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“My study shows that the companies with ‘family friendly’ policies have higher profits,” says a researcher in a Dilbert strip from 1997. Dilbert responds, “Do family policies cause high profits or do high profits simply camouflage the true costs of the policies?”
It’s often thus in social science. Take the question of diversity on corporate boards. There are some intuitive reasons to believe that companies are better off if they consider the widest possible pool of directors and carve out space for different perspectives – in other words, put some people on the board who aren’t white men.
This isn’t necessarily because women and non-white men are smarter, wiser or more diligent, although that may be true. It’s because diverse groups tend to make more sensible decisions. This idea has emerged from the case studies of the psychologist Irving Janis and the psychological experiments of Solomon Asch, and has been explored formally by the complexity scientist Scott Page. Diversity even seems to be good for the Bank of England’s monetary policy committee.
Some studies provide empirical support for the idea that shareholders should want to see more diverse boards. In the Journal of Financial Economics, Renée Adams and Daniel Ferreira found that female directors seemed to provide better oversight, and to inspire their male colleagues to do likewise. In the Financial Review, David Carter, Betty Simkins and W Gary Simpson found a correlation between firm value and diversity on the board. But this raises the Dilbert problem: are these companies well run because their boards are diverse, or do well-run firms decide to appoint diverse boards anyway?
A new study by Alan Gregory and colleagues in the British Journal of Management takes a different tack by looking at how the stock market responds to trades by female company directors. When a director buys stock in his or her own company, that’s probably a good sign: naturally enough, the price of that stock tends to rise almost immediately as investors follow suit. But what if the director is a woman? The study (looking at tens of thousands of trades in UK companies from 1994 to 2006) showed that the stock market reaction was more muted, suggesting that investors didn’t take women’s judgments very seriously.
There are a number of alternative explanations for this. The stock market pays particular attention to executive directors, and to directors’ trades in smaller companies. Women are disproportionately likely to be non-executive directors, and on the boards of larger companies. But whether or not there is a non-sexist explanation for what appears to be a chauvinistic market response, fund managers should be paying more attention to what female directors do.
Why? Because they make more money when they buy shares. On a medium-term timescale, from three months to a year, their trades outperform those of their male counterparts. Far from dismissing the decisions of female directors as noise trading by air-headed tokens of political correctness, investors should follow them more assiduously than they do the men.
This is just one study, and the “women outperform” result, while observed across a variety of time periods, is uncertain enough that it may be a statistical fluke. But it is not a complete surprise: a famous study, “Boys Will Be Boys” by Brad Barber and Terrance Odean, found that men lost money on the stock market relative to women because they traded too often.
The reason for the lack of statistical significance is depressingly simple: there are few female company directors. And, if the attitude of the investment community is anything to go by, that is not about to change.
Tim Harford’s new book, ‘The Undercover Economist Strikes Back’, is published this month by Little, Brown