Corporate governance and strategic personnel management: women on the board and female leadership, CEO overconfidence, layoff decisions - Capital Market Perception and Shareholder Wealth Effects

The present dissertation deals with selected aspects of corporate governance and personnel management and provides an in-depth analysis of capital markets’ perception of these issues and the effects on shareholder wealth. Subjects of the investigation are the role and effects of gender diversity on corporate boards and female leadership, CEO overconfidence and corporate layoff decisions. Chapter 2 offers a comprehensive overview of existing research on the effects of an increased female representation on corporate boards as well as stronger participation of women in leadership on firm performance and thus shareholder wealth. The chapter reviews empirical evidence from 44 studies published between 1996 and 2014. The guiding question of the review is if previous research does provide empirical evidence for economic benefits of increased female representation in top management positions. No uniform picture emerges from almost 20 years of research on the relationship between gender diversity on corporate boards and on TMTs and firm performance. There is no clear trend towards a general economic advantageousness of increased female leadership and performance, the findings are ambiguous. While 15 studies find empirical evidence for a positive relationship, five studies report a negative relationship. Several studies report mixed evidence regarding the relationship (13 studies) and a substantial number of studies cannot establish any link between gender diversity and financial performance (14 studies). A wide variety of different regression models is applied, furthermore events study methodology or interaction analysis. Findings suggest that the relationship between female representation in top management positions and financial firm performance appears to be more complex than originally assumed. The answer to my research question is thus: it depends. Certain boundary conditions and moderating factors appear to influence the relationship. First, performance effects vary between different business sectors. Female representation in top management is associated with better performance if the firm is operating in a complex business environment. Positive effects are observed in particular in the areas of technology and telecommunications. Second, the firm’s strategic orientation is a decisive factor. Firms with a strategic focus on innovation benefit from increased gender diversity in TMTs with regard to performance and firms with a strong growth orientation benefit with respect to productivity. Third, women’s education is a factor of relevance. Performance effects are positive and stronger for female CEOs with a university degree. Fourth, performance effects depend on the quality of a firm’s corporate governance. Gender diversity on the board has a positive impact on the performance of firms that otherwise have weak governance and shareholder rights as intensified monitoring could enhance firm value. Fifth, it needs a critical mass of women in order to realize the potential benefits from increased gender diversity. There is evidence for a curvilinear instead of a simple, linear relationship between gender diversity and firm performance. Although there appears to be no generally applicable rule for the “right” level of gender diversity in upper echelons, critical mass theory gives an indication. The reported evidence on a U-shaped link means that it needs a critical mass of about 30 percent women on the board in order to realize potential benefits stemming from a gender-diverse board. This finding lends support to the statutory gender quotas for supervisory boards at levels between 30 and 40 percent. Against the background of the statutory gender quotas for supervisory boards, chapter 3 analyzes the acceptance level of the quota in firms in German-speaking Europe. It further examines compliance with corporate governance codes’ recommendations and industry’s objectives for the promotion of female leadership. Areas under investigation also include capital markets’ perception of corporate gender diversity initiatives, the major drivers for the development of programs and the perspective on the subject of diversity. For this purpose, an anonymous survey among investor relations professionals in Germany, Switzerland and Austria is conducted, which yields almost 100 analyzable data sets. Findings suggest that staff diversity remains a niche topic for capital markets. Primarily specialized investors and rating agencies with a focus on sustainability, CSR or ESG make inquiries relating to workforce diversity. Accordingly, corporate initiatives for increased gender diversity in executive positions are believed to have no impact on external company valuation by capital market participants. The vast majority of companies does not consider diversity issues under economic aspects but predominantly under aspects of fairness and equality. Most influential external stakeholders driving diversity initiatives are government authorities and regulators, women’s and interest associations and the media. The general acceptance of the quota from investor relations is rather low. Half of the companies have not implemented specific promotion programs for women in leadership and almost two thirds of all surveyed companies have not set any planning targets. Chapter 4 shows the potential adverse effects of failures in corporate governance by the example of CEO overconfidence. Within the scope of a case study, it traces the development of (male) overconfidence on the part of CEO Hans-Martin Rueter with fatal consequences for the firm CONERGY AG, eventually leading to its insolvency. The comprehensive content analysis of press reports, official company documents and analyst reports yields several indicators of optimism and overconfidence. The content analysis of press reports clearly shows that Rueter is portrayed as optimistic and confident. Furthermore, he is described as charismatic, eloquent and persuasive while credible and trustworthy at the same time. Media praise both indicates and will foster overconfidence. Moreover, heightened acquisitiveness in conjunction with large amounts of paid goodwill can be observed. The paid premiums are at least partly attributable to valuation errors and hubris on the part of the bidder. Rueter was presumably overly optimistic about potential synergies and overestimated increases in value. In addition, there are several promoting factors for optimism and overconfidence. The state-funded boom of the German and European solar sector in the first decade of the new millennium led to very successful years for CONERGY. It is most likely that Rueter himself claimed full credit for the organizational successes and it was also credited to him externally, for instance by research analysts. This attribution encourages CEO overconfidence and inter-organizational prestige. A very important source of overconfidence, however, is weak board vigilance. The supervisory board has the decisive duty to monitor and control management’s actions. It should be aware of the potentially serious risks of extreme managerial overconfidence and it must exercise control. The supervisory board, with Rueter’s uncle being Chairman and his brother being a board member, did not effectively constrain the CEO’s excessive expansion. Four major effects of this expansion in combination caused CONERGY’s existential crisis in 2007 and 2008. First, personnel and infrastructure costs rose rapidly due to the newly founded subsidiaries as well as poorly targeted acquisitions. Second, the growing complexity on the organizational level as well as on the technology and product level became hardly manageable. Third, increasing cash requirements and poor working capital management caused precarious shortfalls in liquidity, nearly resulting in insolvency. Finally, CONERGY failed repeatedly in procurement. CONERGY did not recover from the crisis and filed for insolvency in 2013. Chapter 5 provides an analysis of the wealth effects of layoff decisions by banks. Large-scale layoffs are personnel measures that are executed proactively or reactively for various reasons. The effect on stock prices and thus on the shareholders’ equity is examined by applying event study methodology to a sample of 210 layoff announcements issued by banks in Western Europe and the United States between 2004 and 2014. Results refute the thesis of a stakeholder conflict in which several stakeholders are affected, but only shareholders benefit from the staff cuts at the expense of employees. Capital markets on the whole respond to layoff announcements with significant negative abnormal returns in event windows up to eleven days around the announcement date, supporting the declining investment opportunities hypothesis. From the capital markets’ perspective, the announcements of planned redundancies convey negative information about a bank’s current status and also its future prospects including poor investment or growth opportunities or uncertain future cash flows. Banks belong to the financial services industry, their employees are their key source of earnings and their main links to the customers. Capital markets appear to realize and assess the risk associated with the loss of human capital. The detriments associated with the mass layoffs hence weigh more heavily compared with the potential benefits from cost savings. Solely dismissals of employees from the investment banking division are considered as positive by capital markets, most likely owed to the associated reduction of risks and the substantial cost savings due to the high salaries in this division. Furthermore, the negative share price reaction is less pronounced if the planned layoffs are perceived as a proactive measure aiming at reducing costs or increasing efficiency but more pronounced if they are perceived as reactive to adverse market conditions or poor past financial performance. In summary, the results suggest that layoff announcements by banks generally have a decreasing effect on shareholder value. Hence, the owners of the firm in the short term do not benefit from collective dismissals at the expense of employees. In summary, corporate governance and strategic personnel management can impact firm value substantially. This is supported by the evidence provided across the four sections of this dissertation. The effects can be positive or negative. This dissertation shows under which boundary conditions increased gender diversity on corporate boards and in top management teams can but does not necessarily have positive effects on firm value. It also outlines associated potentials for improvement of quality and effectiveness of corporate governance. In contrast, the present work discusses the risks of weak board vigilance, thereby emphasizing the relevance of corporate governance. Failures in monitoring and control through the supervisory board can severely affect firm value. Finally, this dissertation focuses on the personnel measure of layoffs and provides evidence for negative effects on firm value and thus shareholder wealth.