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Mar 20, 2023

The Governance Papers: The cost of sexual harassment, the Gen X board effect – and more

In the first instalment of a new series for Corporate Secretary, Jeff Cossette reports on academic research providing insights for governance professionals

1) The price of sexual harassment
How much does workplace sexual harassment damage company value? Evidence from a new study suggests it’s more than you might think – a lot more.

Until now, researchers have approached the question by measuring the short-term stock market reactions around public revelations of sexual harassment scandals. This line of research documents an immediate shareholder value loss of 0.6 percent to 1.5 percent of market cap.

But the short-run market reaction may vastly understate the cost of sexual harassment. When Canadian researchers measured the pervasiveness of harassment risk by analyzing low-profile employee complaints in online job reviews, they discovered a portfolio made up of the worst performers in their sample of US companies would underperform the benchmark portfolio by about 17 percent. Going forward, these companies also saw significant labor cost increases and dramatic falls in operating profitability relative to companies with the lowest proportion of harassment reviews, the study finds.

‘Financial analysts and investors often undervalue intangibles such as the effect of a toxic work environment,’ says study co-author Shiu-Yik Au, assistant professor of accounting and finance at the University of Manitoba. ‘But [workplace safety] is indicative of all sorts of other underlying issues, including poor control systems and overall bad governance, which can directly impact employee performance, company performance and stock market value.’

So what strategies can prevent harassment and preserve shareholder value (not to mention employee well-being)? In a separate paper, Au and his colleagues find an increase of 10 percent in the number of women on boards – representing about one additional woman – leads to a 22 percent drop in sexual harassment complaints in the following years.

‘Sexual harassment is against the law,’ Au notes. ‘But clearly the law alone is inadequate to solve the problem. For that you need better, more diverse governance.’

2)  The Gen X Effect
Adding Generation X directors to a board boosts company performance, according to a University of New Hampshire study. Sampling US issuers from 2007 to 2017, researchers find companies with at least one Gen X director outperform those without in a variety of ways, including market-to-book ratio (2.016 vs 1.736) and return-on-assets ratio (0.152 vs 0.146). The more Gen X directors, the stronger the effect.

Analysis indicates three channels driving Gen X board members’ ability to impact performance: a predisposition to engage in innovation, value-enhancing ESG activities and the readiness of male Gen X directors to encourage inclusion of women on the board. A comparison with a matched sample of baby boomer directors (in 1996-1997) uncovers no similar link to company value.

‘Our results show an effect unique to Gen X as opposed to simply having younger directors,’ says study co-author Viktoriya Staneva, assistant professor of finance at the University of New Hampshire. ‘The impact is especially strong for companies that invest heavily in R&D.’

3) Market reactions to CEO turnover announcements
Many companies either do not appear to have adequate CEO succession plans or do not communicate those plans to investors, according to the Rock Center for Corporate Governance. But a study of almost 700 CEO turnover cases demonstrates that succession planning disclosure – even in generic form – can significantly mitigate an adverse market reaction to an outperforming CEO’s resignation.

Researchers at Erasmus University Rotterdam say their findings are driven by firms with strong corporate governance. They write: ‘Succession planning disclosure likely relieves investors’ uncertainty about a smooth leadership transition. But our results hold only for companies that announce CEO resignation and successor appointment at the same time. That indicates investors suspect the reliability of the plan in resignation-only cases. Only plans perceived to have been set up by an effective board of directors are considered informative.’

Research roundup

  • Decrying ESG as ‘woke’, the US state of Florida prohibits the participation of some of Wall Street’s largest municipal bond underwriters because of their support for investing strategies using ESG criteria. The result, according to data compiled by Bloomberg, is that Florida now pays almost half a percentage point more than lower-rated California to borrow in the bond market.
  • Japanese companies with female outside directors are more likely to have lower carbon emissions. Researchers say female inside and male outside directors play a more limited role in environmental policies.
  • An analysis of bank performance around the 2007-2008 financial crisis shows those with the most long-tenured independent directors fared better than others. ‘Our findings validate recent policy initiatives supporting the idea that the experience of board members in financial institutions is critical, and that independence is not enough to ensure effective boards,’ study authors write.
  • Companies with more female directors employ comparatively more people and are less likely to engage in significant employee layoffs during periods of economic hardship. Researchers find the lower likelihood of downsizing does not compromise productivity while alleviating the problems associated with understaffing. They conclude: ‘Organizations can do more with more staff, particularly when women influence board decisions.’
  • The total compensation of above-average-looking bank CEOs is around 24 percent higher than that of those with below-average looks. Researchers say their results reflect an ‘attractiveness premium’.
  • An analysis of gender diversity reforms around the world reveals legislation-based regulations are more effective at increasing female representation – and improving CSR performance – than governance code-based directives, especially in countries with common-law legal systems.


Jeff Cossette

A graduate of Carleton University's School of Journalism, Jeff Cossette is a freelance writer who lives in Prince Edward Island with Susie