When looking to invest in a company, you can look at a countless number of indicators that might predict good financial results.
There are sales figures and profits, the quality of product lines, and even the skill set of the company’s workforce. But there’s one key component that some might overlook: the gender of those in charge.
- When deciding which companies to invest in, have a look at the number of women in executive roles at those companies.
- Numerous studies in recent years have shown that women in executive positions can have a positive impact on a company's bottom line.
- While the exact reasons haven't been pinpointed, it's speculated that companies that are doing well are more likely to hire women for c-level positions and that women who obtain these roles are among the most talented employees.
A Woman's Impact
According to a number of studies in recent years, there is increasing evidence that women in executive positions and on corporate boards can have a positive impact on a company’s performance. A more diverse C-suite, these studies conclude, is connected to higher margins, bigger profits, and better total return to shareholders.
“We find clear evidence that companies with a higher proportion of women in decision-making roles continue to generate higher returns on equity, while running more conservative balance sheets,” according to a 2016 report from Credit Suisse. “In fact, where women account for the majority in the top management, the businesses show superior sales growth, high cash flow returns on investments and lower leverage.”
The Gender Gap
Despite this, there is still a relative shortage of women in key business positions. As of February 2021, just 40 of Fortune 500 companies had female CEOs. That’s up only eight women since 2017.
What does research say about the impact of women in management positions?
- The Credit Suisse report showed a correlation between the number of women in management positions and the average annual return of the company. Companies with 25% female participation had an annualized return of 22.8% over five years, while those with over one-third of women in management had a 25.6% annual return. That compares to an 11.7% return for the average company during that period.
- A study from consultant McKinsey and Co. in partnership with the Women’s Forum for the Economy and Society noted that companies with a higher percentage of women in top management have better financial performance.
- A study of 89 European companies over a three-year period saw 64% share price growth among companies with gender-diverse management teams, compared to an industry average of 47%.
- A review of 353 Fortune 500 companies by the non-profit group Catalyst showed that companies with high representations of women in their senior leadership teams had a 35% higher return on equity and 34% higher total shareholder return than male-dominated firms.
- The differences were particularly stark in the consumer discretionary, consumer staples, and financial services industries.
- A study by major Finnish bank Nordea analyzed 11,000 companies and revealed that companies with a female CEO or head of the board of directors had a 25% annualized return over eight years, compared to 11% for the broader worldwide index of firms.
- A study by the Peterson Institute for International Economics suggested that a 30% share of women in corporate leadership positions was associated with a 1% increase in the net margin—equivalent to a 15% rise in profitability.
- The University of California-Davis reported that the top 25 California companies with the highest percentage of women executives and board members saw a 74% higher return on assets and equity than the broader set of companies surveyed. This included companies such as Williams-Sonoma, TiVo, and Skechers.
Why It's Important
Why does gender diversity in the C-suite seem to make a difference in a company’s performance? The causation is not entirely clear, though most studies agree that introducing new voices into management roles can bring a fresh perspective and that women executives have access to different pipelines of qualified employees. The studies also note that because women often have a harder path to management roles, those that do arrive there are among the most talented.
Nordea speculated that companies who are already doing well may be more willing to hire a female executive, while struggling companies may prefer to make the “safe” choice and hire a man. But, Nordea said, “It could also be that women are better managers. Women may also be more careful in their projections than men so that when they actually deliver on what they promise, it has a positive effect on the share price.”
Obviously, the gender of executives in the C-suite and boardroom should not be the only factor to consider when looking to invest in a company. But there is ample evidence to suggest that it can play a positive role in boosting corporate performance and potentially put more money in the pocket of shareholders.