Thought of the Week - One woman is not enough
No, this is not a post arguing for polygamy or marital infidelity! Instead, I want to take up a topic that I last touched on a year ago: gender diversity on the board of directors of a company. Back then, I argued that the first woman promoted to an otherwise all-male board is often less effective in changing a company’s culture and risk-taking than the second, third, etc. The research shows that often, the first woman to break the glass ceiling is the one who is especially well adapted to an all-male culture and doesn’t bring much behavioural diversification to the board. Only when there are more women on the board of a company can diversity of thinking take hold and the company tends to benefit, usually through lower risk-taking and as a result, higher profitability, because there are fewer risky things to go wrong.
But apparently there is also a second driver through which gender diversity reduces excessive risk-taking in companies. Kingsley Wabara from Washington University looked at both the number of women on the boards of US corporations as well as their influence. On the one hand, he confirmed what we already knew. If there is one woman on an otherwise all-male board, the benefits to the company are minimal or non-existent. However, he suspected that this doesn’t necessarily have something to do with the personality of the first woman to come on a board but rather her influence on the board. He argues that it is easy for a board of directors to ostracize a single director and reduce her influence. However, it gets much harder to ostracize a large minority. And it gets even harder to defy a single woman if she is in a powerful position. For example, Wabara found that if he looked at companies with an all-male board and a male CEO, the addition of one female director did not materially change the company’s profitability, financial leverage, or risk-taking. However, companies that had a male CEO and one woman on the board but then added one or more additional female directors to the board saw their operating income relative to total assets increase by 3% while debt relative to total assets declined by 4% on average. Thus, these companies managed to become more profitable despite reducing their financial leverage.
Finally, Wabara looked at companies that switched from a male CEO to a female CEO. By changing one influential position (in this case the CEO), the company’s dynamics were already changing substantially. Companies that switched to a female CEO experienced a significant reduction in share price volatility and a small but insignificant increase in profitability. While far from being proof, this clearly shows that the more influential women that get on a board of directors, the better the company performs. My own research indicates that once women make up more than one-third of the directors on the board, corporate profitability starts to rise substantially. And this is why I endorse regulations like the one in the EU where listed companies have to have at least 40% women on their board. While I am normally sceptical about regulations, this is one that is supported by the data.
Thought of the Week features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to joachim.klement@liberum.com. This publication is free for everyone.
