Practical analysis for investment professionals
20 November 2012

Why Investors Must Push Harder for Greater Diversity on Corporate Boards

Back in September, I had the pleasure of attending a symposium at Bloomberg headquarters in New York City titled “Why Good Governance Needs Great Women.” The event was sponsored by the Women’s Forum of New York, and it provided global perspectives from investors and directors on the importance of gender diversity on corporate boards and what can be done to increase it.

Clearly there is work to be done. According to Catalyst, a nonprofit organization committed to expanding opportunities for women in business, women are not well represented on the boards of Fortune 500 companies. In 2011:

  • women held only 16.1% of board seats;
  • 11.3% of companies had no women on their boards;
  • women of color held just 3.0% of board seats;
  • 71% of companies had no women of color on their board; and
  • of all women directors, 11.3% were African American, 4.9% were Latinas, and 2.5% were Asian.

According to a July 2012 survey by GMI Ratings, an independent provider of global corporate governance and ESG ratings:

  • 12.6% of S&P 1500 directors were women;
  • 11.6% of Russell 3000 directors were women; and
  • 36% of Russell 3000 companies have no women directors.

Unfortunately, this lack of gender diversity is a global issue. A 2012 Credit Suisse study examined all 2,360 companies in the MSCI All World Country Index (MXWD:IND) and found that:

  • 41% of the companies in the index had no women on their boards;
  • 72.1% of the companies in emerging Asian markets (e.g., China, India, the Philippines, South Korea) and 68.0% of the companies in developed Asian markets (e.g., Hong Kong, Japan, Singapore, Australia) had no women on their boards;
  • 60.8% of the companies in Latin America had no women on their boards;
  • 27.6% of the companies in Europe and 19.3% of the companies in EMEA had no women on their boards; and
  • only 18.7% of the companies in North America had three or more women on their boards.

So what are the characteristics of companies that have women on their boards? According to the Credit Suisse study, companies and sectors that are closer to final consumer demand—such as health care, finance, and consumer staples—have the highest proportion of women board members, while those in the industrial, energy, and materials sectors have the lowest proportion. In addition, large-cap companies have a higher proportion of one or more directors than do small- and mid-cap companies.

Why should stakeholders (investors, employees, etc.) care about the diversity of corporate boardrooms? Not only is the lack of diversity an issue of fairness and equality, it is also an issue of stock price and financial performance. The Credit Suisse study, which examined the performance of the companies in the MSCI All World Country Index over a six-year period (2005–2011), provided five compelling reasons for increasing gender diversity on corporate boards:

  1. Better stock market performance: Stocks of large-cap companies with at least one woman board member outperformed those with all-male boards by 26% worldwide, while the outperformance of small- and mid-cap companies was 17%.
  2. Higher return on equity: Companies with at least one woman board member generated an average ROE of 16% versus 12% for companies with all-male boards.
  3. Higher earnings growth: Companies with a least one woman board member grew their earnings on average by 14% per annum versus 10% for companies with all-male boards.
  4. Lower leverage: Companies with at least one woman board member had an average debt-to-equity ratio of 48% versus 50% for companies with all-male boards.
  5. Higher price to book ratio: Companies with at least one woman board member had a price-to-book ratio of 2.4 times versus 1.8 times for companies with all-male boards.

As persuasive as these results are, the authors of this study are careful to state that “none of our analysis proves causality, we are observing the facts.” However, in a telephone interview with Bloomberg, Mary Curtis, one of the authors of the study, noted that “stocks of companies with women on boards tend to be a little more risk averse and have on average a little less debt, which seems to be one of the key reasons why they’ve outperformed so strongly in this particular period.”

Studies by Catalyst and McKinsey support these results:

  • Fortune 500 companies with more women on their boards tend to be more profitable; and
  • Companies with a higher proportion of women on their boards typically exhibit a higher degree of organization, above average operating margins, and higher valuations.

Why is gender diversity associated with better corporate performance? The Credit Suisse study provides seven reasons to explain why gender diversity could be correlated with better corporate performance. Here are four of them:

  1. Signaling: Appointing women to the board sends a positive signal to the market that the organization is focusing more on corporate governance, and that the company is doing well.
  2. Harder working: Researchers have found that the quantity and quality of work produced improves in diverse groups versus homogenous groups. They attribute this to the fact that individuals are more likely to do more preparation for any exercise that they know is going to involve working with a diverse group rather than a homogenous one. In addition, a wider range of available data inputs are likely to be debated in a diverse group. Therefore, board diversity encourages all board members to work harder and to be more prepared.
  3. Broader leadership skills: A 2008 McKinsey study finds that women apply five of the nine criteria that define good leaders more frequently than men. For example, women are better at defining responsibilities clearly and being good mentors and coaches of employees, while men are better at making individual decisions and taking corrective actions if things go wrong.
  4. Risk aversion: A number of academic studies have found that women are more risk averse than men and that having at least one female director on the board appears to reduce a company’s likelihood of bankruptcy by 20%. The Credit Suisse study found that companies with women on the board were less leveraged, which allowed these companies to outperform their peers during the recent global financial crisis and economic downturn.

Given all of the benefits that diversity in the boardroom can provide, why is the pace of change so slow and what can be done about it?

Helen Morrissey, founder of the 30% Club, a group committed to the goal of having women comprise 30% of UK corporate boards by 2015, provided a global perspective at the symposium. Although the group is a voluntary, business-led initiative, many countries in Europe have either proposed or approved legislation that requires a certain percentage of corporate boards to consist of women. For example, in Italy, 33% of public company boards must have women members by 2015. In France, women must comprise 20% of boards by 2014 and 40% by 2017. Norway, Spain, Iceland, Belgium, and the Netherlands have also set quotas for the percentage of board seats that must be held by women.

In an interview at the conference on “the value of diversity,” Katherine Phillips, a professor at Columbia Business School, discussed the use of quotas to achieve diversity. “I actually believe that changing organizations and changing representation in organizations sometimes does require something like a quota,” she said. “In the short term this may come with potentially negative side effects, and it may appear that diversity is detrimental to performance. However, the benefits to diversity are really delivered over the longer term, and if setting quotas is the only way to deliver that change, then it may be a necessary and justifiable strategy.”

A panel of institutional investors that included Martha Carter, global head of research at Institutional Shareholder Services, and Rob McCord, Pennsylvania State Treasurer, challenged investors (individuals as well as institutions) to be more proactive and vociferous in voicing their concerns about greater diversity in the boardroom. They suggested that investors use proxy initiatives, write letters, engage the company in dialogue, and raise public awareness about the lack of diversity at specific companies.

Carter and McCord also cited the lack of term limits on board members as one the primary reasons for the slow increase in gender diversity at many corporations. Surprisingly, a very large number of boards do not have term limits, meaning that directors can stay for decades. Investors should inquire about terms limits at the corporations they invest in, and if there are none, investors should encourage management and the board to implement them.

A panel of current directors discussed the process used to select board members and how that can be improved. Traditionally, most board positions were not widely advertised. Instead, informal networks (think “old boys clubs”) were used to fill available seats. The panel suggested that boards need to increase the transparency of their searches and nominating processes so that it is clear to everyone what qualities and skills are required in candidates. In 2010, the US Securities and Exchange Commission implemented new proxy disclosures rules that require companies to disclose the criteria used by a board’s nominating committee to select and evaluate potential board members.

In addition, the SEC suggested that boards “rethink” the criteria they use to determine if someone is “board ready/qualified.” For example, one criteria that is often used is that a candidate must be a former CEO. Given the lack of women (and people of color) that are CEOs, this greatly reduces the pool of qualified applicants. Companies can also a better job of training and developing internal women and minority managers and executives in order to expand the overall pool of qualified candidates.

The Women’s Forum of New York, Catalyst, and other organizations have created a database of “board-ready women.” In addition, the Women’s Forum also holds an annual event, “Breakfast of Corporate Champions,” which honors Fortune 1000 companies in which women represent at 20% of boardroom directors.

As I left the symposium I thought about the famous quote from Margaret Mead: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©

About the Author(s)
Michael McMillan, CFA

Michael McMillan, CFA, was director of ethics education at CFA Institute. Previously, he was a professor of accounting and finance at Johns Hopkins University’s Carey School of Business and George Washington University’s School of Business. Prior to his career in academia, McMillan was a securities analyst and portfolio manager at Bailard, Biehl, and Kaiser and at Merus Capital Management. He is a certified public accountant (CPA) and a chartered investment counselor (CIC). McMillan holds a BA from the University of Pennsylvania, an MBA from Stanford University, and a PhD in accounting and finance from George Washington University.

4 thoughts on “Why Investors Must Push Harder for Greater Diversity on Corporate Boards”

  1. There is clear evidence from these studies after all being said, that the importance of women in boardroom meetings of the corporate governance of the fortune 500 companies can be helpful in bringing accountability to the members as well as pricing of the stocks.Evidently proven, that with more gender diversity, there will be more fairness and equality. It has shown that the company with gender diversity, always performed better from the research as per taken risks and also producing improved quality and quantity work performance overall in the company environment.

    1. Douglas R Woikey says: discussion of military veterans on Boards? If not, why not?

      Vietnam Era, Gulf War, etc.?

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