This Behind-the-Scenes Advantage Cuts Investment Risk

Competitive advantage. Innovative products. Customer loyalty. Cash-rich balance sheets. Massive industry-growth expectations. Low earnings multiples. Ample free cash flow. Dividend yields. These are just a few of the many factors investors can weigh when choosing stocks for their portfolios.

However, there's one performance-boosting factor that many investors are missing; many companies are missing it, too. Women in important positions behind the scenes, such as serving as directors in corporate boardrooms, help boost corporate outperformance.

Females and fundamentals
Past studies have shown a correlation between female representation on corporate boards and corporate performance, and another such study has cropped up recently.

This summer, the Credit Suisse Research Institute released "Gender Diversity and Corporate Performance," a study showing that over the past six years, stocks of large-cap companies with female board participation outperformed peers with no female directors by 26%.

The Credit Suisse report also illustrated a plus that true long-term investors can really get behind: The observed outperformance doesn't begin and end with stock price, but it also reflects strong underlying fundamental factors. The companies with female board representations boasted higher returns on equity, lower leverage, and higher valuations.

Another important angle to consider relates to long-term risk reduction. Although the stock prices of the companies in both groups did comparatively well during the mid-decade economic growth (or bubbly) period, as the macro environment began crumbling after 2008, the companies with women on their boards strongly outperformed the others.

Stale industry standards
This gives us fascinating food for thought as we investors allocate our investments, particularly because our economy is still in the doldrums and many headlines may discourage investors from investing in stocks.

In good times and bad, it's always true that some companies are riskier investments than others. Part of the joy of investing is figuring out risk versus reward and trying to ascertain the best stocks for our portfolios weighing many different factors. These days, stability may be a huge part of that equation, and female board participation seems to correlate with many positive attributes.

That said, female participation in corporate boardrooms in America is improving, but there's a long way to go. GMI Ratings, which provides global corporate governance and environmental, social, and governance, or ESG, research, follows boardroom diversity closely, and one of its recent reports highlighted some industries particularly lacking in female directors.

Within the Russell 3000, 61% of energy companies had zero female directors. In the telecommunications sector, 55% of companies had no female directors, and about half of the IT companies examined the lack of women in the boardroom.

The good, the bad, and the evolving
Facebook's (Nasdaq: FB  ) recent IPO helped highlight the glaring omissions of female directors in corporate America. This state of being is particularly nonsensical in industries that have extremely high female demographics. Facebook's original board lacked any female directors, and considering that women tend to be social-media power users, that looked like a serious strategic blunder.

Facebook later added Chief Operating Officer Sheryl Sandberg to the board, which was a helpful step in the right direction. However, she's also a member of Facebook's management team and therefore an insider. Some outside female directors would be helpful, too.

The retail industry tends to do a better job of adding women to their boards, which is also a no-brainer since, hey, we ladies do tend to like to shop and pride ourselves on our good taste. For every product targeting women that elicits our eye-rolling observation that "it had to have been invented by a man," it's a reasonable theory that there were no women on the board of directors or management team to issue the old "no woman in her right mind will be caught dead with/wearing/using that" reality check.

There are a few baffling anomalies floating around in retail, though. Urban Outfitters (Nasdaq: URBN  ) lacks even one woman on its board of directors, even though women make up a huge part of the target customer for the core concept and the company's Anthropologie and Free People concepts.

On the other side of the coin, here's an interesting factoid: Women are making major inroads in the corporate boards and management teams of the defense industry. As of its most recent proxy statement, Lockheed Martin (NYSE: LMT  ) has three women on its board, for example. BAE Systems is headed up by Linda Hudson, and in January, Phebe Novakovic will step into her role as chairman and CEO of General Dynamics (NYSE: GD  ) .

Larger companies and the health-care industry also have a good track record for including women on boards, with 73% of these having at least one woman on their boards.

2020 Women on Boards, an organization that seeks to increase the number of women on corporate boards to 20% by 2020, publishes a gender-diversity ranking of companies, including "Z" companies like Adobe Systems (Nasdaq: ADBE  ) with zero women on their boards.

What century is this, anyway?
Many of the denizens of Corporate America are often slow to change from old ways, but in this case, corporate managements and boards aren't doing themselves (or shareholders) any favors by keeping homogenous boards that lack female perspective. The prospect of better fundamental performance and less risk are exactly the kinds of reassurances individual investors need these days.

One of the most common excuses for low female board participation is lack of qualified candidates, but the truth of that argument is quickly becoming obsolete as time goes by and more and more women have spent decades in the workforces of their industries. In addition, organizations such as 2020 Women on Boards and the Diverse Director Datasource (3D) database from CalPERS, CalSTRS, and GMI Ratings should help identify quality candidates to make more robust companies.

More perspectives make better companies that execute better strategic decisions. It's time for Corporate America to move far more boldly into the future, where progressive action and diversity of thought build sustainable profits.

If you want to read about all things Facebook, check out our premium report dedicated to the social-networking giant. See more about the report, which also includes risks, opportunities, and frequent updates on the company.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.  

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Facebook. Motley Fool newsletter services have recommended buying shares of Adobe Systems and Facebook, as well as creating a diagonal call position in Adobe Systems. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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