Women on boards and corporate social irresponsibility: evidence from a Granger style reverse causality minimisation procedure

We hypothesise bi-directional causality between gender diversity on boards and corporate social irresponsibility (CSI). Firms exposed to CSI incidents are likely to increase their board gender diversity for reputational purposes. Simultaneously, gender diversity adds skills and networks to boards which supports their monitoring function and should reduce CSI incidents. Econometrically, this relationship is plagued with reverse causality. Consequently, we propose a Granger-style reverse causality minimisation procedure. Our procedure involves three steps. Firstly, we regress board diversity (BD) on lagged CSI to separate diversity into two components, one driven by CSI (BDDCS) and another unrelated to CSI (BDUCS), with the latter being the sum of the intercept and the disturbance term. Secondly, we confirm that BDUCS experiences a near-zero correlation to CSI and that a Granger causality F-test for CSI affecting BDUCS is clearly insignificant. Thirdly, we regress CSI on lagged BDUCS, lagged CSI and its interaction term. Applying our procedure to 2,880 US firms between 2007 and 2016, we find that boards with higher diversity, for reasons other than CSI, were significantly better than their lower diversity counterparts in reducing CSI incidents once encountering them. This effect is economically stronger for diversity unrelated to CSI than for overall diversity.