Codifying the Correlation of Women Directors and Good Stock Performance

Elizabeth Dilts

Corporate Counsel

08-03-2012

Investors are better off with companies that have female directors on their boards, according to a new report published by the multinational investment bank Credit Suisse.

The finding was echoed by similar reports from at least three other organizations, all published in the last few months, giving the movement to get more women directors on the boards of public U.S. companies its biggest boost of legitimacy yet.

“Credit Suisse has said it, McKinsey said it, Deloitte has said it,” Charlotte Laurent-Ottomane notes, referring to a report that focused on the same issue for European companies by the international management consulting firm McKinsey & Company [PDF], and Deloitte’s report on corporate gender diversity in Australia [PDF]. Laurent-Ottomane is a leader with the 30% Coalition, a group striving to get the percentage of women directors to reach 30 percent by 2015. “Who else do we need to say it for it to be true?”, she asks.

A third report [PDF], by the Committee for Economic Development, was released in July.

Just over 16 percent of directors for Fortune 500 companies are women, according to a 2011 report by New York-based nonprofit Catalyst, which works to increase opportunities for women in the workplace. Only 10 percent of directors worldwide are women, according to a report published by GMI Ratings, an independent research firm that addresses issues of corporate governance.

The Credit Suisse report, which references the studies by Deloitte, McKinsey, and others, analyzed the performance of 2,360 global companies over six years, focusing on one key question: Does increased gender diversity within corporate management correlate to better company performance? When like companies are compared, stock performance is better and less volatile for companies that have at least one woman serving as a director, it found.

Companies with at least one woman on the board averaged a return on equity that was four points higher (16 percent versus 12 percent) than companies without, and they also saw better average net income growth of 14 percent over 10 percent. For stocks with a market cap greater than $10 billion, “companies with women board members outperformed those without women board members by 26 percent,” according to the study.

However, the report stopped short of concluding that women on boards necessarily cause stable or better share price: “None of our analysis proves causality; we are simply observing the facts.”

“It’s a little easy for some who wants this argument to work to say these studies prove that board diversity is going to make shareholders more money,” but it’s more nuanced than that, according to Tim Smith, senior vice president and director of ESG shareowner engagement at the Boston-based Walden Asset Management. Smith is also a representative for institutional investors signed on to support the 30% Coalition.

But reports like this legitimize the perspective of groups like the 30% Coalition that there is a quantifiable financial benefit to gender diversity in the highest reaches of corporate leadership, Smith says. The bigger challenge is to sway directors who frequently say talented women aren’t available.

Beth Brooks, the global vice chair of public policy at Ernst & Young wrote about raising the presence of female directors in a recent post on the website for Business Ethics magazine: “Yet to bump the percentage of U.S. board seats filled by women up by one percentage point, it would only take about 50 women joining the boards of these companies. There is no doubt there are far more than 50 qualified women interested in U.S. board seats right now.”

Brooks couldn’t be reached for comment, but her post was in reference to a report published in July by the Committee on Economic Development [PDF], which argued that U.S. companies stand to fall behind European ones because their lack of female directors makes them less competitive.

Six countries, including Norway and France, have mandatory quotas for female directors. This spring, the European Union started a comment period to assess public opinion for an E.U.-wide quota. Not surprisingly, the Credit Suisse report found more European companies have three or  more women in boardrooms than North America companies. This is significant because proponents of gender diversity say that three women in a room of 10 directors is the proportion at which the behavior of a group begins to change [PDF]. Fewer women in a group of 10 have less impact on the group.

While few 21st century businesspeople would say women executives harm a company’s performance, how much they help increase value is still debated. In a paper published in January, “Does Gender Matter in the Boardroom? Evidence from the Market Reaction to Mandatory New Director Announcements,” researchers from universities in New South Wales, Queensland, and Hong Kong found “no evidence that the market reacts to female director appointments.” However, where that information is highly publicized or mandatorily disclosed in the company’s proxy statements, like in Australia and the U.S., market reaction is positive and significant.

It remains to be seen if this latest report will be interpreted as a true bulwark of support for groups lobbying for more women directors or if the status quo will remain. But Smith said directors’ attitudes towards groups like his have changed since even 10 years ago, when it was common for directors to blame all-male boards on a lack of qualified women candidates.

“In spite of what I consider a perfect storm of factors, you’ve seen the statistics, and they’re flat,” Smith said. The report found more than half of the world’s IT companies have no female directors, for example. “What gets us from here to there without having quotas like European companies?”

It’s individual groups like his, he says, that politely but firmly tell directors, ”We’ll be on your doorstep, respectfully pushing you to make this change.”