A U.S. Board Study by Institutional Shareholder Services reports that while the U.S. is improving in boardroom gender diversity, it still lags most other large developed markets. Though they’re 47 percent of the workforce, women make up only four percent of board chairs at S&P 1500 companies and 17 percent of key committee chairs (as of 2017).
The slow pace of gender diversity growth in executive positions is at odds with business research that shows that adding women to boardrooms and C-suites is good for business outcomes.
Firms appointing women to top management teams bettered their long-term financial performance through smarter strategic risk-taking, according to research conducted by Texas McCombs Professor David Harrison and Assistant Professor Seung-Hwan Jeong of Georgia State University.
Women bring an average of nearly 10 percent additional distinct skills to boards of directors compared to male directors, finds Professor Laura Starks of Texas McCombs and Assistant Professor Daehyun Kim of the Rotman School of Management. “We show that women who are newly added or are already serving on boards bring unique skills to these boards,” says Starks.
More Diversity, More Information
That prompted Starks and Kim to wonder whether boards were cheating themselves. Earlier theoretical research revealed that expertise diversity makes boards more effective as corporate advisors. Female directors, they suspected, might also enhance boards by adding different and currently missing skills.
The researchers looked at boards in the S&P SmallCap 600, an index of companies with market capitalizations between $400 million and $1.8 billion, which average even fewer female directors than larger firms. Thanks to a recent securities rule that requires companies to list directors’ skills or qualifications, Starks and Kim could categorize each director on 16 areas of expertise.
Not only did they find that new female directors offer more identifiable skills than male directors, women also contributed skills that boards had been lacking. Of 519 new directors appointed between 2011 and 2013, the average woman brought 66 percent more areas of expertise than her male counterparts.
While men were heavier on traditional business abilities like finance and operations, women added talent in areas like risk management, human resources, and sustainability. These are the skills for which today’s boards are hungry, notes Starks. “There’s much more emphasis today on environmental and social issues by corporations than there was even five years ago,” she says.
‘The Market Hates Uncertainty’
Harrison and Jeong, meanwhile, looked at how women operate in C-level roles. It’s the tier at which women are scarcest, as they made up only 3.2 percent of CEOs appointed in 2013 and 2014 in Fortune 500 firms.
Three decades of studies have reached ambiguous and sometimes conflicting conclusions about whether women in high positions help or hurt a company’s performance. To resolve those differences, the researchers analyzed 146 previous papers, teasing out factors that might have influenced their outcomes.
A major factor, they found, was that CEOs have more managerial discretion in some firms — depending on the ownership and size of their company and the country in which it operates. Adjusting for those differences, they found that over time firms with female managers did slightly better than average financially.
In the short term, though, incoming female leadership had the opposite effect. Stock returns did take small but detectable hits just after announcements of women CEOs, but that’s likely due to simple skittishness, not chauvinism. “Women CEOs are rare,” Harrison says. “Almost anything rare is seen as risky and brings a sense of uncertainty. The market hates uncertainty.”
But the qualms of short-term investors could create opportunities for those who are more farsighted: long-term returns were more positive for women-led firms, as were accounting metrics such as return on assets. “I might want to buy just a bit after the announcement of a female CEO, because other folks are selling,” says Harrison. “I can scoop up some stock and, later on, I can watch it rise.”
Promoting ‘Smarter Risk-Taking’
So why does management benefit from including more women? For both studies, a key answer is what Harrison calls “a different set of eyes.”
Data suggest that women’s perspectives tend to challenge unspoken assumptions in decision-making groups dominated by men, leading to better decisions, Harrison explains.
Research shows that women have lower appetites than men for low-yield strategic risks. Firms with women in top jobs scored lower on risky measures such as financial leverage, capital expenditures, and share price volatility. “Having a woman on a team helps to promote smarter risk-taking,” says Jeong.
Women also can bring fresh ideas to boards that are stuck in ruts, says Kim. “Expertise is an important source of professional opinions. Bringing in diversity of expertise is really bringing in diversity of opinions.”
From Boardroom to Ballot Box?
Could the new research have implications for the political arena? Boards don’t reach decisions the same way as legislatures, cautions Starks. They strive for consensus rather than majority rule. Nonetheless, elected bodies can gain from women’s perspectives. “There’s an implication that women are bringing different and needed skills to all parts of life,” she says, “including politics.”
Harrison agrees that business leadership differs from political leadership. Nonetheless, he says, his results mirror countries like India and Israel, which have had strong women leaders.
But like the existing handful of female CEOs, a woman president would have to win over a lot of skeptics, warns Jeong. “As long as there are cultural norms about who conventionally occupies that role,” he says, “having someone who’s unconventional will create more scrutiny.”