When searching for an enterprise that may outperform the market, here’s one factor to look for: women in leadership positions. According to a study by the Peterson Institute for International Economics, the presence of women in upper management may improve an organization’s financial performance.
For investors, gender-diverse leadership may signal that an enterprise has good overall corporate governance, according to Credit Suisse’s Gender Diversity and Gender Performance report. Savvy organizations implement human capital management processes that recognize talented women, develop that talent into effective leadership, and understand that a successful organization needs leaders at all levels, not just in the C-suite.
Women Leaders Are Crucial to Enterprise Success
According to Credit Suisse, global large-cap companies with women on the board outperformed companies with all-male boards by 26% over a six-year period from 2006-2011. Although this is a complex figure, as researchers point out that more diverse companies tended to be mature entities with historically good performance, and are heavily concentrated in European and defensive industries, the performance disparity is still compelling.
Credit Suisse’s analysis also indicates a positive correlation between gender diversity and higher return on equity, lower gearing (that is, net debt to equity), profitability, stock price performance, and better average growth for that set of companies.
Why Women Leaders Make a Difference
While the reasons for these positive correlations are varied and debated, multiple studies have indicated that group diversity leads to a broad spectrum of better thinking. According to Scientific American, studies have shown that diverse groups can be more creative, make better decisions, and generate more ideas. The Harvard Business Review reported that studies show diverse teams are more likely to stay objective, process information more carefully, and innovate more often and more radically than homogeneous teams.
Another telling bit of information comes from a study by Development Dimensions International (DDI). That study found that organizations where the majority of leaders are women have better overall leadership quality. Leadership quality, in turn, is linked to better performance against competitors. According to a study by Zenger/Folkman, women leaders (from the C-suite down to frontline managers) receive higher ratings than men on 15 of 16 key leadership competencies. One theory is that a greater percentage of women in leadership positions may indicate that an organization operates as a meritocracy, where promotions go to the best performers rather than to those who best play office politics.
Deloitte’s Human Capital Trends 2014 found that 86% of executives rated leadership as an urgent or important issue. As companies struggle to find candidates to fill leadership roles, it may behoove them to take actions to better ensure that potentials aren’t shut out of the running due to bias, whether conscious or unconscious.
Investors looking for enterprises that will perform well financially may want to consider taking into account diversity and inclusion ratings. Tools like the Thomson Reuters Diversity & Inclusion Index can provide insight. Not only may high ratings correlate to better stock performance, but investing in companies that promote women leaders helps move society toward a more equitable place.