Women Bring More Skills, Better Performance to C-Suite

 

According to two new studies from the McCombs School of Business, adding women to boardrooms and C-suites really is good for business:

  • Firms appointing women to top management teams bettered their long-term financial performance through smarter strategic risk-taking, according to Management Professor David Harrison and doctoral student Seung-Hwan Jeong.
  • To boards of directors, women bring an average of nearly 10 percent additional distinct skills compared to male directors, finds Associate Dean for Research Laura Starks and recent UT Ph.D. graduate Daehyun Kim.

“We show that women who are newly added or are already serving on boards bring unique skills to these boards,” says Starks.

“From the data we’ve seen,” says Harrison, “firms do as well, and usually better, if they shatter the glass ceiling.”

More Diversity, More Information
In the upper echelons of the business world, women are even scarcer than in politics. Though they’re 47 percent of the workforce, they make up only 14 percent of directors at S&P 1500 companies (as of 2013). By comparison, they hold 20 percent of Congressional seats.

That prompted Starks and Kim, a McCombs alumnus who’s now an assistant professor of accounting at the University of Toronto, to wonder whether boards were cheating themselves. Earlier theoretical research revealed that expertise diversity makes boards more effective as corporate advisors. Female directors, they suspected, might also enhance boards by adding different and currently missing skills.

“The ‘old boys’ club’ in the minds of directors effectually puts a limit on skill sets on boards,” says Kim. “The push towards more diverse directors might result in them being better endowed with information.”

The researchers looked at boards in the S&P SmallCap 600, an index of companies with market capitalizations between $400 million and $1.8 billion, which average even fewer female directors than larger firms. Thanks to a recent securities rule, which requires companies to list directors’ skills or qualifications, Starks and Kim could categorize each director on 16 areas of expertise.

Not only did they find that new female directors offer more identifiable skills than male directors, women also contributed skills that boards had been lacking. Of 519 new directors appointed between 2011 and 2013, the average woman brought 66 percent more areas of expertise than her male counterparts.

While men were heavier on traditional business abilities like finance and operations, women added talent in areas like risk management, human resources, and sustainability. These are the skills for which today’s boards are hungry, notes Starks. “There’s much more emphasis today on environmental and social issues by corporations than there was even five years ago,” she says.

“The Market Hates Uncertainty”
Harrison and Jeong, meanwhile, looked at how women operate in C-level roles. It’s the tier at which women are scarcest, as they made up only 3.2 percent of CEOs appointed in 2013 and 2014 in Fortune 500 firms.

Three decades of studies have reached ambiguous and sometimes conflicting conclusions about whether women in high positions helped or hurt a company’s performance. To resolve those differences, the researchers analyzed 146 previous papers, teasing out factors that might have influenced their outcomes.

A major factor, they found, was that CEOs have more managerial discretion in some firms — depending on the ownership and size of their company and the country in which it operates. Adjusting for those differences, they found that over time firms with female managers did slightly better than average financially.

Though benefits were in the range of 1 or 2 percent, those aren’t trivial numbers for large corporations. “You’re talking tens or hundreds of million dollars in revenue or return on assets,” says Jeong.

In the short term, though, incoming female leadership had the opposite effect. Stock returns did take small but detectable hits just after announcements of women CEOs, but that’s likely due to simple skittishness, not chauvinism. “Women CEOs are rare,” Harrison says. “Almost anything rare is seen as risky and brings a sense of uncertainty. The market hates uncertainty.”

But the qualms of short-term investors could create opportunities for those who are more farsighted: long-term returns were more positive for women-led firms, as were accounting metrics such as return on assets. “I might want to buy just a bit after the announcement of a female CEO, because other folks are selling,” says Harrison. “I can scoop up some stock and, later on, I can watch it rise.”

Promoting “Smarter Risk-Taking”
So why does management benefit from including more women? For both studies, a key answer is what Harrison calls “a different set of eyes.”

Data suggest that women’s perspectives tend to challenge unspoken assumptions in decision-making groups dominated by men, leading to better decisions, Harrison explains. “The presence of women on top management teams helps those teams process information in a more comprehensive way,” he says. “We have to talk about it, elaborate it, and justify it.”

Research shows that women have lower appetites than men for low-yield strategic risks. Firms with women in top jobs scored lower on risky measures such as financial leverage, capital expenditures, and share price volatility. “Having a woman on a team helps to promote smarter risk-taking,” says Jeong.

Women also can bring fresh ideas to boards that are stuck in ruts, says Kim. “Expertise is an important source of professional opinions. Bringing in diversity of expertise is really bringing in diversity of opinions.”

From Boardroom to Ballot Box?
In an election year where a record 183 female candidates are running for Congress, could the new research have implications for the political arena?

Boards don’t reach decisions the same way as legislatures, cautions Starks. They strive for consensus rather than majority rule. Nonetheless, elected bodies can gain from women’s perspectives. “There’s an implication that women are bringing different and needed skills to all parts of life,” she says, “including politics.”

Harrison agrees that business leadership differs from political leadership. Nonetheless, he says, his results mirror countries like India and Israel, which have had strong women leaders.

But like the existing handful of female CEOs, a woman president would have to win over a lot of skeptics, warns Jeong — much like Barack Obama has tried to do as the nation’s first African-American president. “As long as there are cultural norms about who conventionally occupies that role,” he says, “having someone who’s unconventional will create more scrutiny.”

 

Gender Diversity on Corporate Boards: Do Women Contribute Unique Skills is published in the American Economic Review.
Glass Breaking, Strategy Making, and Value Creating: Meta-Analytic Outcomes of Females as CEOs and TMT Members is published in the Academy of Management Journal.
 

Faculty in this Article

Laura Starks

Professor of Finance

Laura Starks is the Charles E. and Sarah M. Seay Regents Chair in Finance. She received a BA and Ph.D. from The University of Texas at Austin and...

David Harrison

Professor McCombs School of Business

David A. Harrison is the Charles & Elizabeth Prothro Regents Chair of Business Administration at the University of Texas, Austin. He earned a...

About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

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