Will adding women to your board of directors improve corporate performance? A new Thomson Reuters report says that very well may be the case. The study shows companies with greater gender diversity on their boards are correlated with lower volatility in stock price—and have similar or better gains in stock price across more than 4,000 companies traded globally.
This analysis is new and notable because of the large number of companies analyzed and also because the researchers report on “tracking error,” which is how investment managers talk about market volatility or risk.
It wasn’t always so.
For more than a decade, various studies have shown that gender diversity on boards of directors improves corporate performance. In 2007, Catalyst published a report that corporate performance metrics such as Return on Equity, Return on Invested Capital and Return on Sales were substantially greater (53%, 66% and 42%) for companies whose boards had greater gender diversity than those that didn’t have gender diversity. Importantly, the Catalyst study did not include stock performance in its analysis, though stock performance should be certain to follow these important business metrics of profitability.
In 2011, Catalyst published a similar study, again showing a correlation between dramatically better business metrics and greater gender diversity on boards, but again with no conclusion regarding stock performance.
It might seem strange to think that diversity could matter for stock price appreciation or volatility, but there have been many studies that show that diversity enhances decision-making of teams. Some have posited that the global financial crisis would have been less severe if there had been fewer Lehman Brothers and more Sanchez sisters. A recent New York Times story says women have certain advantages during stressful situations. When women’s cortisol levels were heightened, they tended to take more incremental risk adjusted actions while men who had elevated cortisol went swinging for the fences.
So, if women improve corporate performance and reduce risk in crisis situations, why haven’t investment managers flocked to gender diversity as an investable thesis? To be sure, there are many funds with so-called Environment, Social and Governance (ESG) filters that include gender diversity as one of many attributes, yet few have focused on gender diversity as a primary investment thesis. And, there are a lot of women investors out there who would presumably be intrigued.
To date, the reason for the disconnect between improving business metrics and stock price might be found in a study from Harvard’s sociology department in 2010. It found that when a company appointed a woman to the board of directors, institutional traders sold shares and the stock price took a dip, even though other profitability measures remained positive. Obviously, some traders weren’t buying the idea that gender diversity is a good thing. Interestingly, traders for the major pension funds, that often take strong positions in favor of gender diversity, did not sell shares when women were appointed to the board.
But, perhaps now, we have we reached a tipping point. The Thomson Reuters report also indicates that, for the first time, over half of publicly traded companies now have at least 10% women on boards. Maybe there are now enough women appointed to corporate boards that the appointment of a woman can be viewed more on the merits of improving corporate performance and not through a biased gender lens.