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. A set of criteria has been established for assessing a company’s gender balance status through women-in-leadership metrics, as well as measuring the performance impact of that status.
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.
Excerpts of this piece first appeared in Enterprising Investor.