Gender and business: Women better bosses for investors
Firms led by women appear to a sounder investment
In one study, just over half of companies examined had no women in obvious leadership positions
The case for gender diversity in the boardroom tends to revolve around questions of fairness, but there’s also a strong business case to be made for greater female representation in corporations.
A female influence leads to more profits and better investment returns, and not just when women occupy leadership roles – you can even expect performance to improve if a male boss has more daughters than sons.
According to Does Your Daughter Make You a Better CEO?, a 2015 study which examined the performance of 1,437 chief executives from 1,139 firms, stock markets respond better to acquisitions, debt and equity offerings made by chief executives with more daughters. Chief executives with more daughters are less likely to overpay for target firms, the study found, and stronger profitability is recorded after raising capital. More daughters also result in lower litigation cost and fewer annual lawsuits.
Why? Sociology literature has long showed that when parents have daughters they adopt “more progressive views” on matters such as labour relations, equality, health and the environment, the study notes – an interpretation borne out by other studies examining the impact of daughters on chief executives. A 2011 Danish study, for example, found that male chief executives attempt to reduce the gender pay gap at their companies when they have daughters, while research also shows that firms run by executives with daughters score higher on measures of corporate social responsibility.
That explains the lower litigation costs. As for the findings regarding profitability, the likely explanation is that the daughter parenting experience “makes the CEOs more prudent in deciding corporate policies”. This prudence carries over into chief executives’ personal-finance decisions – executives with more daughters are typically quicker to exercise their stock options than their counterparts. Becoming a parent to a daughter, it seems, results in managers embracing prudence and eschewing excessive risk.
High female representation
The study confined itself to the question of daughters and chief executives, although the obvious implication is surely that companies with high female representation are likely to have a positive influence on chief executives’ behaviour and corporate outcomes in general – an implication borne out by the research.
For example, another recent study, Do Women Stay Out of Trouble?, found that companies with more women in top management roles faced fewer lawsuits, particularly lawsuits related to medical and product liability, the environment and labour matters. No fluke finding, the authors note that their research is consistent with studies indicating that women are more risk-averse and less overconfident than men, as well as being more inclined to comply with rules.
Female chief financial officers appear to have a particularly important role in this regard. One study examining the 1991-2011 period found that firms with female chief financial officers were less likely to be cheat on taxes as well as being more transparent on financial matters in general. Importantly, the researchers found that companies were just as likely to engage in fraud if the chief financial officer was a woman in an otherwise male-dominated board: a board needs to have a “critical mass” of at least 30 per cent female leaders in order to impress on the fraud statistics.
Female chief financial officers are also more likely to produce more readable annual reports, according to a 2014 paper, improving financial transparency by using less complicated words and more detailed numerical information.
Do female-led companies deliver better investment returns for investors? Yes, judging by research carried out last year by Boston-based quantitative firm Quantopian. It found that between 2002 and 2014 a portfolio of Fortune 1,000 firms with female chief executives delivered returns triple that of the S&P 500.
Although those results seem dramatic, some obvious caveats apply. Firstly, it may be that in a male-dominated world only the very best women – “the cream of the crop”, as Quantopian’s Karen Rubin put it – ascend to the top. Secondly, the relatively small sample size – women headed only 80 firms in that period – means the results may be unreliable and driven by outliers.
However, investors appreciate profits, and more detailed research confirms that companies with high degrees of female representation deliver just that. A 2014 Credit Suisse report which examined the performance of 3,000 companies in 40 countries found that firms with more women in top management positions had delivered much higher returns on equity than companies with low female representation over the previous decade. Dividend payouts were also much higher, while stock returns in large-cap global companies were 36 per cent higher over the period than that seen in companies with little female representation.
These findings were echoed in a study issued earlier this year by the Peterson Institute for International Economics and Ernst & Young. Analysing results from 21,980 global companies in 91 countries, it found that companies with at least 30 per cent of women in leadership positions reported much higher net profit margins.
Nevertheless, the study made clear that companies have been slow to embrace the case for greater gender diversity in the workplace. More than 60 per cent of companies had no female board members; just over half had no women in obvious leadership positions; just 4.5 per cent had female chief executives; and a paltry 3.8 per cent of board chairs were female.
Many factors account for this continuing under-representation, although it would be naive to think old-fashioned sexism is not one of them, as indicated by a 2012 US study which showed a prospectus for an initial public offering (IPO) to 222 MBA students. The students, 45 of whom were women, were divided into two groups that received the same prospectus with one crucial difference – in one prospectus, the company was headed by a man, while the second prospectus featured a woman chief executive.
The results were unambiguous: the recommended percentage to invest in the IPO was almost four times higher for firms with male chief executives than for those with female chief executives. When asked to estimate a share price for the IPO, the male-led firm received valuations 11 per cent higher than their female-led counterpart. “Despite identical personal qualifications and firm financials, female founder/chief executives were perceived as less capable than their male counterparts, and IPOs led by female founder/ CEOs were considered less attractive investments,” the researchers concluded.
Other studies confirm that investors continue to engage in unfortunate gender stereotyping. For example, a 2015 study found that a female chief executive who “talked disproportionately longer than others” in a workplace setting was rated by both men and women as “significantly less competent and less suitable for leadership than a male CEO who talked for an equivalent amount of time”. Research also shows that a company’s stock price drops following the announcement of a female chief executive, with no such reaction seen when a male chief executive is appointed.
The irony is obvious, given that women- led companies appear to be better-run firms characterised by more profitability, more transparency and less litigation. Appealing to executives’ sense of fair play will often fall on deaf ears; appealing to their self-interest by making the business case for greater gender diversity in the boardroom may be a better option.