Female executives are probably worth hundreds of billions of dollars to U.S. corporations. Gender diversity isn’t political correctness, it’s a better way to run businesses.
Shareholders are the first beneficiary of a more gender balanced executive suite. But the value added is ultimately transferred to consumers as competitive dynamics work their magic. As such, gender diversity analysis is right for all types of ESG investors.
Strength in Numbers
The benefits of gender diversity are often greatest at firms with a critical mass of women in senior positions. Companies need to move beyond tokenism. Having one or two female board members doesn’t do much good. Nor does giving the CEO seat to a woman and surrounding her with an executive committee of a dozen men.
Much of the gender diversity research has focused on the impact of women in the boardroom. A wave of studies followed the introduction of laws requiring boardroom gender quotas. Norway passed its quota law in 2003 and has since been joined by Finland, France, Germany, Iceland, Italy, and Spain. In 2018, California passed a law requiring at least one female board member by 2019 and two by 2021.
For a while, boardroom related research was inconclusive at best and damning at worst — some studies suggested corporate performance was harmed by the sudden influx of inexperienced ‘golden skirts’ into the boardroom. But more recent work encompassing a greater time span or digging deeper into women’s activity in the boardroom (Ziv, 2013; Green & Homroy, 2017; Eckbo, Nygaard & Thorburn, 2018) goes some way toward erasing the most negative conclusions about boardroom diversity.
The greatest gain from women in the boardroom may be the resultant increase of women in the C-suite. Dezso (2012) suggests female leadership improves firm performance to the extent the firm is focused on innovation. Noland (2016) finds the female share of corporate leadership is positively correlated with gross margin and net income margin. And Christiansen (2016) show a positive relationship between the share of female executives and board members and return on assets.
Much of Women’s Value Add Is Invisible
Improved management as a result of gender diversity is hard to spot. For that, we can thank competitive markets. Leading Edge Inc. hires or promotes dozens of women into senior roles and then takes market share away from its rivals and boosts its profit margins over a multi year period. Competitor Laggard Ltd. takes notice after years of deteriorating financial results and a flagging stock price. Laggard aggressively moves to improve its gender diversity — they even hire away a bunch of female executives from ABC. Laggard’s business eventually improves at the expense of Leading Edge.
Who wins here? At first, Leading Edge’s forward thinking nets it more business and profits, lifting the fortunes of its shareholders and employees. But this advantage is erased once Laggard responds by imitating its more successful competitor. The real winner over the long run is the consumer of Leading Edge and Laggard’s products and services. They get some combination of improved quality and lower prices that long outlives the extra profits earned by any of the industry’s companies.
Economic data also does a poor job of capturing the improvements consumers enjoy as products and services get better. As a consequence, more effective management and technology gains often fail to show up in measures like gross domestic product, or GDP.
The market for laptop computers illustrates the point. IBM launched its first laptop in 1986 for about $4,600 in today’s dollars. The machine’s central processing unit (CPU) had a speed of 4.77 megahertz. Today’s laptops sell for just a few hundred dollars and are more than a 1,000 times faster than the first mobile computers. Nobody questions that the modern laptop is far superior to its most distant ancestors, but it technically accounts for a fraction of the economic output it once did.
Even if a more gender balanced senior management team is leading to a better than ever economy, we need to dig deeper to estimate the true impact.
Two Ingredients May Solve the Puzzle
Big changes and long periods of time.
The value added by senior women is expected to stay hidden unless a company’s management team is more diverse than those of its peers. The best clues will come from companies well out in front of the crowd. Companies with the biggest increases in diversity may be the most instructive.
And the research suggests a critical mass of diversity may be needed before corporate performance is affected — so a longer sweep of time should be considered in any analysis.
I examined the relationship between gender diversity and stock performance for the S&P 100 Index. These are the largest public companies domiciled in the U.S. and they account for more than half of the total market capitalization of U.S. public companies.
The proportion of female executive officers was computed for each company based on annual SEC filings. Some companies include different numbers of executives in their filings each year even if their management teams are unchanged. For this reason, I averaged the most recent two years of filings to get a measure of current gender diversity. I compared this figure to the same figure fifteen years earlier. Some companies don’t have a fifteen-year history as a public company. This reduced the sample size to 84 companies.
Next, I examined the most recent five-year stock return performance graphs and tables in each company’s annual filings. I calculated the relative performance of each company against its chosen peer group. If no table was included with the chart, this was estimated from the stock performance graph.
The median company in the sample increased its proportion of female executive officers by 12 percentage points over the past fifteen years to 20%.
No relationship exists between relative stock performance and changes in gender diversity that are above or below the group average. But the picture changes if I focus on those companies that demonstrated the biggest gains in gender diversity.
Companies that increased their proportion of female leaders by 20 percentage points or greater (the top 25% of companies) were more likely to experience superior relative stock performance. 64% of the 22 companies that lifted their female executive share by at least 20 percentage points had 5-year relative stock outperformance. Among the 62 companies that didn’t achieve such diversity gains, 40% had better stock performance than their peers.
A logistic regression model suggests the observed relationship between aggressive increases in female executive representation and stock outperformance has a p-value of .06. But the data does not yield any statistically significant results that address the size of stock outperformance associated with progress toward gender balance.
Value Migration from Investors to Consumers
The value of gender diversity is shared by investors and consumers. Investors enjoy higher profitability and stock values. Consumers get better products and services for similar or lower prices.
Noland (2016) estimates that for profitable firms, “a move from no female leaders to 30 percent representation is associated with a 15 percent increase in the net revenue margin.” If price to earnings ratios stay constant, this implies a share price bump of 15% as well. But this data set encompasses a single year — as my panel data indicates, the timing of diversity shifts matters. Slow progress toward gender diversity may result in more limited corporate performance gains. And research indicates critical mass is necessary before any benefits should be expected.
It also seems likely that increases in diversity have diminishing returns. This leaves us with the concept of a “gender diversity sweet spot” — some range of female leadership representation that results in better financial performance.
Integrating Noland’s findings with my data on those S&P 100 companies that have increased their female representation by 20 percentage points or more leaves me with a reasonable working assumption that a bump in gender diversity of at least 20 points may yield a roughly 10% gain in the company’s value.
If a company’s value is enhanced by gender diversity, how long will it persist? The S&P 100 companies have increased the share of female executive officers by an average of three-quarters of a percentage point annually over the past fifteen years. I’d expect it to take approximately 10 years for the average company in the S&P 100 to achieve the gender diversity improvement already attained by the top 25% of companies.
A reasonable framework for ESG investors may be to assume that shareholders of companies with gender diversity advantages may be worth as much as a 10% premium to peers, with the expectation that the value premium should be expected to fade over a period not to exceed a decade.
The social value gains are cumulative and permanent, even if the shareholder value of gender diversity is temporary. I define social value in this case as the value added to the consumer surplus. The consumer surplus is the area beneath a product or services’ demand curve and above the market price.
The size of the consumer surplus should increase as companies improve their offerings and compete for customers. Extra profits earned by firms with a gender diversity advantage will be competed away as their peers catch up, causing supply curves to shift to the right. That extra profit then becomes part of the consumer surplus.
How much can gender diversity add to the consumer surplus? First, I assume the companies in the S&P 100 that improved their female executive share by 20 percentage points over the past 15 years enjoy a temporary 10% average value gain at some point that ultimately is converted to consumer surplus.
The combined market cap is more than $4.3 trillion for the 22 companies in the index that meet this diversity improvement threshold. But nearly one third of this is accounted for by Apple and Microsoft. Excluding these two companies drops the total to $2.6 trillion. The estimated consumer surplus gains for the remaining companies is about $240 billion. Extrapolating to the entire U.S. public market, I estimate the ultimate consumer surplus attributable to gender diversity among senior executives is more than $400 billion.
And this figure may continue to grow. Women make up a little more than 20% of senior executive teams in the U.S. Yet women account for 40% or more of degrees awarded in all academic subject areas except for the physical sciences and engineering. Social preferences may keep this gap from closing, but the trend toward greater female participation at the top of the corporate ladder is intact.
Recommendations for ESG Investors
If an ESG Investor’s sole focus is shareholder value, they should look to companies with big upswings in female C-suite participation and a gender diversity gap between the company and its peers. Any expected bump in financial performance and share value from improved gender balance should be viewed as temporary in most cases — like an amortizing asset.
ESG Investors looking to capture social value as well should focus their attention on the largest companies. The potential value added to the consumer surplus is proportional to the size of business. For activist investors, gender diversity laggards may be the most promising candidates for ownership given the social value upside.