A widely documented body of research has demonstrated that companies with higher levels of women in leadership (WIL) have superior performance in several areas, including higher returns on capital, better productivity, and higher stock price performance. During the initial years after the financial crisis of 2008-9, financial and economic research established the positive performance impact of female participation at the board and senior management levels of large corporations. Since then, a number of studies have consistently shown the financial and performance benefits of gender diversity in corporate leadership – and have demonstrated that companies who lag on diverse leadership also lag in performance. The following is an overview of key studies in this area.
Prior to the global financial crisis, Catalyst, a leader in promoting women’s advancement in the workplace, issued a 2007 study showing that Fortune 500 companies with female board members outperformed those with none on equity (ROE), return on sales, and return on invested capital. Furthermore, the outperformance was notably higher for those companies with at least three women on their boards. In an ongoing challenge for corporations to avoid a “one and done” approach, three female board members became the magic number for companies to boost performance.
After the crisis, much attention was focused on deeper assessments of company performance and the workings of Wall Street. A 2012 Credit Suisse Research Institute report demonstrated that companies with women directors performed better than those with no women directors on a range of criteria and turned in better share price performance. In 2013, Pax World Investments, a front-runner in sustainable investing, asserted that these gender balance performance results pointed toward investing in women as an asset class. A company’s gender balance status – its WIL metrics – became investable.
McKinsey Global Institute first published its groundbreaking Power of Parity report in 2015. This study of 15 gender equality indicators in 95 countries, both developing and developed, found high levels of inequality in a range of metrics centered around equality at work, economic opportunity, legal protection, and physical security. The comprehensive analysis concluded that a “full potential” scenario, where women participate in the economy identically to men, would add $28 trill to annual global GDP by 2025. A “best-in-region” scenario in which all countries match the improvement of the best-performing country in their region, would add $12 trillion. Introducing its Gender Parity Score and setting equality at 1, the study found that the lowest scoring region was ex-India South Asia, at 0.44, with North America/Oceania scoring the highest, at 0.74.
The following areas were identified as those areas where effective progress would shift a majority of women closer to parity.
|Global Impact Zones||Regional Impact Zones|
|Blocked economic potential||Low labor force participation in quality jobs|
|Time spent in unpaid care work*||Low maternal and reproductive health|
|Fewer legal rights*||Unequal education levels*|
|Political underrepresentation||Financial and digital exclusion*|
|Violence against women||Female child vulnerability|
*Progress in these areas would have strongest impact on advancing equality.
Six categories of potential interventions were evaluated: financial incentives and support; technology; the creation of economic opportunity; capability building; advocacy and attitudes; and laws and policies. The report found that higher equality in work required equality in society, including in attitudes and beliefs about the roles of women.
Against this backdrop of how equality could impact global GDP, subsequent research continued to confirm the performance benefits of higher WIL metrics. A 2016 report by Credit Suisse, in a follow-up to its earlier studies, not only confirmed the firm’s previous WIL results, but demonstrated that “the higher the percentage of women in top management, the greater the excess returns for shareholders”.
A 2018 study by Bank of America Merrill Lynch showed that companies in its coverage universe with higher levels of women on their boards from 2005-2016 had higher one-year ROEs. In addition, median one-year ROE was also higher for S&P 500 companies with at least 25% female executives during 2010-16.
In a joint undertaking with LeanIn.org, a workplace research firm, in 2015 McKinsey began publishing an annual Women in the Workplace review. The latest results from 2019 indicate that women remain underrepresented at all corporate levels in the U.S. Some progress has been made in the C-suite, although not for minority women, and parity is nowhere in sight. But a glaring gap in the first level of management, a “broken rung” on the corporate ladder, has revealed itself. Only 72 women overall, and only 58 black women, are promoted or hired to manager roles for every 100 men, and the number of women decreases at every additional level upward. The research shows that fixing this broken rung would result in one million more women in U.S. corporate management roles.
In September 2019, Morgan Stanley shared its internal findings that gender diverse companies outperformed their regional benchmarks during the past eight years, while controlling for company size, dividend yield, profitability and risk. Outperformance was strongest in North American and ex-Japan Asia. Another late-2019 study by S&P Global Market Intelligence showed that firms who appoint a female CFO obtain higher profits and share price returns than their male predecessors over their first two years.
In November 2019, a Harvard Business Review paper on gender diversity and 1998-2011 stock prices drew a collective sigh from gender lens analysts. The study found that shares declined, to an undisclosed degree, for two years following the appointment of a woman to a board for over 1,600 public companies. The main reason cited for the temporary price dip was investor bias, which was not news to anyone watching the stubborn WIL data. In a reply to the study, Ellevest’s Sallie Krawcheck pointed out the importance of longer-term results, and also noted that stock price is not the only financial measure of diversity benefits, which many studies have demonstrated, including recently.
The Investments and Wealth Institute (IWI) recently published a summary of the latest academic literature on the benefits of higher levels of gender diversity. Among the analyses highlighted in the review, one 2018 study updated the widely-cited McKinsey analysis from 2015, demonstrating that 1000 companies in 12 countries performed better on profitability and value creation with higher levels of gender diversity in leadership. Another 2018 study showed that S&P 500 companies with higher leadership diversity had higher ROE. In a confirmation of a threshold established in previous work, one study showed that Italian companies performed better on a range of metrics following Italy’s mandate for at least three women on boards. Additional findings included that FTSE 100 companies with more women on their boards had higher firm value, and that Chinese firms with female chairs performed better between 2000-14.
The IWI literature review also highlighted WIL advantages on a broader scale. These included the macroeconomic benefits of gender diversity, the legal costs for companies who fail to halt discrimination, and the innovation and sustainability benefits of gender diversity.
In May 2020, McKinsey published its third in a research series on the benefits of diversity, Diversity Wins: How Inclusion Matters. The analysis, comparing 2014 and 2017 results, showed that companies in the top quartile of management gender diversity were 25% more likely to demonstrate higher-than-average profitability than those in the last quartile, an increase over each two previous periods. This indicates a significant performance gap between gender diversity leaders and “laggards”. In examining ethnic diversity, the results showed an even stronger outperformance by the top quartile. However, progress was very slow for women and minorities in upper management within the U.S. and U.K. data set, particularly for minorities. In addition to confirming the outperformance benefits of greater diversity, the study highlighted the growing likelihood of underperformance for companies in the lowest gender and ethnic diversity quartiles. Diversity wins and lagging behind has costs.
January 2021 Updates
Appointments of female CEOs decreased notably during the pandemic, adding to the unequal effects of the pandemic on women in the global economy. A recent WEF analysis lamented that women remain only 5% of the CEOs of major companies. According to the analysis, women CEO appointments have declined since the start of the pandemic primarily because hiring has focused on CEO experience, a strategy that favors men. At 15%, Ireland ranks highest on female CEOs, while Brazil ranks last at 0%.
Recent research has expanded on the benefits of gender-diverse leadership expanded during the year. A University of Toronto study of more than 6,000 public U.S. companies found that gender diverse boards outperformed those where boards had zero or one woman. Furthermore, in examining financial reporting records from 2000 to 2010, those companies with gender-diverse boards experienced fewer reporting restatements and fraud incidents.
A recent analysis by the Wall Street Journal found that gender-diverse leadership is connected to effectiveness. The study grouped 640 companies into quartiles based on the Drucker Institute’s statistical model of five measures of effectiveness. In looking at leadership diversity for each quartile, the study found the top quartile had the highest percentage of women in leadership. Those percentages declined in order of effectiveness quartile. The analysis demonstrates that corporations will suffer in wide-ranging ways if the recent job losses by women during the pandemic become permanent.
A “one and done” approach also hinders women and minorities and prevents companies from seeing diversity benefits. Research has demonstrated that the presence of women corporate leaders does not lead to an increase in the same, and does not lead to successors being women. Rather, a woman leader’s performance influences future presence of other women. This can be due to several biases that don’t face male candidates, such as downplaying positive contributions by a woman leader and generalizing negative results.
In its annual survey of corporate board directors, PwC found that a clear majority of directors agree that diversity enhances board and company performance. However, women directors reported that a commitment to diversity is lacking at the board leadership and CEO levels. This drives slow progress, as women on S&P 500 boards have moved slowly up from 16% in 2009 to 26% in 2019.
Recent developments in Pay Parity
Widespread gender pay inequality is a component of the stubborn global gender gap, which the WEF estimates will take 257 years to close. In the movement for gender pay equity, progress in some countries is being driven by mandates on pay gap reporting. In contrast, progress in the U.S. has been largely driven by shareholder engagement, a process through which a company’s shareholders raise proposals to the board and management.
There are two pay gap metrics. Adjusted pay data compares direct peers doing the same work, accounting for factors such as job title, location, and years of experience. Disclosure of adjusted pay by gender is moving toward standard practice for U.S. companies. But the meaningful pay divide is the median pay gap. This is the median pay of women who are working full time versus the median pay of men working full time, providing a raw look at the earnings of women in full-time work compared to men. Median pay gaps measure whether different groups are holding the same number of high-paying jobs, whereas adjusted pay data masks differences in opportunities for higher paying work.
Arjuna Capital is a leader in shareholder advocacy, including for disclosure of pay gap data. Arjuna’s 2020 Gender Pay Scorecard examined pay disclosure and equality commitment levels for 50 large U.S. companies. Slow progress has meant that most are still failing. In a 2018 breakthrough, Citigroup disclosed its adjusted pay gap data after several years of shareholder pressure. The next year Citigroup became the first major U.S. company to disclose both median and adjusted pay data by gender and minority for its global operations. Citi’s shocking 2018 median gender pay gap of 29% declined slightly to 27% in 2019 and 26% in 2020, with its minority median pay gap improving from 7% to 6% in 2019, where it remained in 2020.
Table 1 summarizes pay gap data for the countries where gender lens equity funds are primarily invested. Progress is uneven, particularly in Europe, where the EU’s Citizen’s Assembly announced an effort to prioritize the reintroduction and adoption of stalled pay gap disclosure legislation.
The U.K. leads the way in required reporting, with employers of over 250 required to publicly disclose their median pay gaps. The Nordic countries, where required reporting has the longest history, have registered the smallest average gender pay gaps. Japan and the U.S. are among the worst performers, and neither requires reporting yet. The U.S., where public pay gap reporting regulations are currently under legal challenges, pay gaps for minority women are well behind the average.
There are several ways for gender lens equity funds to capture the diversity benefits of improvements in pay parity. The first is to incorporate pay equality into investment criteria. Another is shareholder proposals for pay gap disclosure. In a closely watched decision, the SEC recently raised the stock ownership threshold for submitting shareholder proposals from $2,000 to $25,000, with thresholds going down in subsequent years of ownership. It also toughened requirements for resubmission of a proposal. The ruling has been criticized by some for reducing opportunities to participate, and praised by others for reducing corporate costs. Despite this setback in thresholds for participation, shareholders can still engage, and gender lens investors should play a role.
Research shows that companies with diverse suppliers experience no loss of efficiency and often achieve access to new markets. According to a recent Harvard Business Review analysis, companies with diverse supply chains benefit from new product opportunities, increased competition, market knowledge and innovation from multiple corners, and enhanced brand recognition.
Commitments to supplier diversity among large corporations is one end of the challenge and investment opportunity. The other end is small and medium enterprises (SMEs) in both developed and developing markets. Recent research by Boston Consulting Group estimated that global GDP could rise by 3-6% if women and men participated equally as entrepreneurs. In addition to funding gaps, women-led startups face sustainability and growth gaps. Narrowing this entrepreneurial gender gap requires investment in supply-diverse companies and increased impact investment in early- and growth-stage WOEs. In seeking to support and capture the benefits of diversity, it is important for all segments of gender-lens investing to incorporate a focus on women-owned SMEs and the companies who do business with them.
Workplace benefits is another focal point which should be included within gender lens investment criteria. In the U.S., the federal Family and Medical Leave Act requires employers over a certain size to provide unpaid family leave. But national paid leave has been a policy battleground, while local and state initiatives on paid sick leave and paid family leave vary. Against the backdrop of the dramatic job losses by women as a result of increased demands of the already overwhelming unpaid care economy, paid family, sick, and parental leave legislation bears close watching under the Biden Administration. Emergency rules at the federal level established temporary protection for paid leave, but those expired on December 31. If the U.S. recovery is to be women-focused, nationwide leave policies will be a cornerstone. States with paid-leave policies for new parents have seen reductions in women leaving the workforce in both the one- and five-year periods following the arrival of a child. Before the pandemic, the majority of U.S. employees did not have paid parental leave.
Excerpts of this piece first appeared in Enterprising Investor and The Impactivate.