Gender Equality: Good for Business

Many of us were excited to learn that civil rights activist Harriet Tubman will soon be featured on the $20 bill. Unfortunately, for women who work jobs where men earn $20 per hour, they will only be receiving one Hamilton, one Lincoln, and one Washington for their hours of work. Even in 2016, women continue to earn about 78% of what men do for equal work. Income inequality has been compounded by a lack of women’s leadership in the C-suite, on executive boards, and throughout corporations’ organization charts. This disparity is not only an injustice—it also happens to be bad for business.

WOMEN IN THE C-SUITE: DRIVING PROFITABILITY DESPITE DISPARITY

By some measures, the world is succeeding in closing the gender gap. The World Economic Forum’s 2015 Global Gender Gap report shows that in the U.S., women comprise 48% of the total workforce, are more likely to graduate from college than men, and make up 53% of all graduating PhDs. College educated young women are also now just as likely to be employed in professional positions such as doctors, lawyers, scientists, or managers as they are to be employed in traditionally female-dominated industries such as teachers or nurses, according to Census data.

With improvements like these, one might ask, just how serious can the gender disparity be? Let’s start at the top. Women currently hold 4% of CEO positions, or 20 out of 500, at S&P 500 companies. But despite the limited presence, women’s leadership in those 20 companies (and others) has proven to be an advantage for the company’s stock price. Wall Street firms have created indexes that focus on companies with the largest percentage of women in leadership or on boards. While these indexes are still relatively new, and shorter-term performance has varied, they have managed to outperform the S&P 500 over a five-year time horizon and have also outperformed year to date [Figure 1].

Moving to the board room, women hold 19% of corporate board positions, according to recent data from Catalyst, an organization dedicated to expanding opportunities for women and business. This small group has consistently been credited with driving growth, change, innovation, and most importantly, success. Companies where women hold corporate board positions consistently outperform other companies across key financial metrics such as return on equity, return on sales, and return on invested capital. On average, each metric is higher at companies with three or more women on corporate boards, by 46%, 84%, and 60%, respectively [Figure 2].

Although women are driving profits at major corporations, opportunities for women on corporate boards and in senior leadership roles continue to be limited, and have not improved markedly over time, as shown in Figure 3. An opportunity for increased women’s leadership opened in 2015, when 17% of the largest companies in the world had open CEO positions. Despite a well-documented talent pool, women filled less than 3% of these positions.1

WHY THE DIFFERENCE IN PERFORMANCE?

Several factors help the stronger performance of companies with more balanced gender representation over time, a few are highlighted below.

Transformational Leadership as a Competitive Advantage

Women are generally more likely than men to be transformational leaders,2 which may help explain why companies led by women are more successful.

Two common categories used to describe leaders are transactional and transformational. Although these two aren’t mutually exclusive, a transactional leader manages through rewards and penalties, e.g., production bonuses and/or quotas. These types of leaders have been shown to be successful, but much of the success comes from rewards rather than penalties.

Transformational leaders, on the other hand, are inspirational. They create a vision, model the behaviors they desire of their employees, and encourage employees to reach for goals through personal development and collaboration. Unsurprisingly, these traits tend to lead to more engaged employees,3 and engaged employees have been found to be more productive and profitable.4

More Democratic/Less Autocratic Leadership Drives Decision Making

Women are generally more likely than men to include junior colleagues in decision making (a factor that may help develop future leaders), and are more likely to welcome different views and new ways of approaching problems.5

Diversity Can Lead to Better Decisions

Some have asked if the financial crisis would have happened if there were more women leaders on Wall Street. While no one can say for sure, there is evidence that women senior executives are more risk averse.6 In addition to the C-suite, the question may apply to trading floors as well, given that men have been shown to take more risks when surrounded by a group of people who are like them (as would have been the case on Wall Street trading floors in the period leading up to the financial crisis), while women in the same situation don’t.7

More importantly, though, gender diversity (and other types of diversity for that matter) leads to greater diversity of ideas. Everyone looks at the world a little differently, and having increased gender and cultural diversity on a management team can bring insights that might otherwise be missed. Incorporating more viewpoints at all levels of the business helps generate better ideas, which should, in turn, improve problem solving and decision making.

GOOD FOR COMPANIES, GOOD FOR COUNTRIES

Greater women’s leadership can help individual companies perform better, but rolling up the impact to the national level is eye-opening. A recent study by the McKinsey Global Institute indicated that full gender parity (i.e., both wages and the number of workers) could add $12 trillion to the world economy, including $4.3 trillion in growth in the U.S. (nearly double California’s 2015 gross state product of $2.4 trillion) [Figure 4]. This number is particularly noteworthy as the U.S. already scores high on gender parity compared with many areas of the world.

It’s no surprise that countries that have embraced women in the workforce and in leadership positions are often among the most successful.8 Many poor and developing countries, such as those in East Africa, have a high percentage of women in the workforce but partly out of necessity. However, developed nations, such as Scandinavian countries, have been among the most successful at closing the gender gap, and they have reaped the rewards. Norway, Sweden, and Denmark rank in the top 10 of all countries, measured by gross domestic product (GDP) per capita. China’s economy has surpassed that of rival Japan in part due to greater openness for women in the workforce.

NEXT STEPS: EXECUTIVES MUST TAKE ACTION

Many have long discussed what will drive change for women. Fortune 500 companies across a range of industries have created high-potential corporate leadership programs, developed best hiring practices that tie recruitment of women to annual compensation, and initiated succession planning that includes consideration of women at the most senior leadership levels. Many companies are also adding or expanding parental leave policies to make workplaces more family friendly for both genders. These steps on their own, although important, have not been enough. If history is a guide, they will likely continue to be insufficient, and may lead businesses to leave money on the table.

Another track managers can take is to try including at least two women in final interviews, or even use blind pools (where names, gender, and ethnicity are not known) for selecting candidates for initial interviews. People tend to unconsciously favor the status quo, and it was recently found that when one woman was included in a pool of four finalists, she had statistically no chance of being hired. Including an additional woman changed the status quo though, and the chance of a woman being hired increased more than would be expected based solely on probability.9

Here at LPL Financial, Chairman and CEO Mark Casady is trying to drive change by encouraging male CEOs to advocate for women in leadership positions in business and shift the current trajectory of opportunity for women. “Male CEOs must step up to the plate and make it happen,” Casady explained in a recent Huffington Post article.

Casady advocates for three primary ways to close the gender gap: 1) create a corporate culture where women’s concerns can be addressed in an open environment; 2) acknowledge unconscious biases and mental models that are impacting women’s advancement; 3) retain and develop top talent.

CONCLUSION

Strides have been made in achieving gender parity of opportunity and pay in recent years, but more needs to be done. The good news is that the need for change is becoming more accepted. The allure of additional profitability for companies and economic growth for countries may help leaders stay focused on the issues that are causing the disparity, potentially providing new ideas and ways of doing things that can help bring full equality.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing in stock includes numerous specific risks, including: the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a failing market.

INDEX DESCRIPTIONS

The Barclays Women in Leadership Index includes U.S. companies that among other criteria, have a female CEO and/or companies where at least 25% of the board of directors are female.

The State Street Global Advisors (SSGA) Gender Diversity Index focuses on large cap U.S. companies that have the highest levels of gender diversity in senior leadership within their sector.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing major industries.

1 PricewaterhouseCoopers Study, CEO Turnover at a Record High Globally, with More Companies Planning for New Chiefs from Outside the Company (2015).

2 A.H. Eagly, M.C. Johannesen-Schmidt, M.L. van Engen, Transformational, Transactional, and Laissez-Faire Leadership Styles: A Meta-Analysis Comparing Women and Men (American Psychological Association, 2003).

3 L.C. Batista-Taran, M.B. Shuck, C.C. Gutierrez, and S. Baralt, The Role of Leadership Style in Employee Engagement (2009).

4 J.H. Fleming, and J. Asplund, HumanSigma: A Meta-Analysis (New York: Gallup Press, 2007).

5 M.L. van Engen, Gender and Leadership: A Contextual Perspective, doctoral dissertation (Tilburg University, the Netherlands, 2001).

6 M. Faccio, M. Marchica, and R. Mura, CEO Gender, Corporate Risk-Taking, and the Efficiency of Capital Allocation (2016).

7 E. Ermer, L. Cosmides, and J. Tooby, “Relative Status Regulates Risky Decision-Making About Resources in Men: Evidence for the Co-Evolution of Motivation and Cognition” (Human Behavior, 29, 106–118, 2008).

8 World Bank data (04/28/16).

9 Harvard Business Review, If There’s Only One Woman in Your Candidate Pool, There’s Statistically No Chance She’ll Be Hired (2016).

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