On Sep. 30, California took a huge step to influence the composition of corporate boards in America. Governor Jerry Brown announced that companies based within its borders will be required to put female directors on their boards.
If this is a game changer, let’s take a look at where and how “the game” is currently being played in the U.S. Recent data released from FactSet analyzed the degree to which women are currently represented on boards of United States public firms.
It painted a picture of incremental change and, if you’re a believer in accelerating gender diversity at the board level, the numbers probably left you frustrated.
The percentage of companies in the Russell 3000 stock index (the only one FactSet measured) with no female board members declined to 18 percent from 23 percent in 2017.
Twenty-two companies now have 50/50 representation, while women make up the board majority at 14 companies, up from five. Just 5 percent of companies in the index are led by women, unchanged from March 2017.
Advocates often turn to data similar to what the Peterson Institute for International Economics and Ernst & Young have produced, showing that companies with at least 30 percent women in leadership roles may boost their net profit margins by about 15 percent compared with those without female leaders.
This study in particular looked at 22,000 companies in 91 countries, and found the biggest gains took place when women held senior positions, such as Chief Financial Officer (CFO) and Chief Operating Officer (COO).
But companies run by a female CEO without other women in executive roles or on the board of directors did not perform particularly better or worse than male-run firms. As effective as one female CEO may be, she will not exercise her full potential unless there are women in other leadership roles and on the board.
While some studies have found that female directors add value, generating higher return on assets, other studies show a decrease in firm performance and an overall loss in value for shareholders.
And if the water was not muddy enough, still other studies conclude that female board representation has absolutely no relationship to firm performance.
But absent from too many discussions are more recent findings from academic scholars investigating outcomes of board gender diversity on a global scale.
While not one of these analyses could find a direct causal relationship of shareholder return driven by women on boards, these complex studies did reveal a nuanced economic rationale for strongly supporting these initiatives.
First, there is a strong contingency factor impacting the positive outcomes of women on boards. Accounting returns are more positive in countries with women on boards and where those countries have stronger stakeholder protections.
Lehigh's Corrine Post (Lehigh) and Georgia State's Kris Byron found that boards with a relatively larger number of women are more engaged in activities that are central to the formal responsibilities of a board: monitoring for risk and strategy involvement.
Second, a European study also did not find any simple evidence of diversity correlating with a firm’s value, but it did uncover more contingency factors that can enhance value. For example, it found a positive effect of women on the board and an increase in return on assets (ROA) and return on sales (ROS).
In addition, there was also a strong positive relationship between financial performance and social compliance, all factors that have a “spillover” effect to increasing firm value.
In other words, greater female representation on boards of large European firms increases their values but does so from the increased degree to which the firms observed ethical social policies.
Finally, while these contingency factors create a more indirect and nuanced case, they strongly suggest it’s not a mere numbers game. At the heart of any board’s effectiveness is its tolerance for divergent views and the ways these views are facilitated by the board chair or lead independent board member.
Current research on board optimization I am now engaged in has been showing a significant need for extremely well-facilitated board meetings that can leverage member dissention toward better decision-making, rather than quieting conflict.
Not surprisingly, the recent analysis of leadership of women in publicly owned firms in the United States is striking in the context of what the global studies predict.
1. Having a female CEO correlated strongly with having high female representation on the board of directors. There is danger in seeing this as a one-way conclusion that women CEOs bring on more women to their boards.
It may just as easily imply a two-way relationship, where women on the board influence the selection of a CEO who happens to be of their gender. FactSet found that 0.6 percent of companies without female board members have female CEOs, compared to 6 percent of companies with at least one female board member.
The percent of companies with female CEOs increases to 9 percent when 20 percent or more of board members are female and to one-third when 40 percent or more are female. This correlation also held true across all sectors of the Russell 3000.
2. By sector in the U.S., utilities has the most women in CEO and board seats. This is consistent with, and predictable from, non-U.S.-based research, since firms in this sector are also among the most heavily regulated, and regulation was a key factor in the European study.
By subsector, the highest percentage of female CEOs and board members are in water and electrical, firms dominated by government regulation.
While utilities was at the top, technology ranked at the bottom in terms of female CEOs, with 2.4 percent of the companies having female leadership. This sector also ranks near the bottom when it comes to female representation on boards of directors, with an average of 16.1 percent.
As the federal government and news media have speculated about increased regulation for the technology sector, it would be reasonable to predict that greater diversity will follow if the sector is ultimately regulated.
Here’s the paradox: Regulation may reduce innovation and disruption that benefits society. But if it comes, we have a window to the future from the global studies on women on boards in regulated industries elsewhere:
They bring economic value that translates to profit, a sharper attention to risk and strategy, with shareholder return and possibly a new board dynamic that enables those firms to minimize the negative impact of regulation.
In a critical way, women on boards may be the countervailing force that minimizes the impact of regulation on an industry. The new California mandate may be just what the U.S. needs to create more effective boards and better performing corporations.
Mark Lipton is graduate professor of management at The New School in New York City, an expert on corporate boards, and the author of "Mean Men: The perversion of America’s Self-Made Man."