Recently, I discussed the topic of gender diversity on the board of companies or in the executive team again. Back then I showed that there is a bit of a threshold effect where a single woman on the board doesn’t change the performance of a company much, but once there is a substantial minority, their influence on the company becomes visible and the performance of the company changes.
My own research indicates that a good rule of thumb for this threshold is one third. Once one third of the directors of a company are women, the intellectual diversity and the diversity of experience has a substantial influence on the company’s strategy and operations. The influence of women is typically felt through less risky financial activity and higher investments in research and development. The lower financial risk (e.g. through less debt) leads to fewer losses in a recession or a crisis and a higher likelihood to survive. The higher investment in R&D leads to higher long-term growth. And while the correlation between more diverse boards and better financial performance may be accidental, there is increasing evidence that it is indeed causal and that female directors with their different attitude to risk and risk management are moving companies towards lower risk strategies that pay off in the long-term.
It just so happened that we recently experienced a massive crisis around the globe and what better way to test this hypothesis with the performance of companies and their shares during that crisis? That’s what Farida Akhtar and her colleagues did. They investigated the companies in the S&P 1500 index and analysed the influence of an entire battery of factors on the share price during the height of the pandemic in 2020. As could be expected, they found that companies with lower short-term or long-term debt or higher cash reserves relative to total assets experienced lower share price declines in spring 2020. But if a more diversified board composition leads to less risky financial behaviour of companies, then companies with a more women on their boards should also have experienced smaller share price decline.
And indeed, holding all other factors such as debt, or cash levels or investment in R&D constant, a 10% increase in the share of women on the board was associated with a 1.5 percentage point lower drop in share price during the height of the pandemic panic. That may sound like nothing given that many shares dropped 50% or more during that episode, but remember that companies with a higher gender diversity on the board also tended to have lower debt levels and higher investment in R&D. A 10 percentage point decline in short-term debt/assets was associated with a 2.6 percentage points smaller drop in the share price and a 10 percentage point increase in R&D investments was associated with a 4.7 percentage point smaller drop.
Taking these numbers together, it becomes clear that companies with less debt and more investments in future growth were the winners during the pandemic panic. But companies with more diverse boards benefitted in two ways. First, a more diverse board led to lower debt levels and higher investments in R&D which in turn protected the share price in the pandemic. But even when we hold these effects constant, there is an extra effect on the share price, a certain je ne sais quoi about companies with a more diverse board that seems to make them more resilient to unforeseen events and protects the share price during a market crisis. I am speculating here and feel free to disagree with me, but from 2010 to 2016 I worked in a company that had pretty much an even split between men and women (which in the investment world is unfortunately not too common). And my experience from that time is that women did bring different insights to the table that enabled us to make better decisions when it came to managing risks. However, in hindsight, I have to admit that we men all too often dominated the women in the team and overruled their input, most of the time to our detriment, as it turned out. I hope I have learned my lesson by now…