Gender Diversity Study

Companies with at least one woman on their board have outperformed their peers in terms of share price performance in recent years, providing investors with striking evidence that gender diversity is a valuable metric to consider when evaluating investments.

That’s one of the conclusions of “Gender Diversity and the Impact on Corporate Performance,” the latest study from the Credit Suisse Research Institute, which analyzed the performance of close to 2,400 companies with and without women board members from 2005 onward.

Below is an interview with Mary Curtis, director of thematic equity research at Credit Suisse and lead author of the report.

What were the key findings of the Gender Diversity Report?
We found that in a like-for-like comparison, big-cap stocks with at least one woman on the board would have outperformed stocks with no women on the board by 26% over the course of the last 6 years. But, there was a clear split in the performance: when economic growth was relatively robust over 2005 to 2007, there was little difference in performance between stocks with or without women on the board; almost all of the outperformance in our back-test has been delivered post 2008, since the macro environment deteriorated and volatility increased.  In other words, stocks with greater gender diversity generally look defensive: they perform best when markets are falling, they deliver higher average ROEs through the cycle, exhibit less volatility in earnings and typically have lower gearing ratios.

Were there any findings that surprised you?
Stereotyping is one of the key reasons why gender diversity has generally been quite poor. What’s surprising is the degree to which stereotyping influences decisions. We cite two examples in the report:

(1)           Two sets of MBA students given case studies on the performance of a CEO. The case studies were identical in all but one detail: in one the CEO is called John and in the other she is called Jane. The upshot was that the MBA students rated the performance of Jane much more harshly than they did John, despite the fact they had performed in exactly the same way.

(2)           The other example was one highlighted by Malcolm Gladwell in his 2005 book, where a female trombonist attended a blind audition for the Munich Philharmonic Orchestra in 1980. The panel thought that all the candidates that day were men. They were shocked to discover that one was a woman and even more so, that it was the woman who has delivered the best audition. Since blind auditions have become common practice in the US, the ratio of male to female musicians has risen to 50%.

What are some the reasons that women have such a positive effect on corporate performance?
There is no easy answer as to why gender diversity matters. While the facts and data in the study are objective, the interpretation of the results carries more than an element of subjectivity. We outlined several of factors in the report but I found four of them to be most compelling. First, it is a fact of life that nobody wants to look bad in front of a complete stranger. Therefore, in more diverse environments team members tend to make a greater effort ,attention to detail and contributing to a better than average outcome from all the participants in a team in a more diverse environment. In fascinating study, Woolley et al (2010) provided evidence that the collective intelligence of a group was not mostly determined by the average or maximum intelligence of the individuals within the group but was better explained by the style and type of interaction between the group members. Specifically, the authors showed that having women in the group meant the degree of communication within the team improved and the team produced better results.

Secondly, McKinsey and NASA have done various studies on leadership skills and have shown that women are better at delivering certain leadership characteristics, such as mentoring and coaching. These studies support the idea that a degree of gender diversity at the board level would foster a better balance in leadership skills within the company may hold merit.

Third, there is unusually strong consensus within the academic research that a greater number of women on the board improves performance on corporate and social governance metrics.

Finally, and perhaps of greatest interest to investors, stocks with women on board are more likely to have lower levels of gearing than their peer group where there are no women on the board. There is no doubt that lower relative debt levels have been a useful determinant of equity market outperformance over the last four years. Lower gearing has delivered average outperformance of 2.5% per annum over the last 20 years and 6.5% per annum over the last four years (within European listed equities). It is far from a consistent determinant of performance: in periods of rapid economic expansion and equity bull markets low gearing is often an underperforming style. Nevertheless, on average, the style has worked well and the inverse correlation between female management and risk aversion (or debt) is very notable.

Even given this compelling data what do you see as possible barriers to change? And possible solutions to these issues?
Unfortunately there are plenty of hurdles (some, but not all, of which are fairly structural) that are likely to limit female representation on the board or indeed in other senior management positions. These barriers include the so-called “double burden” which refers to the dual role undertaken by working women: one job in the formal workplace and the other managing the household and family. The potential solution is to engineer a working environment that is compatible with family life, which should be to the benefit of all employees, men and women. This is likely to require buy-in from both the public and private sector. From a management perspective, the emphasis on career advancement should be focused on skills, capabilities and results, with less emphasis on time served.

Stereotyping is a major issue for all cultures and extensive academic literature on stereotypes suggests they are generally very slow and fairly difficult to change. However, academics have noted that female leaders were more likely to be accepted within the community if their appointment came after a period of tenure of other female leaders. This highlights the positive impact that establishing role models can have with respect to changing the perception of stereotypes.

We found that the idiosyncratic processes of board appointments are also partially responsible for lower overall levels of female board representation. Senior roles are often filled through networking contacts and to the extent that men seem to be more successful at networking than women limits the ability of women to gain access to such positions. Breaking the cycle basically means changing recruitment processes: widening the net and identifying a balance of candidates from each gender for board level and top management vacancies. The statistics on networking also suggest that organizing events or systems to improve networking opportunities, especially for women, may also help promote greater gender diversity in the workplace in the long run.

Survey data show two particular character traits that are likely to impede professional progress for women namely that women are less confident in their own abilities (on average) and are typically less ambitious. The lesson for employers is to tailor training and development to the different traits of male and female managers. Coaching and mentoring have proved to be the most effective ways of addressing women’s lower confidence and lesser ambition.

For a copy of the report, please click here: “Gender Diversity and Corporate Performance”