Higher numbers of women in senior leadership teams linked to higher profit margins

A new decade-spanning study attests to the power of having more women on boards — as well as the frameworks to get women there — in order to spark better company performance and profit generation.

Companies with more women in senior management teams have about 30 per cent higher profit and generated cumulative return-on-equity at almost 30 per cent higher than those with lower rates, as shown by Realindex’s study on gender diversity in the private sector.

Women on boards = better performance

The report, titled Beyond Lip Service: tracking the impact of the gender diversity gap, looked closely at the composition in both senior management and executive teams of 2500 large cap companies, in 30 countries over more than a decade.

There has been a long-held notion that improved diversity leads to better teams and decision-making, “ shares the study’s co-author, Dr Joanna Nash. “The analysis showed a clear correlation between greater diversity and better company performance.”

The study also looked at how government-enforced quotas moved the dial. It shows that they have sparked higher participation of women on boards over the last decade, however they note that without these quotas for senior management teams, women are being left behind in C-suite representation.

Quotas or disclosure statements?

Analysis shows that quotas are more effective than disclosure in boosting female representation — although both are important,” shares co-author Dr Ron Guido, who cites the importance of external forces to generate change.

“This is evident in the higher proportion of women on boards in markets where minimum levels are mandated. The proportion of women in senior management lags in nearly all markets where there are no such requirements for gender balance.”

The opportunity for investors

The data also offers insight to the opportunity this poses for investors. The date shows that investing in “high diversity firms” instead of “low diversity firms” has the potential to bring in an annual return premium of 2.5% for diverse boards and a 4% annual premium for diverse senior management.

The gender diversity premium has not yet been priced in by the market, meaning that investors who can identify companies with higher diversity, especially in senior management, may generate higher investor returns compared to the benchmark,” shares Dr Nash.

Beware of the ‘pink ghetto’

The report also reminds us to consider how ‘pink ghettos’ form in organisations. These are the phenomenon that sees women often end up in silos that are less likely to launch-pad into higher positions and the CEO role, such as human resources, company secretariat, marketing and legal.

Even when women do form part of the management team, they are concentrated in several functions outside of the CEO role which are less likely to be a launch-pad into the top job. To achieve equality, we need to fill the CEO pipeline with more women,” Dr Guido concludes.

For more information about this study and insights from authors Dr Joanna Nash.and Dr Don Guido, read more on Women’s Agenda.