Finance & Markets
underappreciated step that firms can take to encourage financial decision-making that is more prudent and risk-averse. They can appoint a woman to the chief financial officer (CFO) role. According to social psychology research, women’s and men’s attitudes to risk tend to differ. Women are more risk-averse. This could have important implications if it translates into practice. Together with my colleagues, Mohamed Janahi and Georgios Voulgaris, we set out to investigate gender differences in financial decision-making at a senior level in banks. As the CFO tends to have the most influence over the organisation’s financial decision- making, we focused on the CFO role. In the US, for example, they are responsible for preventing the manipulation of financial reports and are accountable for financial reporting quality. At the same time, we chose the reporting of the loan loss provision (LLP) item – the amount set aside by lenders to cover future credit losses – to gauge different attitudes to decision-making. The LLP is the largest single item of accrued liabilities (expenses that have been incurred but not billed for yet). It is an important reporting item in the sense that it affects bank performance and is an indicator of a bank’s risk level. It is also one of the biggest discretionary items on a bank’s balance sheet. Most financial reporting, at least from the outside, is very rule-driven. But when there is a reasonable degree of discretion involved, as with the LLP, it provides an insight into decision- making behaviour. This includes how risk-averse a manager is. By looking at the ‘timeliness’ of the LLP reporting, we can assess
how CFOs exercise their discretion. To what extent does the LLP foreshadow bad news or just reflect what is happening right now? Reporting that is ‘timely’ adopts a broader, more conservative, transparent, and forward-looking approach to stating a bank’s LLP position by incorporating bad loans before they become non-performing. A non-performing loan is one Incorporating bad loans before they reach this stage is a better reflection of a bank’s potential risks in terms of future losses, compared with a more aggressive accounting approach that only incorporates current non-performing loans. Indeed, banks that failed to report LLP in a timely manner before the financial crisis were more likely to fail once it hit. Using data on US banks for the period 2007 to 2016, we were able to examine any potential correlation between the approach to LLP reporting and CFO gender. In total, we looked at 2,760 reporting events from 119 banks with an average size of $107 billion. Our findings show that women CFOs are associated with timelier LLP reporting. We also found a similar but smaller effect linked to gender-diverse boards. Given the low numbers of “Having a female CFO may offer both reputational and cost advantages’’ where interest and principal payments are at least 90 days late or there is good reason to think they will not be repaid.
female CFOs in our dataset, we also applied a more practical test for causality. We did this by looking for changes in the timeliness of LLP reporting when a male CFO was replaced by a female, compared to when they were replaced by another male. The results supported our original findings – appointing a female CFO following a male led to greater timeliness of LLP reporting. Overall, therefore, women CFOs tend to report the LLP in a way that more accurately reflects the riskiness of the loan portfolios. In this regard they adopt a more conservative, more risk-averse, and – given the greater transparency – more ethical approach to major financial decision-making than their male counterparts. This suggests they are less likely to engage in managerial opportunism and accounting fraud, for example. We believe these results can be extended to banks outside the US, firms in the financial sector and, most likely, organisations more generally in the context of major financial decision-making. They are increasingly relevant in situations where accounting provisions allow for greater discretion. The potential implications are wide ranging. Some are quite speculative, some less so. For a start, having a female CFO may offer both reputational and cost advantages. Consider legal regimes where there are onerous obligations relating to directors’ accountability for the accuracy of financial statements, as with the Sarbanes- Oxley Act in the US. It is not difficult to see a situation where directors’ and officers’ liability insurance premiums are discounted for female CFOs, in much the same way as motor
TO THE CORE
1. A study found women CFOs are more likely to report loan loss provision – the amount lenders set aside to cover credit losses – in a timely fashion, reducing the risk of a financial crisis. 2. This suggests that female CFOs adopt a more risk-averse and transparent approach to major financial decisions than their male counterparts, and are less likely to engage in managerial opportunism. 3. Having a female CFO could
benefit a firm’s reputation and even liability insurance premiums. The findings also strengthen the case quotas to increase the number of women executive directors.
W hen a systemic crisis that threatens to destabilise regional and global economies. We discovered this to our cost during the 2008 financial crisis. Even if systemic contagion is averted, reckless risk-taking can lead to fraud, firm failure, investor loss, and substantial economic damage. A raft of regulatory and legislative measures have been imposed to prevent this type of behaviour. However, implementing and financial firms adopt a reckless attitude to risk- taking, it can lead to enforcing these measures at the firm and industry level is costly. Our research shows there is another relatively simple and
insurance is often less expensive for women drivers, especially in a world where algorithms and AI enable highly customised risk pricing. Similarly, in the investing sphere, the risk-averse and ethical approach associated with female CFOs could be factored into environmental, social, and governance (ESG) reporting and assessment. And, in environments or firms where there is low external regulatory control, the presence of a female CFO may help build and maintain a reputation for financial prudence and stability. It is even possible to imagine a time when regulatory and legislative measures are applied differentially, depending on the gender diversity of the board. The findings also lend weight to arguments in favour of quotas for women executive directors or, at a minimum, a greater proportion of women in CFO roles. According to the US Department of Labor, 58.6 per cent of accountants and auditors and 55.8 per cent of financial
managers were female in 2019. Yet very few women become CFOs of major corporations. A study by executive recruitment firm Crist Kolder found just 12.6 per cent of CFOs from the S&P and Fortune 500 firms were women. Our findings strongly suggest firms that do hire women CFOs are likely to benefit from a more prudent and ethical approach to managing the firm’s finances. At the same time, increasing the number of women top executives could drive broader change in the financial sector, improve transparency in corporate decision-making, preserve value for investors, and reduce the likelihood of reckless, risk- taking-induced crises. That is a powerful argument for change.
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