Diversity at the top pays dividends

Companies with more female leaders do better, but are these women the cause of the success?
Gender gains: the corporate benefits of female leaders are hard to ignore

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Does the gender of executives make a difference to business performance? The evidence is mounting that it does.

McKinsey, the management consultancy, has published research showing that mixed-gender boards outperform all-male boards. Separate studies found a positive relationship between the diversity of executive boards and returns on assets and investments among Fortune-listed US companies.

Sodexo, the outsourcing company, even has data that suggest global companies in which women make up at least a third of board members achieve “far higher profit margins” than rivals with fewer women on their boards.

Theories about why more gender-balanced companies perform better smack of common sense. “If 50 per cent of the world’s population is facing barriers to reaching top jobs, that is huge untapped potential businesses are missing out on,” says Francesca Lagerberg, global leader for tax services at Grant Thornton.

Understanding this to be true is easy. Proving it, however, is difficult.

If companies with a significant number of women in senior leadership roles perform better than those without (see below), there are no studies that definitively show female management to be the cause.

This uncertainty in turn is undermining progress towards gender equality, according to some HR executives and researchers.

Ms Lagerberg for example acknowledges that “correlation does not necessarily mean causation.” But at the same time, she says, “the growing body of compelling research linking corporate performance to having female leaders is unlikely to be a coincidence”.

The absence of explicit proof of cause and effect is a red herring, argues Linda Eling-Lee, head of environmental, social and governance research at MSCI, investment portfolio analysts which recently conducted a gender-analysis of 1,621 global companies across 24 countries.

“There are actually very few causal links that you can make in any type of social science, let alone financial performance in business,” she says. “I think that people who are sceptical of the premise will be sceptical regardless.”

Investors are already starting to pick up on the idea that diversity brings dividends, says Ms Eling-Lee, who explains that MSCI’s gender-analysis was “driven by institutional investors who are interested in understanding if there is something to be gained [in looking at diversity] from an investment perspective”.

“It is not so much that the firms that are gender diverse do better, it’s that the firms that aren’t gender diverse do worse, because they are impeding themselves.” MSCI found that the return on equity in companies with greater diversity at the top “was really significantly higher”. “That was a fairly stark result . . . and investors are interested,” says Ms Eling-Lee. “In this more dynamic and competitive world you need a fuller range of experiences and perspectives at the very top of the company.”

Looking at the numbers by sector tells a similar story about the benefits of diversity. The accounting firm Rothstein Kass in 2012 found that hedge funds run by women outperformed hedge funds led by men. Among the top 500 mining companies, earnings per share were 13 times higher at those with women on their board, than at those without, PwC reported last year.

Mary Barra, a rare woman at the top of the automotive industry, says she was given the chance to work her way up to becoming General Motors’ chief executive because “20 years ago at GM people valued diversity”.

She says that “when you want to hire someone to get the job done . . . you should pick people not like you to create that diversity, which will be across gender and across cultures and across experiences.”

Marcus Noland, executive vice-president and director of studies at the Peterson Institute for International Economics, says evidence that gender diversity makes business sense is not hard to find.

He points to the example of a multinational baby formula company that only recently ended its decades long history of men running the marketing department for a product bought mainly by women.

“If a firm is not advancing smart, talented, ambitious employees, and one of its rivals is, then the rival is going to outperform,” Mr Noland maintains.

Carolyn Fairbairn, director-general of the CBI, the British employers group, believes developing more female leaders “will make a real difference to the success of the UK economy, our productivity and the UK’s future place in the world. “People of different genders, from different parts of the world, and of different lifestyles, ages, sexuality, religion, physical and mental health capabilities enable better business decisions,” she said in a recent speech.

So does the gender mix of top executives really make a difference to business performance?

Yes, but as Ms Fairbairn, who has occupied both executive and non-executive roles, points out, women form just one part of the diversity needed for corporate success.

Room at the top: Execs or non-execs?

The appointment of women to senior management roles has a greater impact on an organisation’s financial performance than their appointment as non-executive directors.

This is the finding of research by the Peterson Institute for International Economics, and it comes despite the focus on women in corporate boardrooms driven by Lord Davies’ review of women on boards in the UK and the Thirty Percent Coalition in the US.

Marcus Noland, the report co-author, says: “With respect to women on the board, evidence is mixed. But the data on women at C-suite level is much more robust and solid — we can torture that data any way you want and still get the same answer. For the sample as a whole, firms with more women can expect a 6 percentage point increase in net profit.”

This, says Mr Noland, points to the importance of establishing “a pipeline” of female managers and leaders in a company, rather than adding female non-execs at the top and hoping for an immediate effect.

Carolyn Fairbairn, director-general of the UK’s Confederation of British Industry, backed this view in a speech in January, saying: “Non-executive directors and even chairmen attend between four and 10 board meetings a year . . . [But] it is the job of executives to take daily decisions, shape and define strategy, and influence culture through the everyday examples that they set.”

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