Sentry eyes? Women directors and corporate penalties

The ethical role of women directors is the source of increasing scholarly interest. This study investigates the impact of women directors on corporate misconduct using a dataset of U.S. firms listed between 2002 and 2019. It reveals a significantly negative association between women board directors and corporate misconduct. This association is robust to alternate proxies and regression techniques accounting for potential endogeneity. This study finds that an increase in the proportion of women directors by one standard deviation decreases corporate penalties amount by approximately 1.911%. It also notes that the impact of women directors on corporate misconduct is significant when the board has at least three women and is mainly influenced by independent, rather than executive, women directors. Moreover, the relationship between women directors and corporate misconduct is driven by governance quality, external monitoring, and industry nature. Overall, the investigation indicates that the presence of women directors provides ‘sentry eyes’ to corporate boards and reduces corporate misconduct. These findings contribute to the continuing debate on the role of women directors and board diversity and have implications for devising effective corporate governance mechanisms. • Women directors provide ‘sentry eyes’ to help reduce corporate misconduct. • When at least three women are on corporate board, their impact becomes significant. • External monitoring and industry nature signify the sentry role of women directors. • ESG-linked compensation channels the sentry role of women directors.