5 Comments

Summary:

According to recent research, companies with women on their boards perform better in volatile markets than those with all-male boards. Samantha F. Ravich, co-chair of the National Commission for the Review of R&D Programs in the Intelligence Community, explains why tech companies should take notice.

seggregation_photogramma1

In the mid-1950s, economist Harry M. Markowitz first described how investors could reduce their overall risk by filling their portfolio with securities that do not usually move in the same direction. As with all significant economic research, Markowitz (who was later awarded a Nobel prize in economics for his work in portfolio theory) proved mathematically what every good grandmother has known for centuries — don’t put all your eggs in one basket. Or, if you prefer to listen to your Sunday school teacher, take a look at what King Solomon, one of the richest men of his time, wrote in the book of Ecclesiastes, “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”

Now what does this have to do with your boardroom? Plenty, if you read the new report by the Credit Suisse Research Institute. The study analyzed 2,360 companies and found that firms with at least one woman on the board outperformed stocks with no women on the board by 26 percent. In the aftermath of the market crash of 2008, companies with women on their boards did even better comparatively. According to the study, these companies delivered, “higher average ROEs through the cycle, exhibit[ed] less volatility in earnings and typically [had] lower gearing ratios [measurement of financial leverage].”

As Yilmaz Arguden explains in his Harvard Business Review blog post, there are a number of explanations for these statistics: women help ensure better corporate governance; women expand the knowledge base of the market; and, opening the pool of board candidates to include women ensures a wider pool of applicants from which to select the best. There is probably truth to all of these reasons, but one need look no farther than Solomon and Markowitz — diversification minimizes risk.

When all the opinions given around a boardroom are highly correlated, potential risks and opportunities might be missed. It is no longer controversial (if it really ever was) to suggest that women and men often see the world differently — or at least they focus on and prioritize different aspects of the same event. Consequently, whether it is how to differentiate one’s product in an oversaturated technology market, how best to allocate a limited pool of research and development funds for potential future product lines, or how to create a public engagement strategy around a particular corporate action, adding the views of women to the board can produce a larger possible solution set.

Just as no rational investor would purposely include the stock of a failed company in their portfolio simply to diversify their holdings, board selections must be made on merit. Unfortunately, the corporate pipeline has not typically been filled with women. In the technology world, the shortage is even more acute. According to a survey by the tech recruitment group Harvey Nash, only 9 percent of chief information officers in the U.S. are women. This is bad enough, but it’s even worse when one considers that this number has gone down from 11 percent in 2011 and 12 percent in 2010. Perhaps that is one reason why more than 50 percent of IT companies do not have any women on their boards (see Credit Suisse Research Institute report cited above), making technology companies among the worst in board diversification.

Tech companies consider themselves ground breaking, innovative and disruptive. Good attributes to be sure, but most board members and all stock holders want those characteristics to yield higher sales, higher return on invested capital and higher return on equity.

Technology companies would be wise to apply their nontraditional mindsets to looking for potential female board members. They should look beyond the traditional venues, such as colleagues of existing board members, other similar boards and the traditional executive search firms. Do the extra legwork — reach out to non-traditional networks, including the growing number of professional associations for women who work in science, technology, engineering and mathematics, and get in contact with corporate directors associations for women. Firms should also consider often overlooked but potentially valuable disciplines that have a higher percentage of women, including business and strategy (to understand challenges from evolving markets) and behavioral sciences (to understand human behavior).

After all, what successful company willfully overlooks the opportunity to outperform its competitors by 26 percent?

Samantha F. Ravich served as deputy national security advisor to former Vice President Dick Cheney. She currently is the co-chair of the National Commission for the Review of R&D Programs in the Intelligence Community and a senior advisor to The Chertoff Group. The opinions expressed here are entirely her own. 

Image courtesy of Flickr user photogramma1.

  1. Great article, thanks.

    I am particularly glad to read it as it relates to the US and the tech industry, both rightly considered a cradle for merit and competency-based choices. In fact, focusing on increasing gender diversity at board level would be greatly beneficial for merit. Let me briefly comment on a couple of aspects:

    1. in addition to valid and interesting research, as that from Credit Suisse and several more examples, selecting talented women for Non Executive Director positions is a phenomenal way to emphasise merit in the selection of Non Executive Directors.

    Even in countries like the US, or sectors as tech, which have considered “merit” as a driving compass in selecting people, the percentage of women on boards has barely moved past the 15% mark.

    Focusing on selecting more women can be purely revolutionary, as it will increase choices based on leadership competencies. Let me bring in the case of Italy. We have recently introduced a law, in essence requiring, since 12 August 2012, Italian listed or State-controlled companies to appoint a fifth (to become a third at the following mandate) of board members as part of the “under represented gender”. This law has been implemented earlier by a number of Italian corporates, during the Annual General Meeting season of 2012: exceptional women were selected. As shareholders were nudged by the law towards changing some board members, they realised they would be better off by selecting themon the basis of merit and competency;

    2. Another great result was that overall corporate governance improved. As this law mandates for shareholders to change a number of board members, Italian companies have rightly taken it as a great opportunity to make better use of their Boards. Hence, some leading Italian global companies, such as Fiat Chrysler for example, implemented a smaller board, with a view to fostering its effectiveness.

    3. As a final remark, let me repeat one f my mantras: exceptional female talent is ever more crucial, in one of those defining moments, as difficult as they are, where proper and effective use of talent and leadership can, and will make a difference for the better. More on this here: http://wp.me/p2mHJv-28.

    Tommaso Arenare

    http://www.twitter.com/tommaso_arenare

    Share
  2. Reblogged this on Open Thinking and commented:
    I am particularly glad to read it as it relates to the US and the tech industry, both rightly considered a cradle for merit and competency-based choices. In fact, focusing on increasing gender diversity at board level would be greatly beneficial for merit. Let me briefly comment on a couple of aspects:
    1. in addition to valid and interesting research, as that from Credit Suisse and several more examples, selecting talented women for Non Executive Director positions is a phenomenal way to emphasise merit in the selection of Non Executive Directors.
    Even in countries like the US, or sectors as tech, which have considered “merit” as a driving compass in selecting people, the percentage of women on boards has barely moved past the 15% mark.
    Focusing on selecting more women can be purely revolutionary, as it will increase choices based on leadership competencies. Let me bring in the case of Italy. We have recently introduced a law, in essence requiring, since 12 August 2012, Italian listed or State-controlled companies to appoint a fifth (to become a third at the following mandate) of board members as part of the “under represented gender”. This law has been implemented earlier by a number of Italian corporates, during the Annual General Meeting season of 2012: exceptional women were selected. As shareholders were nudged by the law towards changing some board members, they realised they would be better off by selecting themon the basis of merit and competency;
    2. Another great result was that overall corporate governance improved. As this law mandates for shareholders to change a number of board members, Italian companies have rightly taken it as a great opportunity to make better use of their Boards. Hence, some leading Italian global companies, such as Fiat Chrysler for example, implemented a smaller board, with a view to fostering its effectiveness.
    3. As a final remark, let me repeat one f my mantras: exceptional female talent is ever more crucial, in one of those defining moments, as difficult as they are, where proper and effective use of talent and leadership can, and will make a difference for the better. More on this here: http://wp.me/p2mHJv-28.
    Tommaso Arenare
    http://www.twitter.com/tommaso_arenare

    Share
  3. The Credit-Suisse study is flawed in many ways:

    First, it assumes corporate boards have a role to play in a company’s stock performance. That is a baseless assumption not supported in the data. Boards have very limited role to play and as Reid Hoffman said the only role of a board is hire the CEO. Setting strategy and executing on it falls on the executive team and the rest of the company.

    Second, even if the board did play in role in company performance there is only very small correlation between a company’s performance and stock performance. It is not really an efficient market.

    Third, The study compared average stock performance of the two groups. Not pairwise comparison and not frequency comparison. Averages hide lots of detail. Take for instance Apple and S&P 500. While S&P 500 is down 13% from its 2007 highs, without Apple it would have been down addition 2%. What about such big movers in the two groups that disproportionately affect the averages? If we take them out, what would the performance difference look like?

    Fourth, the report found a correlation in stock performance then it goes on to provide seven reasons on why the gender diversity is helping stock performance. The implied statement here is, women board members were the reason for stock performance, let us tell you why they made the difference. That is an untenable leap from correlation to causation. It buries us with plausible narratives on how women board members would have made the difference without telling us how it can draw the causation argument.

    Fifth, isn’t the question here, what type of corporations would seek to strengthen its board and seek to add diversity (not just demographics but ideas too) to help it perform better? Such a corporation is likely already doing many things right that is contributing to its performance. Attributing its performance to appointing women directors is confusing the cause.

    Making a claim as if companies stand to gain 26% gain in stock just by appointing women to their boards is far reaching simply because it is not supported by the data presented.

    Share
    1. I entirely agree with the points raised by Rags Srinivasan here.

      There has been a flow of research (and I suspect more of the same will be coming) trying to find correlation or another form of quantitative evidence to the necessity of increasing gender diversity. Rather than spending time to demonstrate such supposed correlation, Companies are much better off in considering real reasons in support of better gender diversity.

      A crucial reason, in my opinion, is that selecting female Non Exec Directors nudges companies towards selecting people on the basis of leadership competencies, and this is, in itself, revolutionary, as it cascades down positive repercussions on broader corporate governance issues, as well as on making effective people decisions in the broader company, beyond the board.

      Share
    2. Point well made Srinivasan, it is similar to the Obama Campaign. He had funding and he won. Attributing his win to the funding or the other way around. The possibility that both of them are Effects of a Third Cause. Obama’s Charisma for example. IN the same way, having a woman on Board already signifies open-ness of the Board and the diversity on Board may not have as much to do with Stock Performance.

      Share

Comments have been disabled for this post