Female Managers Can Raise Share Values

By Brian Bloch AAA

In pretty much all Western countries, men continue to dominate big business, and addressing this disparity is an ongoing controversy. No one can really justify the "glass ceiling" and proposals for removing it range from voluntary or even legal quotas of women on the board, to strategies by which women can break through these traditional barriers through their own skills, personality and power. It does indeed seem that when the latter occurs, but not the former, a company stands to benefit considerably. This can be seen through some of the current female CEOs at large companies.

The Evidence
In this context, some research from Switzerland (Credit Suisse) and Italy (Mara Faccio et al.) provides a compelling economic case for having high-ranking women in companies. The very substantial Credit Suisse investigation reveals that even a modest degree of reduction in male dominance quite literally pays off. The difference in share prices can be substantial, as much as 26% for large firms. Credit Suisse points out that the results are not necessarily consistent over sectors, countries and time, but that "a bit more balance" can only help.

The consultancy company McKinsey also did some research on this issue and found that firms with more women in senior management did particularly well on various criteria, such as return on equity, operating profits and stock prices. The consultants even described the link between promoting women and doing well as "striking."

The Reasons
Why exactly this occurs is quite complex and there are various possible explanations. For one thing, male domination was also prominent among those causing the financial crisis from 2008 onwards. It is thus logical to look to women as a promising potential source of more prudent financial management. Indeed, it does seem that "less testosterone" reduces the tendency to take excessive risks. This notion has been confirmed by the Italian research mentioned above and from John Coates in Cambridge, England.

There are other factors as well. Some experts believe that the financial crisis has induced many firms to reconsider the way they run their businesses and diversity is one of the core issues that have emerged.

There is a huge body of research on the benefits of diversity and of a combination of leadership styles, indicating that a good gender mix helps raise efficiency, leading to more effective controls and monitoring. There is substantial evidence of productive managerial differences between the genders. Furthermore, women naturally understand other women better, or at least differently, than men, so they can cater more effectively to the "other half" of the population. More women at the top may therefore indicate that a company is doing well and has a sound, state of the art approach to management.

Yet another and quite different explanation (and a warning) is provided by Frank Dobbin and Jiwook Jung of the Harvard University Department of Sociology. They argue that "investor bias" may raise share prices where there are more female board members. They found that blockholding investors are careful not to look like they discriminate against firms with more female directors, even if they are skeptical of the real economic benefits. Furthermore, non-blockholders do not react negatively. Yet, Dobbin and Jung point out that, "the big picture seems to be that gender diversity does not help firms and may hurt them."

Whatever the Case, Let Gender Balance Occur Naturally
Kenneth Ahern and Amy Dittmar from the University of Michigan found that a legally-enforced quota is counterproductive. "Forced diversity" not only runs counter to fundamental market and efficiency-inducing forces, but obliges companies to appoint people for the wrong reasons. Radical changes are far less effective than allowing economic realities to prevail over time. Evidence from Norway in particular, with its 40% quota for female managers, indicates that such drastic measures can have disastrous consequences. In fact, the threat of a quota is arguably a better way to encourage progress, rather than actually proceeding with legislation.

It is also important to note that the male-female ratio differs naturally from sector to sector. For instance, there tend to be more women in consumer goods and the health sector, compared to automotive industries, or to use an even more extreme example, weapons manufacturing.

A Methodological Word of Warning from Harvard
Getting back to the Harvard sociologists, it is important to note that how exactly the research is done appears to impact quite substantially, and even fundamentally, on the results. Dobbin and Jung warn that "the effects of board diversity on corporate performance are not well understood." Specifically, they explain that studies comparing data at two points in time indicate that gender diversity in boards enhances stock values and profitability, but that panel data over several years yield either no or even negative effects. Clearly, more research is needed to resolve this ambivalence and uncertainty.

The Future Looks Reasonably Promising
Fortunately, research suggests that the gender imbalance is slowly but surely moving in the right direction. Egon Zehnder International has established that, in Europe, women's share of board seats has risen, albeit not terribly fast. But the trend is there all right, and there is no reason for it to slow down or go into reverse. There is still a long way to go, but the signs are there that we are heading firmly in the right direction.

The Bottom Line
Despite the debate on the merits or demerits of capitalism and of neoliberalism, and the massive shocks to the system in recent years, market forces and economic rationality remain vital. While the need for financial regulation seems clearer than ever, female managers are obviously, and without artificial support, proving their economic worth when given the chance. The glass gender ceiling is not productive, but on the other hand, one should not attempt to break it by force. Women are quite capable of proving their worth in raising corporate value through various financial, managerial and human capabilities that they can provide and men cannot.

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