There’s been a lot written about the benefits of board gender diversity, but this article from the Harvard Business Review, Adding Women to the C-Suite Changes How Companies Think, reports on a study by three academics of the impact of adding women to the C-Suite—not just whether the businesses performed better, but why they performed better. In other words, “[w]hat are the specific mechanisms that drive the positive business outcomes associated with increasing the number of women in the C-suite?” According to the authors, much past research has revealed that companies with more women executives “are more profitable, more socially responsible, and provide safer, higher-quality customer experiences.” But why is that the case? To find out, the authors looked at a narrower question of how the addition of women to top management teams changes companies’ “strategic approach to innovation”?  The authors conclude that the addition of women executives to the management team brought more than “new perspectives”—they “actually shift how the C-suite thinks about innovation, ultimately enabling these firms to consider a wider variety of strategies for creating value.”

In their study, to determine the nature of any shift in strategy, the authors looked at 13 years of information for 163 multinational companies, examining their appointments of male and female executives, their R&D expenses, the incidence of M&A transactions and letters to shareholders.  All of the companies in the study were “actively involved in activities associated with strategic innovation (e.g., technology-based M&A and internal R&D).” To reduce the possibility that the authors were simply observing trends already in motion, all of the authors’ measurements were conducted both before and a year after the women were added to the executive team. The authors also controlled for other factors to isolate the effects of adding women to the executive team.

After the appointment of women executives, the authors identified these changes in firms’ strategic approaches:

More open to change, less open to risk.The first change the authors identified was that companies “became both more open to change and less risk-seeking. In other words, these organizations increasingly embraced transformation while seeking to reduce the risks associated with it.” How did authors determine that? The authors used linguistic analysis to study company communications issued by top management before and after the appointment of women executives, employing a standard methodology used for categorization of words. After women joined the executive team, the authors found that the incidence of words that reflected  a “propensity for risk-taking” decreased by 14%, while the incidence of words indicating “openness to change” increased by 10%.  The authors contend that this shift in the mindset of the executive team affected the team’s thinking—not in the sense that the women contributed “specific new ideas,” but rather by making the management team as a group “more open to change and less comfortable with risk-taking, “ which “was reflected in tangible changes to how these firms made key strategic decisions.”

Change in focus from M&A to R&D. The authors found that, as a result of the companies’ increased reluctance to take on risk, their strategy shifted from a focus on M&A, which the authors characterized as a “knowledge-buying strategy,” toward a focus on R&D, which the authors characterized as a more collaborative “knowledge-building strategy.” The authors evidence showed that, when the team experienced a “one standard deviation increase in propensity for risk-taking, the likelihood of doing an additional M&A the following year increased, on average, by 10%,” but more aversion to risk-taking led to significantly less M&A activity. After women joined the executive teams, companies averaged a 1.1% increase in R&D investment, which the authors characterized as a substantial increase in light of the average total R&D investment of these companies.

More impact if women well-integrated.The authors report that the better women were integrated into the executive team, the greater their impact.  This effect was especially evident where there were already other women on the team and where the new women executives were part of a smaller group of new appointees.  Interestingly, the authors found that adding women executives to the team “only actually changed C-suite thinking in cases where the executive team already had at least one woman.”

Why did the inclusion of women executives have these effects?  The authors suggested several possible explanations based on prior research.  To advance to the highest management levels, the authors theorized, many women must “walk a difficult tightrope” that requires them to “carefully weigh the benefits of their innovative proposals with the risks of potential failure. Based on this common experience, one could expect [executive teams] to become more focused on balancing innovation with risk mitigation as more women join their ranks.”  The authors also suggested, based on prior research, that women executives are “likely to care less about tradition and are more open to challenging the status quo than their male counterparts. Behavioral psychology has found that these sorts of attitudes fundamentally increase others’ receptiveness to change.” Past studies also suggested that women were “on average more risk-averse….When an individual who seems more risk-averse enters a group, research has found that it can cause other group members to believe that the group as a whole is more risk-averse than it actually is, which can in turn lead everyone to become less open to risk.” Finally, prior studies indicated that “having more diverse perspectives… can make a group more open to change, and more likely to see change as feasible,” while the breadth of opinions can slow the decision-making process, decreasing the chances of rash decisions.  As a result, the authors suggested, these shifts in approach could be “simply the direct result of increasing diversity” on the management team.

Although these patterns are not necessarily applicable in every circumstance, the authors contended that their study provided insight into the “broader impact of gender equity in the C-suite,” beyond simply a focus on a female CEO. In addition, they believed that they would “see similar findings for members of other underrepresented groups, such as racial and ethnic minorities.”

Posted by Cydney Posner