by Cydney Posner

So says a new study from the Peterson Institute for International Economics.  The results suggest that the presence of women in corporate leadership positions may improve firm performance and that “the magnitudes of the correlations are not small.”

The study looked at 21,980 firms headquartered in 91 countries. According to the paper, almost 60% have no female board members, just over half have no female “C-suite” executives and less than 5% have a female CEO.

Sidebar: In the U.S., boards are still largely “pale, male and stale”;  according to this Bloomberg QuickTake, women make up less than  20% of directors of S&P 500 companies, and growth in female representation has slowed. (See this PubCo post.)

The results of the study indicate that the presence of more women on corporate boards and in executive positions contributes to firm performance: “for profitable firms, a move from no female leaders to 30 percent representation is associated with a 15 percent increase in the net revenue margin.” As the study explains in more detail:

“For example, a profitable firm at which 30 percent of leaders are women could expect to add more than 1 percentage point to its net margin compared with an otherwise similar firm with no female leaders. By way of comparison, the typical profitable firm in our sample had a net profit margin of 6.4 percent, so a 1 percentage point increase represents a 15 percent boost to profitability. When considering a broader set of firms, both profitable and unprofitable, the result is even more striking. For the sample as a whole, the firm with more women can expect a 6 percentage point increase in net profit, while overall median net profit was just over 3 percent. One wonders if similar results would be obtained if one analyzed the organizational ranks below the C-suite. These results, together with the finding that quotas do not appear to have a significant impact on firm performance, suggest that although the boards of publicly traded firms are an easy target for legislators, the payoffs for policies that facilitate women rising through the corporate ranks more broadly might be larger. More women on corporate boards might be a way of promoting that outcome: Statistically, there is a correlation between the presence of women on boards and the presence of women in executive ranks. A more gender-balanced board might show greater interest in encouraging a more balanced executive team.”

According to the study, the proportion of female executives made the most significant contribution, followed by the proportion of female board members.  Surprisingly, having a female CEO “has no noticeable effect on firm performance.”  The authors maintain that this “pattern underscores the importance of creating a pipeline of female managers and not simply getting lone women to the top. The positive correlation between the proportion of women in corporate leadership and firm profitability could reflect the existence of discrimination against women executives (which gives non-discriminating firms an edge) or the fact that the presence of women contributes to skill diversity (to the benefit of the firm).”

The study also identified 14 countries that have enacted gender equity quota laws, mostly in Europe, but also including India, Kenya and Malaysia. However, the study found “no evidence that the female board quotas…have had an impact, for good or ill, though the statistical analysis may be too crude to detect such effects.”

No one is talking about anything nearly that dramatic here.  In November, SEC Chair Mary Jo White contended that, “[w]hile quotas are not the path we follow in the United States, the target goal of a minimum of 40 percent women on the boards of all Fortune 1000 and S&P 500 companies by 2025 set by the Women’s Forum of New York is within reach and an imperative. But it will not be easy.”  In January, at the Securities Regulation Institute in San Diego, White  noted the importance of board diversity and the numerous studies showing that it provides value, “yet the numbers [on boards] really are not bearing that out in most companies. I think on the gender side, it’s 16 percent women [on public boards] and I think GAO just put out a study in December saying that it’d take about four decades to get parity if you had an equal number of men and women, for example appointed to boards. I don’t think it’s a want of supply either. I think there are plenty of highly qualified diverse candidates.”

Although the SEC does not mandate board composition, it does “have disclosure rules on directors and their experiences and backgrounds and diversity. Those rules have been the subject of some conversation as to whether they are strong enough, whether they really are giving [enough useful information to] investors who are interested, and many are, in the racial, ethnic, and gender diversity of boards. They don’t require that disclosure. What they require is if a board considers diversity, say so and how, if it does. If you have a policy on a diversity as you’re locating and nominating directors how is that implemented and how do you judge its effectiveness? In that rule we don’t have a definition of diversity because obviously diversity can mean a lot of things. In addition to gender, race, ethnicity, all kinds of qualifications, rightly so, fit into that concept.”

But that nebulous approach may soon be coming to an end.  White noted that the SEC has received “a number of petitions pending that raise the issue of — wouldn’t this be more meaningful if you actually defined diversity in your rule, SEC, to at least include ethnicity, race, and gender, in addition to whatever other qualities, fall under that category and require disclosure of those facts.” White agreed that those concerns were “well-founded,” and she has asked the staff to study the issue “with an eye towards — with these concerns that I share, whether we need additional guidance or rulemaking.” 

In addition, The Washington Post reports that Rep. Carolyn Maloney (D-N.Y.) said  earlier this year that she plans to introduce new legislation about board diversity modeled on policies in Canada and Australia.  Apparently, Australia’s disclosure policy has been effective: the percentage of women on corporate boards there has jumped from 10.7% in 2010, when the policy was adopted, to 17.3% in 2015, according to Catalyst.  The article reports that an “early draft of the legislation would require companies to share statistics on their boards’ gender composition in their proxies, disclose their strategies in place to improve those numbers, and direct the SEC to recommend strategies for increasing gender diversity. Her proposal would also have companies explain why if they’re not complying. ‘Requiring an explanation is so important — it forces them to think about it’ Maloney said in an interview with The Washington Post. ‘We should be nudging them along and giving those who are working to enhance the presence of women on boards a gold star.’”  Maloney also shared her concerns in a letter to White.  In her view, she told the Post, “it’s huge that investors want to know the numbers. If investors want to know this information, why not give it to them?” The draft legislation does not include a voluntary target, but Maloney indicated that she “plans to consult with a range of stakeholders in coming weeks to get their views about whether it would be appropriate to include one. She does not support the idea of quotas.” While commentators quoted in the article were skeptical about the odds of passage of legislation of this type, other commentators were more optimistic: “It does raise awareness of the issue….She’s going to raise that on the floor of the Congress. I don’t know how they will ultimately dispose of her proposal, but public awareness and education helps build public pressure to do the right thing.”

Posted by Cydney Posner