The truth about women’s impact on corporate boards

Published: 1st July

Greater profits, greater CEO pay and enhanced problem-solving are just a few of the claimed advantages of increasing the number of women on a company’s board of directors.

Could it really be true that merely adding a few women to the board could bring such powerful change? Alice Eagly, professor of psychology and management at Northwestern, and one of the most renowned researchers on female leaders, delved into the academic research on the topic. She summarized what social scientists had learned about women’s impact on corporate boards. Let’s just say, it doesn’t look good.

Before diving into the research, it’s important to note that encouraging corporations to add more women to their boards is a noble goal. According to a report released last week by research firm, Catalyst, only 19.9% of board seats at S&P 500 companies are held by women. Women still have a long way to go to reach parity with men in the boardroom and should certainly be given every opportunity to pursue directorships. Nonetheless, we don’t want to fabricate reasons that companies should hire women. So, let’s take a closer look at each of the three claims about women on corporate boards to assess their validity.

1. Companies With More Women Board Members Experience Greater Financial Performance: Perhaps the greatest claim of increased profits associated with female board members comes from Catalyst. Catalyst claims that the Fortune 500 companies that had the greatest representation of women board directors had a higher return on investment, return on sales and return on equity. We’re not talking about just a few percentage points, Catalyst indicates that those companies with the most women on their boards had a 66% higher return on investment than the companies with fewer women on their boards. I’m a big fan of promoting the accomplishments of working women, but, honestly, does anyone really believe that merely putting women on the board can increase these profits by 66%? Catalyst’s researchers ranked the Fortune 500 companies based on the percentage of female board members, and compared the top quartile with the bottom quartile. Those in the top quartile had a 66% higher ROI than those in the bottom quartile. Other non-academic research organizations replicated these findings both in the U.S. and internationally, and the idea that women on boards could boost profits has been repeated in countless media outlets including the New York Times, the Los Angeles Times and the Washington Post. So, what’s wrong with this type of analysis?

There are basically two statistical problems. First, there is no control for the direction of causality. Instead of more female board members leading to increased profits, increased profits could be leading to the hiring of more female board members. (To be fair, Catalyst didn’t directly claim that more female board members caused the higher financial performance, they just said they found a relationship between the two.) Nonetheless, there is certainly no indication that more female board members lead to increased profits.

The second, and more likely problem, is that there could be a third variable that influences both profits and female-hiring. What’s a third variable? The classic example of third variable is the relationship between ice cream sales and murders in the United States. Although ice cream sales and murder rates are highly related, there clearly is no relationship between the two behaviors (that is, eating ice cream doesn’t lead one to commit murder). However, a third variable, heat, is responsible for causing both. Higher temperatures lead to more ice cream sales and higher murder rates. The same is most likely true for the relationship between women on corporate boards and greater financial performance. That is, there is most likely a third variable causing both of these outcomes.

Fortunately, as Alice Eagly points out in her analysis, there are sophisticated statistical techniques that can control for these issues. What happens when we use them? Basically the impact of female board members on financial performance disappears. One large study even found a small reverse effect (greater gender diversity produced worse financial outcomes). But, for the most part, it seems that gender diversity in the boardroom has no effect on corporate outcomes (and, if it exists, it’s tiny). Let’s move on to the next claim.

2. More Women On Corporate Boards Leads To More Productivity And Better Problem-Solving: The argument here is that in diverse boards, each board members brings different knowledge and experience to the company’s problems, and, therefore, can solve the problems more effectively. It sounds reasonable, but the research doesn’t seem to support this idea. Why? Eagly writes that social processes get in the way of diversity’s potential. She explains that men and women have different levels of status in our society, and that can create issues when men and women are forced to work together in a group setting. We also have a preference to be around people who are similar to ourselves and that can create obstacles when we try to diversify our work groups and bring in a woman to work with a group of white men. What does the research say? Sadly, the largest analyses of diversity in groups suggests there is no advantage to gender diversity (and possibly a small disadvantage).

3. More Women on Corporate Boards Leads to Higher CEO Pay: Equilar, a compensation research firm found that companies with greater gender diversity on their boards also paid their CEO’s about 15% more than those with less diverse boards. As with the higher profitability claim, there are a number of possibly confounding third variables. For example, we just learned that board gender diversity is associated with the profitability of an organization, so, of course it’s also associated with higher CEO pay. It doesn’t mean that gender diversity causes the higher CEO pay, and most likely it does not.

In sum, women aren’t miracle workers for an organization. But, that’s OK, because neither are men. Women should be provided the same opportunities to sit on boards as their male counterparts, because it’s the fair thing to do. However, we have to stop stretching the truth in order to promote women’s opportunities in organizations. We must not fabricate results about the benefits of hiring women. And we shouldn’t have to. Female board members perform just as well as their male counterparts, and organizations who do not appoint women to their boards are stuck in the past and missing out on some great talent.

Kim Elsesser is the author of Sex and the Office: Women, Men and the Sex Partition that’s Dividing the Workplace.

Source: Forbes




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