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More women on boards better for financial returns, CSR

Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec, and Saskatchewan now all require listed companies to annually report their approach to adding more women to their boards and senior management. Gender equality on boards is certainly a live issue in the corporate world.

Given the expansive nature of the topic, I have split the topic into three articles. This series supports the fact that not only is gender diversity on boards important for better financial returns, it is a basis for improved corporate social responsibility initiatives.

In many respects, I have written this series to arm those in our profession wanting to demystify some of the mythology around diversity and inclusion surrounding gender, boards, and corporate social responsibility.

My goal is to give in-house counsel, external lawyers, and anyone who advises existing decision-makers some persuasive information and strategies towards gender equality on boards, the C-suite, and upper-management, who I define as decision-makers.

Increasing gender diversity should not be viewed as merely something companies have to do to comply with securities regulators. It is clearly an opportunity. My hope is the internal dialogue within organizations is that they get to work towards gender diversity among their ranks.

Here is Part 1 of the series. It lays out a foundation for those less familiar with the terminology around diversity and inclusion, and provides a strong business case for gender equality among decision-makers based on the most recent research. Undoubtedly, gender diversity is integral to both qualitative and quantitative organizational growth.

Part 2 will dive into the effect of gender diversity on how a company values and engages CSR. In Part 3, we will evaluate some tools to help advisers engage decision-makers to get them on board with gender diversity and inclusion within their own ranks.

Part 1: Gender board diversity means better financial performance or diversity and inclusion 101

Let’s start with the basic terminology to make sure we are all on the same page. Diversity is about the wealth around human differences — including gender, race, ethnicity, gender identity, sexual orientation, disability, and life experiences.

Inclusion is simple enough. It’s about creating a culture within an organization where someone can bring his or her whole self to work. It fosters belonging, respect in value, while encouraging engagement within and outside the organization.

Diversity is about being in the room. It’s an initial step. Inclusion is about having a seat at the table and having a relatively equal voice. Diversity alone is about having the right faces in the right places. That doesn’t get us where we want to be from the perspective of CSR.

The research supports the fact that diversity and inclusion are an essential element to CSR. Without an inclusive culture at the board, C-Suite, or other staffing levels, diversity alone can sometimes be more about feel-good propositions that will have less of an impact on both quantitative and qualitative organizational growth including the bottom line.

It is that sweet spot in the middle when these two goals meet, where people within an organization — members, clients, staff, and leadership — wake up every morning and feel as if they have a meaningful role to play.

Research going back to the 1950s indicates the more inclusive and diverse the organization, the greater the ingenuity, creativity, and meaningful are the outcomes of that organization.

The research

We know intuitively that diversity matters. It’s also increasingly clear that it makes sense in terms of outcomes, both financial and qualitative, in the for-profit and not-for-profit sectors.

The latest research finds companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians.

Companies in the bottom quartile are statistically less likely to achieve above-average returns. Diversity is a competitive advantage that may swing market share towards more diverse companies and other organizations over time.

While correlation does not equal causation (i.e. greater gender and ethnocultural diversity in corporate leadership do not automatically translate into more profit), the correlation does indicate that when companies commit themselves to diverse leadership, they are more successful.

More diverse companies and organizations are better able to win top talent and improve their customer orientation, employee satisfaction, and decision-making. All that leads to a virtuous cycle of increasing financial and non-financial returns.

With regard to gender diversity on boards, there has been an immense amount of research conducted that supports a correlation between it and financial performance. I will highlight some of the most recent research released in the last five years.

Research goes back to the 1980s and is expansive in its scope. There are several wide-ranging global studies that represent thousands of corporations and organizations. The same outcomes and conclusions could also apply to government and the not-for-profit sector.

For instance, earlier this year, the Peterson Institute for International Economics, a private nonpartisan, non-profit think-tank that conducts research into international economic policy, released the outcomes from a massive study of almost 22,000 firms in 91 countries. “Is Gender Diversity Profitable? Evidence from a Global Survey” found “the presence of women in corporate leadership positions may improve firm performance. This correlation could reflect either the payoff to non-discrimination or the fact that women increase a firm’s skill diversity.”

Not so convincing you say? In 2015, another study of 1,050 companies, Grant Thornton looked at companies in the U.S., U.K., and India. It found “the profit foregone — or opportunity cost — by the companies with male-only boards is a staggering $655 billion across the three economies.”

Moving forward, the research suggested that in the U.K. and U.S., the impact of moving to mixed boards on the S&P 500 and FTSE 350 could boost GDP by around three per cent.

Massive potential lies beyond the large listed companies on which the research was based. One could only hazard a guess at the further GDP gains to be made in non-listed and mid-sized companies.

In 2014, Credit Suisse released persuasive research indicating that companies with greater gender diversity on boards and in management exhibit higher returns on equity, higher valuations, and superior stock price performance. The study is based on the “Credit Suisse Gender 3000” database, established by mapping more than 3,000 companies globally and comprised nearly 3,700 women out of a total of 28,000 senior managers.

Thomson Reuters put it very simply after conducting its own research in 2014 with a broad analysis of 4,255 public companies globally: “Having greater gender diversity in top management results in higher corporate output” when looking at a variety of performance indices.

The research above is supportive of a 2011 study prepared by Catalyst, which reported that companies with more women on boards drastically outperform those with the least when looking at several indicators of financial performance.

Based on three key measures to examine financial performance — return on sales, return on invested capital, and return on equity — companies with the most women directors outperform those with the least on ROS by 16 per cent and on ROIC by 26 per cent.

Companies that sustained three or more women directors in at least four of five years appreciably outpaced those with sustained low representation by 84 per cent on ROS, 60 per cent on ROIC, and 46 per cent on ROE.

It seems abundantly clear that greater gender diversity on boards, the C-Suite, and upper management directly supports higher corporate returns.

Based on my own research and 15 years of experience working with organizations on diversity and inclusion initiatives, the reason you see this quantitative financial growth by way of financial returns is as a result of its predecessor — the qualitative growth in the workplace culture, morale, and people.

Qualitative growth happens prior to greater financial returns. People very quickly understand that when they work in an environment in which they are valued, where they are part of decision-making, and in which they can see their own personal and career growth, they are encouraged and supported when they bring all of the facets of themselves to work.

A culture such as this, where managers, directors, and other team leads are skilled in emotional intelligence and trained in diversity and inclusion, stimulates individuals to place their employer’s mission statement high within their personal mandate.