The female advantage

A new reason for businesses to promote women: it's more profitable

By Rebecca Tuhus-Dubrow
May 3, 2009
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IN THE CUTTHROAT world of business, companies are always looking for ways to increase their profits. They outsource to Bangalore. They endlessly tweak their "brands." Some even try to shed their least desirable customers.

Now, a growing number of consultants and corporate leaders swear by a new strategy to boost the bottom line, one that departs from the standard bag of tricks: put more women in charge.

Several studies have linked greater gender diversity in senior posts with financial success. European firms with the highest proportion of women in power saw their stock value climb by 64 percent over two years, compared with an average of 47 percent, according to a 2007 study by the consulting firm McKinsey and Company. Measured as a percent of revenues, profits at Fortune 500 firms that most aggressively promoted women were 34 percent higher than industry medians, a 2001 Pepperdine University study showed. And, just recently, a French business professor found that the share prices of companies with more female managers declined less than average on the French stock market in 2008.

This mounting body of evidence represents an important twist in the debate over women in business. For decades, women's advancement has been seen as an issue of fairness and equality. Now some researchers are saying it should also be seen in another way: as a smart way to make money.

"The business case is so strong," says Alison Maitland, senior visiting fellow at Cass Business School in London, and coauthor of the 2008 book "Why Women Mean Business." "We need more women in senior management."

The numbers are certainly striking, but their meaning is not yet fully understood. Correlation does not equal causation: While the link between higher levels of female leadership and profits is fairly well-established, it's less clear that women are directly responsible for the success. Rather, companies of a particular kind - forward-thinking, adaptable - may both turn higher profits and promote more women. And some of the data on women's influence are mixed. One recent study, for example, found that the presence of senior women just below the CEO led to higher profits - but the effect of female CEOs was neutral or slightly negative.

And if the high-level women do directly cause better performance, it is not entirely clear why. One possibility is that women enjoy an edge in understanding the consumer market: by some estimates they make 80 percent of consumer purchases. Another theory is that gender diversity stimulates more vigorous discussions, resulting in smarter decisions. More controversially, women may on average exhibit a different, and fruitful, leadership style.

Some analysts even suggest that women might have been able to temper the excesses that led to the current financial crisis. The culprits, one can't help but notice, were overwhelmingly male. More women at the table, some speculate, might have served as a prudent counterweight to reckless, testosterone-addled men. In fact, Iceland has dispatched a team composed largely of women to clean up after its collapse.

"There's evidence that women tend to be more risk-averse than men," says Daniel Ferreira, who teaches at the London School of Economics. Based on his own research, he says, "Women on boards would have been more vigilant and more worried about what the executives were doing. I suspect that it would have attenuated the crisis we are living now."

. . .

It can be easy to forget the momentous change in the position of women that has occurred, at least in Western societies, over the course of a few generations. Young women today approach life with ambitions and expectations that their great-grandmothers would have scarcely believed. Girls surpass boys academically in elementary and high school, and the majority of American college graduates are women.

Yet the corridors of corporate power are still dominated by men. Last year, women at Fortune 500 companies held only 15 percent of board director positions, 16 percent of corporate officer positions, and 6 percent of top earner positions, according to a study by Catalyst, a nonprofit dedicated to expanding opportunities for women in business. The figures are even lower in most of Asia and Europe.

Going back at least to Betty Friedan's 1963 book "The Feminine Mystique," feminists have pushed for women to enter the workforce, to find a source of meaning, income, and independence outside the home. The dissatisfied housewives of Friedan's book are much less common now, and women have poured into all sectors of the economy, moving far beyond the secretary's office. Yet they still encounter the infamous "glass ceilings" and "sticky floors." The reasons are multiple and mutually reinforcing: tenacious associations between leadership and masculinity; women's own priorities and obligations as mothers, which depend in turn on their spouses' parental contributions; and a variety of subtle cultural barriers.

As women have slowly penetrated the upper echelons, though, scholars have started to study the impact of their presence. In 2001, the late Roy Adler, a professor at Pepperdine University, found that companies that promoted more women also did better financially. He and his colleagues examined data provided by more than 200 Fortune 500 companies about the gender makeup of their senior management and board members from 1980 to 1998. They discovered that the 25 best firms for women outperformed the industry medians on three measures. Calculated as a percent of revenue, their profits were 34 percent higher; as a percent of assets, they were 18 percent higher; and as a percent of stockholders' equity, they were 69 percent higher. The results were published in the Harvard Business Review.

In 2007, Catalyst published a study looking at the number of female board members at Fortune 500 companies, using data from 2001 to 2004. The researchers divided the companies into four groups - the top quartile had the most women on boards, the bottom quartile the least - and compared their profitability on several metrics. In return on equity, the top quartile yielded 13.9 percent, compared with 9.1 for the bottom; for return on sales, the top quartile achieved 13.7 percent, versus 9.7; for return on invested capital, the top quartile reached 7.7 percent, as opposed to 4.7.

"If you take a company in 2009, and it has no women on its board, you've got a troubled company," says Harvey Wagner, a business professor at the University of North Carolina who helped conduct the study.

A few researchers have begun to tease out the dynamics at work. One recent study determined that women in senior management had an especially positive impact on firms involved in research and development. Based on data from 1,500 American companies, from 1992 to 2006, the study used an econometric analysis to try to answer the chicken-and-egg question of whether better firms promote women or women in power make better firms. The authors - Cristian Dezso, a professor at the University of Maryland, and David Gaddis Ross, a professor at Columbia University - reported some evidence of the former, but stronger indications that women leaders exert a beneficial influence. "It's consistent with this theory that women manage in a participatory way, a democratic way," says Dezso, a style that is thought to foster teamwork and creativity.

Not all of the evidence, however, points to the unalloyed advantages of female leadership. These findings applied to senior positions "just below" the CEO, but the study found no positive effect of having a female CEO. They also identified the benefit only in companies that spend a significant portion of their budgets on research and development.

Daniel Ferreira's recent study, conducted with Renee Adams at the University of Queensland in Australia, examined the influence of gender on corporate boards, and likewise arrived at mixed conclusions. The presence of women appeared to affect the dynamics of boards, specifically by making them more vigilant. If a company was otherwise poorly governed, these boards seemed to enhance profits. But if the company was already governed well, the tougher, more gender-diverse boards actually appeared to have a counterproductive effect, diminishing profits.

"Women tend to be tougher as monitors," says Ferreira. "Their leadership style seems to be different. This is not necessarily a good thing in all circumstances."

Scholars have called for further studies to explore these questions in greater depth and nuance. Where women appear to positively influence performance, is this effect due to greater gender diversity, or to superior female management? In other words, is a 50-50 balance optimal, or is it the more women the better? (This has been essentially impossible to study because so few firms are female-dominated.) Another important question is what distinguishes firms that retain women from those who don't - is it a matter of instituting certain policies, or more nebulous cultural elements? And are female-friendly policies - in particular, those designed to enhance work-life balance - detrimental to profits, or might they instead yield monetary rewards?

. . .

Given the mixed evidence - and the need for much more research - some caution against taking the case for female leadership too far. Companies should not expect that simply putting more women in corner offices or on boards will automatically improve performance, Ferreira believes. He and others are wary of quotas, which have significant support in parts of Europe. Norway even has a law requiring that women constitute 40 percent of board members.

Still, a number of corporate leaders maintain that senior women confer a competitive advantage. CEOs such as Carlos Ghosn of Nissan and Renault, Andrew Gould of Schlumberger, and Michel Landel of Sodexho have spoken of the promotion of women as a key to business growth, and their companies have all introduced policies, including numerical targets, to encourage it. Baxter International Inc., citing research on the financial benefits, recently set and reached a target of 50 percent women in management and executive positions in its Asia Pacific branches. Last October, a group of male executives who participate in a British mentoring program published a letter to the editor in The Telegraph: "We are convinced it is essential to accelerate the progress of women into senior positions, given the UK's need to deploy the best talent available. This need is greater than ever in the current economic climate."

According to much of the scholarly literature, women struggle with a number of disadvantages, such as discomfort with promoting themselves. They are much more likely to report lacking access to the informal networks that spread crucial information and advice. Disproportionately responsible for child care, they require more flexibility. As a result, many exceptional female employees languish in middle management and eventually leave in frustration.

This is the most basic reason many analysts identify for the correlation between gender diversity and corporate performance. Organizations that are sensitive to these issues, and are therefore closer to being genuine meritocracies, tend to thrive.

"Those organizations produce more women leaders and better results," says Herminia Ibarra, a professor at INSEAD, an international business school. "They're picking the best and the brightest, and letting them bloom."

Rebecca Tuhus-Dubrow is a contributing writer for Ideas. She can be reached at

(Joel Castillo for the Boston Globe)