Companies with Women Directors Outperform in the Boardroom

Last week I discussed how the stocks of companies headed by female CEOs underperform on average by more than 20% (page 9) during the first year of her tenure at the top. There is evidence that this underperformance is due to sexist shareholders putting downward pressure on stock prices through their knee-jerk selling. Other reasons include a time-commitment deficit resulting from childcare responsibilities, as well as a female skill set more attuned to detail-oriented individual tasks as opposed to big-picture strategic “vision.” Of course, having your head in the clouds without your feet on the ground is dangerous, but great salesmen can get away with it if they are smart enough to hire talented operations people and delegate the details to them.

Male Dreamers Sometimes Win Big

Take one of the greatest salesmen of them all: the late Steve Jobs of Apple (NassdaqGS: AAPL).  His “reality distortion field” allowed him to bend reality to fit his “magical thinking” and achieve innovative and highly-successful products that a more detailed-oriented person may never have thought of in the first place.  Unfortunately, distorting reality can also backfire and lead to disaster as seen in Jobs’ insane decision to delay pancreatic cancer surgery for nine months while he tried to cure himself with nuts and berries.

Men and Women Are Different and Complement Each Other

Whatever differences there are in men and women skill sets are almost certainly based on sociological factors and not genetic, although it is undisputed that male and female brains are different. For example, a recent Stanford University study found that the widely-touted risk-averse nature of women investors is not due to a lack of testosterone, but rather to gender stereotyping that becomes a self-fulfilling prophecy. On the other hand, there is some evidence that while men and women exhibit equal aptitudes on average, the distribution of male aptitude is more extreme at both ends of brilliance and stupidity (i.e., fat tails), at least in math and the sciences (others disagree). In speculating why there were such a disproportionate number of men in the top echelon of science jobs, economist Larry Summers made the following controversial statement shortly before he was fired as president of Harvard University:

On many, many different human attributes — height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability — there is a difference in the standard deviation and variability of a male and a female population. If one supposes, as I think is reasonable, that if one is talking about physicists at a top 25 research university, one is not talking about people who are two standard deviations above the mean. And perhaps it’s not even talking about somebody who is three standard deviations above the mean. But it’s talking about people who are three and a half, four standard deviations above the mean in the one in 5,000, one in 10,000 class. Even small differences in the standard deviation will translate into very large differences in the available pool.

Even if what Larry Summers said was partially true, women get the last laugh because women live longer than men – thanks to some mitochondrial DNA mutations that only affect men (at least on the fruit fly level).

Companies with Women Directors Outperform

The “vision thing” and a 24-hour time commitment may be important at the CEO level, but neither is that important at the board of directors’ level. Consequently, an August 2012 study by Credit Suisse (NYSE: CS)  found that companies with at least one female director on the board significantly outperform companies with an all-male cast over the long term (i.e., six years).  Sexist shareholders may dampen stock returns during the first year, but this unfortunate phenomenon disappears soon afterwards and the true value of female contributions reveals itself in years 2 through 6.  Let me caution that some studies have concluded that this alleged outperformance is “spurious” (page 1) because the outperformance doesn’t control for the fact that highly-successful firms (i.e., the ones that are already outperforming) are more likely to appoint female board members. With that caveat, let’s look at the positive conclusions of the recent Credit Suisse report:

  • Among large-cap companies (i.e., market caps of more than $10-billion), those with at least one woman board member outperformed companies with all-male boards by 26% worldwide. Outperformance for small-to-mid-cap stocks with female board members was less, but still substantial at 17%.
  • Return on equity (ROE) of 16% vs. 12%
  • Earnings growth of 14% vs. 10%
  • Debt-to-equity ratio of 48% vs. 50%
  • Price-to-book value ratio of 2.4 vs. 1.8

Sounds awesome, but the report warns that “none of our analysis proves causality; we are simply observing the facts.”

Female Outperformance is Based on Risk Aversion

Assuming causality, the lead author of the report stated in a telephone interview:

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.

There is that female-based “risk averse” mantra again! If you read my article entitled The Great Investment Truth Behind Simple Arithmetic, you’ll understand why it makes perfect sense that risk-averse companies outperform in periods of volatility — which definitely describes the recent six-year period that included the 2008 global financial crisis. The Credit Suisse report also mirrored Larry Summers’ statement on science aptitude by mentioning the extreme nature of male-only investment performance (both good and bad) compared to more-stable and less-extreme female-influenced investment performance:

Particularly optimistic men added to investment volatility: their portfolio performance was more likely to be extreme, whether great or extremely poor. Meanwhile, the same result did not hold true for women: there was no difference in investment style between more or less optimistic women. Women just remained more risk averse regardless of their outlook.

This female risk-aversion helps explain why female-influenced companies are less likely to go bankrupt:

Having at least one female director on the board appears to reduce a company’s likelihood of becoming bankrupt by 20%, and that having two or three female directors lowered the likelihood of bankruptcy even further. Negative correlation between female directors and insolvency risk appears to hold good, irrespective of size, sector and ownership, for established companies as well as for newly incorporated companies.

It also explains why female-influenced companies are less likely to receive an auditor letter questioning the company’s ability to continue as a going concern and why, according to GMI Ratings, boards with women members:

exercise more diligent oversight. They have better attendance records than homogenous boards, and they invest more effort in auditing when the complexity of the business warrants heightened scrutiny.

Female Outperformance May Not Continue

Investing Daily readers care about the future, not the past, so will the female-board outperformance continue? Unclear, unless you expect repeat of the 2008 meltdown because, as the Credit Suisse report warns:

The outperformance of stocks with women on the board may not continue if the world shifts back towards a more stable macro environment in which companies are rewarded for adopting more aggressive growth strategies.

In addition, the differing opinions that result from a diversity of viewpoints can cause acrimonious conflict and have a damaging effect on boardroom decision-making:

The drawback is that diversity may bring greater tension and conflict to the decision-making process. Even though diverse groups were more likely to produce a better result than the homogenous teams, their confidence in that result was lower and the working environment was perceived to be more difficult. Indeed, the effects of conflict, poor communication and distrust can outweigh the potential positives brought on by different points of view. Ultimately, this is the challenge for management: to harness the positives of diversity while avoiding the pitfalls.

Investing in Women is Common Sense Regardless of “Proof”

I understand the pitfalls of diversity and the lack of definitive proof that female participation in  boardrooms actually causes improveds company performance, but common sense tells me it’s a good idea anyway. My reasoning is simply that women constitute 51% of the population and possess valuable insights and talents that should be utilized. It simply is nonsensical to exclude such a rich talent pool from corporate service! As the Credit Suisse report states:

Any company that achieves greater gender diversity is more likely to be able to tap into the widest possible pool of talent.

A corporate board with female representation may enhance the understanding of customer preferences. According to a book published by Boston Consulting Group in 2010, 73% of US household spending decisions are controlled by women.

I agree with a 2009 statement by University of California-Irvine business professor emeritus Judy Rosener that men and women bring different skills to the table that complement each other and having a mixture of sexes on a corporate the board is better than having a board composed exclusively of only one sex:

A company with a mix of male and female leaders, with their differing attitudes regarding risk, collaboration and ambiguity, will outperform a competitor that relies on the leadership of a single sex. It happens that companies are dominated by men, but they probably would not perform better if dominated by women. Women aren’t better, but they bring to the table something that men don’t have.

Come to think of it, that’s how I feel about parenting and adoption also.

Women Remain Under-Represented in the Corporate World

Below are two damning statistics on the status of women in the boardroom of Fortune 500 companies:

The numbers are much worse outside of the Fortune 500, with 36% of all Russell 3000 companies (more than 200 such deadbeats are listed here) and 41% of all companies in the MSCI All-Country World Index not having a single woman board member. The worst industry sectors for gender diversity are energy and mining, while the best is consumer staples. This makes sense, since energy and mining involve commodities that “are what they are,” whereas consumer staples are highly sensitive to the changing consumer tastes of the household that women (on average) understand best.

Protect Your Stock Portfolio with Women-Influenced Companies!

Whether or not you believe that female-influenced boards actually outperform male-only boards over the long run, the fact remains that companies with women board members are more defensive in nature and tend to outperform in down markets. Consequently, it makes sense to allocate a portion of your stock portfolio to such lower-risk companies (but remember not to do so during the year that female members are first added because of sexist shareholder selling).

Below is a list of global large-cap stocks with the highest percentage of female board members:


Total Number of Directors

Number of Women Directors

Percentage of Women Directors

Procter & Gamble (NYSE: PG)




Wellpoint (NYSE: WLP)




Statoil ASA (NYSE: STO)




General Motors (NYSE: GM)




Wells Fargo (NYSE: WFC)




Hewlett-Packard (NYSE: HPQ)




Deutsche Bank AG (NYSE: DB)




France Telecom (NYSE: FTE)




PepsiCo (NYSE: PEP)




McKesson (NYSE: MCK)




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