Gender diversity and corporate performance August 2012 Research Institute Thought leadership from Credit Suisse Research and the world’s foremost experts Contents 3 Editorial 4 Gender diversity and corporate leadership 6 Introduction 9 Gender diversity: Latest data and recent trends 12 Women on the board and stock- market performance 14 Women on the board and financial performance 17 Rationalizing the link between performance and gender diversity 20 The value of diversity Interview with Professor Katherine Phillips 22 Achieving the targets – easier said than done! 26 Barriers to change 29 References 31 Imprint/Disclaimer For more information, please contact: Richard Kersley, Head of Global Research Product, Credit Suisse Investment Banking, richard.kersley@credit-suisse.com Michael O’Sullivan, Head of Portfolio Strategy & Thematic Research, Credit Suisse Private Banking, michael.o’sullivan@credit-suisse.com COVERPHOTO: THINKSTOCKPHOTOS.COM/DIGITAL VISION. PHOTO: ISTOCKPHOTO.COM/MOODBOARD_IMAGES GENDER DIVERSITY_2 Editorial There has been considerable research on the impact of gender diversity on business. This report addresses one key question: does gender diversity within corpo- rate management improve performance? While it is difficult to demonstrate definitive proof, no one can argue that the results in this report are not striking. In testing the performance of 2,360 companies globally over the last six years, our analysis shows that it would on average have been better to have invested in corporates with women on their management boards than in those without. We also find that com- panies with one or more women on the board have delivered higher average returns on equity, lower gearing, better average growth and higher price/book value multiples over the course of the last six years. There is not one easy answer to why gender diver- sity matters. While the facts and data we present are objective, the interpretation of the results carries more than an element of subjectivity. We analyzed the academic literature in this area and conducted several interviews with several experts on the topic. Among these, we want to thank Professor Katherine Phillips (Paul Calello Professor of Leadership and Ethics at Columbia Business School) and Professor Iris Bohnet (Academic Dean and Professor of Public Policy at the Harvard Kennedy School and now a Director on the Credit Suisse Group Board). With their help, we identified seven possible explanations that, on a stand-alone basis or in some combination, help explain our findings. What is next? Several public bodies have become more vocal in supporting increased participation of women in leadership roles in the corporate world. Some, like the Norwegian government, have set mandatory targets; others have chosen to issue rec - ommendations on board diversity. Ultimately, the trend towards greater gender diversity within man - agement looks set to continue – and going forward will provide another metric for those scrutinizing cor - porate governance. Our research suggests that a specific consequence of greater board diversity for shareholders is one of reduced volatility – manifested as enhanced stability in corporate performance and in share price returns. Urs Rohner Brady W. Dougan Chairman of the Chief Executive Officer Board of Directors GENDER DIVERSITY_3 Gender diversity and corporate leadership The impact of gender diversity on corporate leadership has been widely debated for many years. In our review of the topic, we look at the impact from a global perspective by analyzing the performance of close to 2,400 companies with and without women board members from 2005 onward. PHOTO: ISTOCKPHOTO.COM/MEDIAPHOTOS GENDER DIVERSITY_4 PHOTO: ISTOCKPHOTO.COM/MEDIAPHOTOS Gender diversity within senior management teams has become an increasingly topical issue for three related reasons. First, although the proportion of women at board level generally remains very low, it is changing. Based on our numbers, only 41% of MSCI ACWI stocks had any women on their boards at the end of 2005, but this had increased to 59% by the end of 2011. Second, government interven - tion in this area has increased. In the past five years, seven countries have passed legislation mandating female board representation and eight have set non-mandatory targets. Third – and most interesting – the debate around the topic has shifted from an issue of fairness and equality to a question of superior performance. If gender diver - sity on the board implies a greater probability of corporate success, then it would make sense to pursue such an objective, regardless of govern - ment directives. There is a significant body of literature on this issue; articles on the subject span several decades. Some suggest corporate performance benefits from greater gender diversity at board level, while others suggest not. In the positive camp are the likes of McKinsey and Catalyst. Catalyst has shown that Fortune 500 companies with more women on their boards tend to be more profitable. McKinsey showed that com- panies with a higher proportion of women at board level typically exhibited a higher degree of organiza- tion, above-average operating margins and higher valuations. Other studies, such as those conducted by Adams and Ferreira or Farrell and Hersch, have shown that there is no causation between greater gender diversity and improved profitability and stock price performance. Instead, the appointment of more women to the board may be a signal that the company is already doing well, rather than being a sign of better things to come. We note that much of the available literature analyzes the impact of women on the board within one market or region. Usually, this is the USA or Europe or another isolated market. Hence, to add to the debate, we consider the issue from a global perspective, looking at the impact on performance through time, both in terms of stock returns and commonly quoted financial metrics (ROE, EPS growth, gearing and P/BV). Studying the data over time, and encompassing periods of relative bull and Introduction bear markets, provides an opportunity to assess the conditions under which female influence on leadership may deliver the best performance and highlights periods in which gender diversity on the board may be less useful. Specifically, in our study we set out to answer four broad questions: 1. What evidence is there to support the theory that stock-market performance is enhanced by having a greater number of women on the board? 2. Is there any difference in the financial character- istics of companies with a greater number of women on the board? 3. Why might it make a difference (better or worse) to have some gender diversity in company man- agement? 4. What factors might limit companies in increasing female representation? Some of the answers are obvious, some are less so. For example, the extent to which subconscious stereotyping can bias the selection process. Our key finding is that, in a like-for-like com- parison, companies with at least one woman on the board would have outperformed in terms of share price performance, those with no women on the board over the course of the past six years. However, there is a clear split between relative performance in the 2005–07 period and perfor - mance post-2008. In the middle of the decade when economic growth was relatively robust, there was little difference in share price performance between companies with or without women on the board. Almost all of the outperformance in our backtest was delivered post-2008, since the macro environment deteriorated and volatility increased. In other words, stocks with greater gen - der diversity on their boards generally look defen- sive: they tend to perform best when markets are falling, deliver higher average ROEs through the cycle, exhibit less volatility in earnings and typically have lower gearing ratios. We can therefore conclude that relative share price outperformance of companies with women on the board looks unlikely to be entirely consistent, but the evidence suggests that more balance on the board brings less volatility and more balance through the cycle. PHOTO: ISTOCKPHOTO.COM/BIM GENDER DIVERSITY_6 PHOTO: ISTOCKPHOTO.COM/BIM GENDER DIVERSITY_7 PHOTO: ISTOCKPHOTO.COM PHOTO: ISTOCKPHOTO.COM/PIXDELUXE GENDER DIVERSITY_8 Gender diversity: Latest data and recent trends To assess the impact of female board representa- tion, we have compiled a database of the current constituents of the MSCI AC World index detailing how many women were on the board of each con- stituent company at the end of each year since 2005. This encompasses data for 2,360 compa- nies and over 14,000 data points. Our key summary observations from this set of data are: 1. Sectors that are closer to final consumer demand have a higher proportion of women on the board. Sectors closer to the bottom of the supply chain tend to have a much lower propor- tion of women on the board. 2. Certain regions (e.g. Europe) and countries (e.g. Norway) tend to have relatively high ratios of women on the board, for others the numbers are extremely low (e.g. Korea). 3. Larger companies are much more likely to have women on the board than smaller compa- nies. 4. Over the past six years, the fastest rates of change in female representation have come from European companies. In Figure 1 we detail the proportion of companies within each sector that have zero, one, two or three or more women on the board. Broadly speaking, sectors that are closer to final consumer demand (for example, Healthcare and Financials) have a higher proportion of women at board level. Heavy industry and Information Technology (IT) have a much lower proportion of women board members. More than 50% of the IT and Materials companies in our sample universe have no women on the board. The dispersion in female representation is more significant at market and regional level than at sec- tor level. As we illustrate in Figure 2, 72% of the companies listed in Emerging Asia, within our sam- ple, have no women on their boards compared to only 16% of the companies listed in North Amer- ica. The picture is amplified if we consider greater degrees of gender diversity. For instance, there is a greater proportion of European companies with three or more female board members (27.6%) than there are European companies with no women on the board (16.3%). Meanwhile in Asia and Latin America, the number of companies with three or more women on the board is insignificant. Many of these differences reflect local legisla- tion. Various European governments have set mandatory or non-mandatory targets for female board representation over the past five years and this has driven the numbers for the region to higher levels. We look at this issue in more detail on page 25. Figure 1 Proportion of companies in each sector split by number of women on the board (end-2011) Source: Credit Suisse Number of women on the board % in each sector 0 1 2 >=3 Total Healthcare 26.7 35.1 24.4 13.7 100 Financials 32.2 27.3 23.1 17.4 100 Utilities 33.1 19.5 29.3 18.0 100 Consumer Discretionary 37.7 27.2 20.2 14.9 100 Consumer Staples 38.5 15.5 23.5 22.5 100 Telecommunication Services 40.0 21.1 21.1 17.9 100 Energy 46.8 28.1 18.1 7.0 100 Industrials 48.4 24.3 17.2 10.1 100 Materials 52.5 22.1 16.7 8.7 100 Information Technology 52.5 26.3 13.8 7.4 100 Total 41.2 25.0 20.3 13.6 100 Figure 2 Proportion of companies in each region split by number of women on the board (end-2011) Source: Credit Suisse Number of women on the board % in each region 0 1 2 >=3 Total North America 15.8 32.4 33.1 18.7 100 Europe 16.3 27.4 28.7 27.6 100 EMEA 34.7 26.0 20.0 19.3 100 Latin America 60.8 28.0 8.8 2.4 100 Developed Asia 68.0 19.8 9.4 2.8 100 Emerging Asia 72.1 15.8 7.3 4.8 100 Figure 3 Average market cap (USD m) in each sector split by number of women on the board Source: Credit Suisse Number of women on the board USD m 0 1 2 >=3 Consumer Discretionary 8,451 13,105 11,941 17,437 Consumer Staples 10,320 7,196 21,984 38,790 Energy 14,018 27,948 29,461 33,004 Financials 6,586 10,586 15,282 23,382 Healthcare 6,282 12,649 24,497 55,127 Industrials 5,649 9,363 13,537 18,512 Information Technology 7,893 23,859 24,949 47,985 Materials 7,205 9,987 13,798 15,186 Telecommunication Services 14,462 7,977 31,734 32,698 Utilities 7,561 8,507 12,743 12,954 Total 8,100 13,211 17,730 26,506 PHOTO: ISTOCKPHOTO.COM/PIXDELUXE GENDER DIVERSITY_9 Figure 4 Proportion of companies with one or more women on the board (end-2005 vs. end-2011) by sector Source: Credit Suisse 80% 70% 60% 50% 40% 30% 20% 10% 2005 Materials Financials Industrials Healthcare IT Utlities Total Telecommunication Services Consumer Discretionary Consumer Staples Energy 0% 2011 Figure 5 Proportion of companies with one or more women on the board (end-2005 vs. end-2011) by region Source: Credit Suisse 90% 80% 70% 60% 50% 40% 30% 20% 10% 2005 Developed Asia Latin America Emerging Asia North America Europe EMEA 0% 2011 We also note that the number of women on the board typically rises with the size of the company. On average, it is the large cap, and higher profile companies that have added women at senior man- agement level. This holds true whether we catego- rize the universe by sector or region. In Figure 3 we present the data aggregated by sector. On aver- age, companies with three or more women on the board have a market capitalization three times greater than that of companies with no women board members. The picture is changing, however. Looking at the data over the years we can see a clear trend towards greater female board representation. At the sector level, the increase has been relatively uni - form over the past six years. However, we note that the slowest rate of change has been in the Asian- dominated IT sector (there was only a 12 percent - age point increase in IT companies promoting women to the board for the first time between 2005 and 2011). Utilities and Financials have delivered higher than average female board appointments: there was a 20 percentage point increase in com - panies within each sector promoting at least one woman to the board over the past six years. At the regional level, the fastest rate of change over the past six years has been for European com- panies: just under 50% of European companies in our sample universe had one or more women on the board at the end of 2005, but by the end of 2011 this had increased to close to 84%. Asian markets (both emerging and developed) have most obviously lagged the trends in Europe. The breakdown of the regional data into the component markets (Figure 6) illustrates the degree to which national cultures (and policies) influence the picture. The data suggest the Scandi- navian markets (where mandatory and non-manda- tory targets have been set) have the highest degree of female representation at board level. Female board representation looks low in Switzerland and Italy, compared with the other major European mar- kets. Spain has seen the greatest improvement over the past six years: in 2005 only 22% of Span- ish companies in the sample had one or more women at board level; by the end of 2011 this had increased to 89%. Within Australasia, female board representation is particularly low in Korea, Taiwan and Japan but much higher in New Zealand, Aus- tralia and Thailand. According to our numbers, China has seen the greatest improvement over the past six years: only 6.5% of companies had any gender diversity at board level in 2005, but this had increased to 50% by the end of 2011. Within the EEMEA markets, Israel and South Africa stand out on the gender diversity front: well over 90% of companies in our universe in both markets have at least one woman on the board. GENDER DIVERSITY_10 [...]... 2011 Avg GENDER DIVERSITY_ 17 Rationalizing the link between performance and gender diversity We can identify seven key reasons why greater gender diversity could be correlated with stronger corporate performance: 1 A signal of a better company There is a significant body of research that supports the idea that there is no causation between greater gender diversity and improved profitability and stock... customer satisfaction, and to consider diversity and corporate social responsibility More recent research (2010) conducted by Harvard Business School demonstrated similar results Adams and Ferreira also suggest that gender diversity improves the performance of firms with weak governance but, on the downside, they point out that for firms where governance is already strong, greater gender diversity leads to... leaders The lesson for employers is to tailor training and development to the different traits of male and female managers Coaching and mentoring have proved to be the most effective ways of addressing women’s lower confidence and lesser ambition GENDER DIVERSITY_ 29 photo: istockphoto.com/vm References ••“The Bottom Line: Corporate Performance and Women’s Representation on Boards”, Lois Joy, Nancy... ••Cristian L Deszõ and David Gaddis Ross, “‘Girl Power’: Female participation in top management and firm performance, ” working paper, December 2007 ••Renee B Adams & Daniel Ferreira, Women in the Boardroom and Their Impact on Governance and Performance, 94 Journal of Financial Economics, (2009) ••Kathleen A Farrell & Philip L Hersch, Additions to Corporate Boards: The Effect of Gender, Journal of Corporate. .. ••Frank Dobbin and Jiwook Jung, Corporate Board Gender Diversity and Stock Performance: the Competence Gap or Institutional Investor Bias?,” North Carolina Law Review, Vol 89, 809 – 838 ••Katherine W Phillips, Sun Young Kim-Jun, So-Hyeon Shim, “The Value of Diversity in Organisations: A Social Psychological Perspective.” ••Katherine W Phillips, Denise Lewin Loyd, “When surface and deep-level diversity. .. tipping point over the issue of diversity For large US corporates, it is almost out of step if you aren’t thinking about diversity issues That’s not to say that every company will join in the trend (some people never see that popular movie, right?) but on average momentum appears to be building in favor of greater diversity generally, including greater gender diversity GENDER DIVERSITY_ 22 Figure 19 Two... improves performance on corporate and social governance metrics A study of Canadian companies (listed and unlisted) by Brown and Anastasopoulos in 2002 entitled Not Just the Right Thing, but the “Bright” Thing, showed that boards with three or more women performed much better in terms of governance than companies with all- GENDER DIVERSITY_ 19 male boards The study also found that the more gender- diverse... Greater effort across the board Other evidence suggests that greater team diversity (including gender diversity) can lead to better average performance Professor Katherine Phillips (Paul Calello Professor of Leadership and Ethics at Columbia University) and her colleagues have studied the impact of greater diversity in team exercises and found that (a) individuals are, on average, likely to do more preparation... that gender diversity is any more likely to be successful than any other type of diversity The issues are two-fold: (1) a woman’s status is often perceived as lower than that of a man and hence she isn’t given the equal footing that we have found to be a key ingredient in achieving success through diversity; and (2) there is a significant body of evidence that shows that women don’t speak GENDER DIVERSITY_ 21... 2003 On the face of it, their data showed positive gender diversity effects However, using two different techniques to handle reverse causation, they found statistically significant negative effects on profits and stock value following the appointment of women to the board Farrell and Hersch looked at 300 Fortune 500 companies between 1990 and 1999 and showed that firms with strong profits (ROA) are . Officer Board of Directors GENDER DIVERSITY_ 3 Gender diversity and corporate leadership The impact of gender diversity on corporate leadership has been. market performance 14 Women on the board and financial performance 17 Rationalizing the link between performance and gender diversity 20 The value of diversity