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Company performance: The impact of gender

Leadership + Management

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“There is no business case for putting women on the board. There is no business case for putting men on the board. Gender has zero impact,” says Wharton management professor Katherine Klein, quoting research evidence regarding women on boards, which says that changing the gender composition of a board does nothing for company performance.

A new law in California requires all publicly traded companies based in the US federal state to have at least one woman on their boards by the end of 2019. By 2021, firms that have at least five members on their boards of directors will be required to have two or three that are female, depending on the total size of the board. Companies that don’t comply would face fines between 100,000 and 300,000 U.S. dollars.

The bill cites reports from Swiss bank Credit Suisse from 2012 and 2014 that show a correlation between women on boards and improved performance at companies. “We find clear evidence that companies with a higher proportion of women in decision-making roles continue to generate higher returns on equity, while running more conservative balance sheets,” the 2014 report said. “In fact, where women account for the majority in the top management, the businesses show superior sales growth, high cash flow returns on investments and lower leverage.”

Klein says, though, one should not be cherry-picking when it comes to studies and their outcome and when you look at the meta analyses on the hundreds of studies on the topic in a statistically rigorous effort “they essentially find zero relationship between the diversity and the gender diversity on the board and company performance. Gender has zero impact.”

Nevertheless, Klein agrees to the statement that having more women on company boards gives them a bigger say in key decisions. At the same time, “it’s important to understand that the CEO has a lot of influence on the board composition,” said Klein. “CEOs are either picking the people who are on their boards or they’re working closely with an independent board chair to pick people who are on the board.”

A few European countries have similar laws requiring companies to have a minimum number of women on their boards. France, Iceland, Norway and Spain have quotas of 40 per cent for women on boards, while Germany has a 30 per cent requirement. In the U.S., too, several states including California and Pennsylvania have over the years passed resolutions urging publicly held companies to add more women to their boards.

The sponsors of the California bill maintain that their bid to ensure gender diversity on company boards “is not at the exclusion of other aspects of diversity,” though that has been one of the criticisms it has faced. But tracking those other aspects of diversity on corporate boards is difficult because regulators like the Securities and Exchange Commission do not require disclosures on them.

Klein suggests a compromise solution for companies that may not want to be legally forced to add more women directors to their board. In the least, they must share information on their diversity record, she said. “Give us the gender diversity of the board, the top management team, and of your managers overall. And tell us about your gender pay gap – the amount of money that the average woman makes in the company versus the average man.” Public disclosures of such data could prompt companies to take corrective action. 

Read more on www.knowledge.wharton.upenn.edu

 

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