There's a semisecret weapon that some companies have in their boardrooms and that other companies lack. You'll be surprised when I tell you what it is, because it has been linked to significantly higher corporate performance. It's women.
Unfortunately, many companies still don't take full advantage of board diversity. But the situation may be changing for the better soon, thanks to the Securities and Exchange Commission. It recently put into effect a new rule requiring companies to disclose how they considered gender diversity when nominating people for their boards. This is likely to lead to more companies considering women, and consequently more women on boards.
Why the SEC is right
There are plenty of reasons to push for such a change:
- To many, it's clearly the right thing to do, to reflect half of the American workforce, to encourage female employees, and to include diverse viewpoints and perspectives.
- It can also be cost-effective. If female employees feel shut out, they may seek greener pastures elsewhere. Hiring and training new workers is costly. Discriminating against women can also be costly, with lawsuits and all.
- As an investor, my favorite reason is this: Companies can simply make more money by being more inclusive. A 2004 report from Catalyst divided 353 Fortune 500 companies into four groups according to their representation of women in leadership positions. The top group sported returns on equity that were 35% higher than the bottom group, while total return to shareholders was 34% higher.
The bad news ...
Unfortunately, corporate America has yet to broadly embrace such reasoning. Instead, most boards of directors have, at most, just one woman. While that smacks of tokenism, it's still better than nothing, and a (slow) step in the right direction.
For instance, DuPont (NYSE: DD) and PepsiCo (NYSE: PEP) not only have four women each on their boards, they have female CEOs as well. Wal-Mart (NYSE: WMT) and Accenture (NYSE: ACN) have three female directors each.
Yet these companies are still the exception rather than the norm. A Corporate Library study came up with some mixed news:
- While close to 90% of the S&P 500 companies have at least one woman on their board, 57% have two, and only 19% have more than two. (Given that many boards feature 12 or more people, even having three women sometimes means representation of 25% or less.) Tesoro (NYSE: TSO) and D.R. Horton (NYSE: DHI) are among those who still have no women on their boards, according to their corporate websites.
- Only 14 companies in the S&P 500 have women serving as chairperson of their boards.
- Among the smaller Russell 2000 companies, about half have no women at all on their boards.
Why do small companies have so much less female representation on their boards? One explanation suggested by the report from Catalyst is that "these companies do not receive as much scrutiny from those promoting gender diversity in the boardroom as the largest firms."
Of course, once the day comes when the typical glossy photo of a board of directors is full of female faces, that 35% performance advantage will have disappeared. But that would be OK, because all diverse companies may just be performing at higher levels by then.
What do you think of the issue of gender diversity in corporate leadership? Let us know how important you think it is or isn't -- leave a comment below.
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