Female board directors help curb overconfidence of male CEOs, study finds

When female board members are present, male CEO tend to exhibit less overconfidence, according to a study published in the Journal of Empirical Finance

For the study, European researchers examined data from 1,629 U.S. firms on their CEOs and boards, according to an accompanying Harvard Business Review article on the study. During the study period, 1998 to 2013, researchers found men were disproportionately represented among CEOs and board members. The study authors looked at whether CEOs were less likely to act overconfident when female board leaders were present and how their presence may have affected corporate decisions and performance.

The researchers found male CEOs with women on their company boards are less likely to hold options when exercising them would lead to profits, in comparison to male CEOs at companies without female directors, according to HBR. The researchers used holding or exercising options to study overconfidence as the choice is a personal one made by the CEO and "likely to reveal a CEO’s individual beliefs and confidence about the company," they said. 

Interestingly, female directors had a larger effect on male CEOs in industries where overconfidence is more prevalent, like pharmaceuticals, computer software, coal and construction, the researchers noted. During times of crisis, companies with female directors saw their performance drop by a smaller amount than those without. 

"One benefit of having female directors on the board is a greater diversity of viewpoints, which is purported to improve the quality of board deliberations, especially when complex issues are involved, because different perspectives can increase the amount of information available," the researchers wrote for HBR. "So a board with female directors might be more likely to challenge the CEO and push him to consider a wider range of options, as well as pros and cons, when making strategic firm decisions. This could then attenuate CEO overconfidence and correct for potentially biased beliefs."

Read the full HBR article here.

Read the full study here.

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