoing. Depending on the model we used, every one percent increase in female representation on the board was associated with at least a four percent decrease in the probability that the corporation will be associated with a violation of the law. 

In other words, although more women had access to corporate information and the opportunity to engage in or facilitate the commission of corporate crime, the opposite occurred. 

Our analysis uses an external statutory intervention: the introduction in 2011 of a mandatory appointment of at least one female to the board of directors in public corporations listed on TASE. This is a relatively soft intervention because it comes with no meaningful sanction for noncompliance. In comparison, tougher rules were imposed by the by the state of California in 2018, and by Nasdaq, which imposed an “appoint or explain why not” requirement in 2021. California Senate Bill 826 (2018) requires that every national and foreign company headquartered in the state with a listing on a major US stock exchange have at least one female director on its board, or two females on boards with five members; three female directors must be appointed to boards with six or more members. The penalty for noncompliance may reach $900,000 annually. Nasdaq Stock Market rules 5605(f) (“Diversity Board Representation”) and 5606 (“Board Diversity Disclosure”), approved by the Securities and Exchange Commission in 2021, require listed companies with fewer than five board members to appoint one diversity member and companies with more directors must appoint two. Noncompliance may lead to delisting. 

The debate regarding mandatory quotas is ongoing: California’s legislation is subject to constitutional challenges in courts. The Nasdaq rules are the subject of academic criticism.   

Our study shows (see figure) that a soft mandatory quota will have an effect on the number of diversity directors but will not affect the annual rate of change in the process of gender balancing. The data show a significant increase in the representation of females on the boards of Israeli public corporations since the quota was passed or around the time of its enactment. The percentage of women on the board of directors jumped significantly from 18.6 percent in the year up to its passage to 21.36 percent in the year following its passage, almost ten percent. 

However, the mandatory quota did not have a significant effect on the upward slope of change in the rate of advancing gender equality. The average annual rate of increase in the proportion of women on boards from 2005 to 2010 was 1.32 percent, and after the the mandatory quota was introduced (from 2011 to 2017) it increased only to an average of 1.47 percent, which is not significant. This suggests that nudge-like quotas have a weak influence on the embedded social and cultural perceptions.

These are important findings because corporations are supposed to operate within the confines of the law, and so are their executives. The role of boards is to monitor the activities of management, including legal compliance. Studies show that women tend to be better monitors than men. This may be because women have a different ethical approach to decision-making or because their low representation makes them critical outsiders by default. Either way, better monitoring reduces corporate social harms and increases corporate social responsibility. 

Most corporations in the United States still suffer from severe underrepresentation of women and other minority groups. The effort to increase boardroom diversity in general and gender parity in particular is likely to be a net social benefit. 

Disclosure: The authors are professors with expertise in corporate law, economics, gender studies and criminal law. This essay is based on our research project on gender and corporate crime conducted with the generous support of the Rina and Meir Heth Center for Competition and Regulation and the Emile Zola Chair for Human Rights, both at the College of Management, Israel. 

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