Companies with Women on the Board Perform Better
Good news from the boardroom this week. A new study concluded that Fortune 500 companies with more women on their boards perform better financially than companies with fewer female directors. The study, The Bottom Line: Corporate Performance and Women’s Representation on Boards, was conducted by the non-profit organization Catalyst, which works to expand opportunities for women in business. It found that, although women only occupy 14.6% of seats on the board of directors of Fortune 500 companies, they have a major impact on a company’s financial success.
The Catalyst researchers examined 520 companies and looked at three measures — return on equity, return on sales and return on invested capital – over the three year period from 2001-2004. In those three categories, companies with the highest percentages of women on the board outperformed those with the fewest by 53% on return on equity, 43% on return on sales and 66% on return on invested capital.
In a Reuters article about the study, Catalyst President Ilene Lang explained the results of the study by saying, “Bringing women on their boards to represent the stakeholders really gives them a better company and better performance.”
What accounts for the improved financial performance of companies with more female directors? One theory is that these institutions have done a better job adapting to the challenges of a global economy and incorporating diversity on the highest level. Another possibility is that female directors place a higher emphasis on principles of corporate governance and transparency than their male counterparts. A third idea is that women board members may contribute unique viewpoints and perspectives that improve a company’s performance.
Do you think that women add value to the boards of public companies as women, or do you think that these companies performed better because they had the highest quality board members, regardless of gender? Will this study encourage corporations to appoint more women to their boards?
No attempt seems to have been made to investigate the causality here. All that is shown is a slight correlation. It’s highly likely that these successful companies share many other attributes – probably even the sectors and geographies in which they operate – which drive their success. Correlations don’t tell us anything about cause and effect and this study seems pretty bad science, if it’s science at all. It does the cause of women in the boardroom no good to hype their role in this way.
Note from the editor: the study was based upon the four-year average for ROE, ROS, and ROIC for 2001, 2002, 2003, and 2004, and women board director data for 2001 and 2003. Results from the study were robust across sectors, including consumer, health care, industrial, information technology and materials, with mixed results in the financial sector. Since companies in the top quarter in terms of female board member representation significantly outperformed those in the bottom quarter, its time to get beyond the correlation vs. causation argument, acknowledge that women board members are a driving force in improving the financial standing of their companies, and start exploring the mechanisms by which this result is achieved.