Why Companies With Women Executives Succeed More Often

Wikipedia / Grace Villamil.

Sallie Krawcheck, a notable Wall Street figure, has partnered with Pax World Management to develop a new index fund. The Pax Ellevate Global Women's Index Fund (NASDAQMUTFUND: PXWEX  ) invests globally in companies' female executives, board members and female-friendly policies. 

The business case 
While there are obvious social reasons behind the fund, Ms. Krawcheck emphasizes the business angle of her venture: 

Research indicates that companies with more women in senior management have higher returns on capital, lower volatility, greater client focus, increased innovation and greater long-term orientation. As a result, I believe they should also deliver better stockholder returns over time.

Boards with women outperform -- especially in crises 
There is evidence to back up her claims. While some academics don't find any positive effects to gender diversity, Thomson Reuters released a study in 2013 that showed improved share price performance with gender diversity.

Credit Suisse researchers reported similar findings. Looking at 2,500 companies worldwide between 2005 and 2011, it reported that while companies with female board members outperformed slightly in good times, the real benefits appeared from 2008 onwards.

In other words, companies with more gender diversity outperformed during the crisis. To borrow the words of the Credit Suisse researchers, they tend to look defensive, outperform when markets are falling, deliver higher average returns on equity, and experience less volatility in earnings. 

It's the return on equity that's most striking -- while share price is nice, the real long term benefits of an investment comes from the underlying business performance. And indeed, large companies with greater female representation have better returns on equity and sales. 

How can you tell if a company is "Good"? 
While the literature on female board membership seems pretty solid, looking at diversity programs in large organizations yields fewer clear results. What is an investor interested in social policies to do?

One large review paper, published in the academic journal Human Resources Management, emphasizes the importance of support for diversity programs from the top; in other words, when top-level management is perceived to support diversity measures, they're more likely to succeed. Whether or not the fund will use this as a factor in their investment model is anyone's guess; however, it's probably not a bad shorthand for those of us analyzing our investments with fewer resources.

The idea of a shorthand might also be handy because a company's situation is an important part of whether a diversity program will be successful, and this might be hard to analyze from the outside. For example, a company that's already rather diverse will have an easier time than one starting from scratch, and those with cultures of openness and creative conflict might fare better as well.  

The joy of more data
It will be interesting to see the birth of the new fund and to look at its performance over time. I for one am quite interested in the idea of putting one's money where one's mouth is -- perhaps a testament to the overall growth of values-based investments. 

But this could be much more than a social experiment -- we could very well be seeing the birth of an interesting new investment strategy.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2992683, ~/Articles/ArticleHandler.aspx, 12/18/2014 9:22:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement