Newly incorporated companies with one female director have a 27% lower risk of becoming insolvent than comparable firms with all-male boards, according to a team of researchers led by Nick Wilson of Leeds University Business School in the UK and reported in the Harvard Business Review. The effect decreases as the number of female directors rises, suggesting that what matters is diversity rather than the specific number of women on the board. Earlier this year, data developed by a team of researchers at the University of Wisconsin-Milwaukee indicated that companies whose directors include one or more women are 38% less likely to have to restate their financial-performance figures to correct errors than firms with all-male boards. In addition, previous research shows that groups with greater gender diversity generate more-innovative thinking in problem solving.
The new study found that new firms are less likely to face the hazard of insolvency when they have boards with more experienced directors, directors with greater networking relationships, more local directors, more female directors, directors with low levels of recent insolvency experiences and low levels of recent director turnover. Results suggest that the background, experience, networking, gender diversity and composition of new boards are important in determining the trajectory of success or failure of new firms.
The recent research tends to support efforts made during the tenure of Connecticut State Treasurer Denise L. Nappier, who as fiduciary of the Connecticut Retirement Plans and Trust Funds, the state’s pension funds, has advocated for independent directors and gender diversity on boards as part of a comprehensive shareholder activism program aimed at increasing the value of the state’s shares in a range of investments.
The data is also of special relevance to Startup Connecticut, the Connecticut franchise of The Startup America Partnership, which is based on the premise that young companies that grow create jobs. As a core American value, entrepreneurship is “critical to the country’s long term success and it’s time to step up our game,” the website points out. Startup Connecticut’s mission is to “evangelize and celebrate entrepreneurship and innovation” in Connecticut. The most recent Start Up Weekend was held in Storrs in March.
In analyzing the impact of local directors, as compared with those from outside the start-up’s immediate geographic area, the study found that local knowledge local networks and/or relationships reduce insolvency risk. Directors in local networks that have “built trust and loyalty may be receiving more time and support in the surrounding economy. As insolvencies result from unpaid debts, such a local connection may mean that new firm directors face less pressure from creditors and potential insolvency proceedings: they can buy more time from local network members to resolve issues.”