Greater gender diversity in companies’ management coincides with improved corporate financial performance and higher stock market valuations. A new Credit Suisse Research Institute study presents the financial evidence, looks at which regions and sectors show higher diversity levels and analyzes the obstacles to female participation in the workplace.
Enhanced female participation in management positions should not be seen as “nice-to-have” or a necessary box ticking exercise imposed to satisfy quotas. More women in senior management positions improves companies’ financial performance and makes a difference for investors in terms of equity market returns, according to a new Credit Suisse Research Institute study entitled “The CS Gender 3000: Women in Senior Management”. “The research, which expands on an initial 2012 study, provides striking evidence: higher returns on equity, higher price/book valuations and higher payout ratios,” said Stefano Natella, Head of Global Equity Research at Credit Suisse’s Investment Banking division. “We also found that greater diversity, along with female CEOs, tend to mean higher leverage, in stark contrast to the generally accepted association of women and financial conservatism,” he said. Does this mean that better companies hire more women, or that women chose to work for more successful companies, or that women themselves help improve companies’ performance? The most likely answer is probably a combination of the three. While the statistical findings highlighted in the report suggest that diversity does coincide with improved corporate financial performance and higher stock market valuations, Credit Suisse acknowledges that it is not able to answer the causality question and this is an important limitation to the observations made in the study.
The “Gender 3000”
The study is based on the “Credit Suisse Gender 3000” database, which the researchers developed by mapping the board structures and senior management of more than 3,000 companies worldwide. It composed of more than 28,000 senior managers, of which nearly 3,700 were women. The results showed that since the beginning of 2012 until June 2014, large companies with a market capitalization exceeding 10 billion US dollars and with at least one woman on the board have outperformed by 5 percent on a sector neutral basis. When expanding the period back to 2005, in order to include the market volatility incurred during the financial crisis, this amounts to a compound excess return of 3.3 percent. When companies with a market capitalization below 10 billion dollars are included, the outperformance is less marked with an annual return of around 2.5 percent. The return on equity (RoE) of firms with women on their boards is also higher than those without, signaling premium returns. The reward for these higher returns is in then reflected in the valuations of these companies: higher price to book values (P/BV). A higher P/BV ratio implies that investors expect the management to create more value from the existing assets. Furthermore, the proportion of earnings paid out as dividends to shareholders (the payout ratio) is also higher at firms with more than 10 percent of women in their top management compared to those with fewer. And, in terms of mergers and acquisitions, female CEOs tend to acquire less and divest more operations than their male counterparts.
Regional Rather Than Sector Differences
The financial evidence is compelling, and the good news is that board diversity is progressing slowly in almost every country and sector, with women making up 12.7 percent of the boards analyzed at the end of 2013, up from 9.6 percent in 2010. Regional differences are more striking than those seen at sector level, with North America and Europe showing the highest female participation in their companies’ senior management, followed by Asia. Latin America has the lowest female participation rate. At sector level, media and real estate both have more than 20 percent of women in senior management positions, while the automotive, capital goods and technology (hardware) sectors report the lowest proportion. Another interesting finding is the positive correlation between market capitalization and the number of women at the top. As companies become more global in their client base and management, the sector pull may force cultural change. The study suggests that the development of new sectors and industries should also speed up this process, as they are less prone to preconceived ideas. But what can and should be done to improve the situation faster?
Imposing gender quotes is not the right way, according to the report. Since 2006, Norway has applied a law requiring that females occupy at least 40 percent of listed companies’ board seats. The firms most impacted by this law have since seen their firm value (measured as total market value over total asset value) drop by more than 12 percent for every 10 percent increase in female board members. “It seems that the market believed the companies were constrained in their ability to appoint the most qualified candidates to their boards,” said Natella. “Our concern is that governments, rather than taking board initiatives as a first step, will fail to push through additional progress, resting on the progress made. Also, male-led management teams who hit their quota may then believe that all gender issues are solved and ignore the substantially larger problems they have in gaps in female representation throughout their management structure.” The report suggests that regulators should demand that all publicly traded companies disclose gender data and policies in their financial reporting.
There appear to be four categories of obstacles to achieving greater gender diversity: natural sector biases, cultural biases, workplace-related biases and structural/policy issues. The natural sector bias and cultural issues appear to be the more challenging to overcome. Even though women outnumber men at most universities, the global average of women in senior management positions remains flat. One explanation is that few women graduate in the crucial STEM subjects (science, technology, engineering and mathematics) and those who do often leave these sectors after graduation, resulting in a chronic under-representation in sectors such as mining, oil & gas and engineering. Cultural biases such as stereotyping and the perception that females are less committed to their work also play a role, while workplace biases, such as the gender pay gap and promotion practices, are easier to remove. Structural obstacles can also be overcome relatively easily through targeted government or corporate policies. In Scandinavia for example, an earmarked paternal leave and affordable childcare ensures that women who wish to go back to work after the birth of a child can do so.
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