When it comes to leadership roles in publicly traded companies, it’s still a man’s world. That’s the not so surprising takeaway from a report released by Peterson Institute for International Economics. What is surprising is the finding that organizations with 30% female leaders could add up to 6 percentage points to their net margin.
So what’s the correlation between women leaders and profitability? According to Betsy Berkhemer-Credaire, author of The Board Game: How Smart Women Become Corporate Directors, one of the key reasons is risk aversion. “Companies with women on their boards tend to be a little more risk averse and have, on average, less debt,” Berkhemer-Credaire cites from a 2012 Credit Suisse report. The study showed that the net-debt-to-equity ratio at companies with at least one female director was 48%, compared with 50% at all male boards. Businesses with women on the board also reduced debt faster following the 2008 economic downturn.
“The Credit Suisse research,” says Berkhemer-Credaire, “shows an incontrovertible correlation between significantly better business performance and gender diversity on boards of directors.” The author finds that a convergence of seven global factors has set the stage for a significant increase in women on Fortune 500 boards:
- Regulatory requirements. The financial crises that rocked the last decade resulted in the Sarbanes-Oxley (SOX) and Dodd-Frank Acts. Compliance with these regulations requires, among other things, that companies appoint outside, independent board members to ensure objective oversight.
- Quotas in Europe. The simple truth is that U.S. companies lag behind in board diversity. A 40% quota for women on boards was mandated in six European countries over a decade ago. Though quotas are not likely to be legislated in the U.S., the shift toward gender balance in Europe puts substantial pressure to respond in kind.
- Women in government. The number of female world leaders has more than doubled since 2005. According to the United Nations, there are currently 12 female heads of government and 11 elected female heads of state. Their achievements on the international stage show that women have the capability and public endorsement to lead effectively.
- Expanded expertise. Globalization and technology trends require companies to seek a diversity of knowledge and experience. Corporate boards are actively looking for candidates with global human resources backgrounds and technology expertise.
- Investor demand. Institutional investors increasingly push for diverse boards – ones that can bring a variety of perspectives and ideas to handle complex challenges faced by today’s leaders. In California, CalPERS and CalSTRS manage billions of dollars in retirement investments. Trustees of these funds partner with gender diversity groups to create 3D (Diverse Director DataSource) a centralized database of viable female board candidates.
- Demographic shifts. According to Berkhemer-Credaire, “the retirement age for most corporate directors is 72- to 75-years old.” Although most companies do not impose mandatory retirement or term limits, a number of forward-thinking companies are working on succession plans to create a diverse bench of board members.
- Advocacy efforts. Across America, organizations are supporting women who are board ready. Some, like the Corporate Board Resource, offer a database of viable candidates for members only. Others, like the one created by Women’s Forum of New York, offer the database free to nominating committees and search firms.
The bottom line is that women in leadership can improve your bottom line. If your board is looking male, pale, and stale, it may be time to consider whether it truly represents the constituencies it serves.
Question: Is your board improving your bottom line? If not, have your considered gender diversity?
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