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Are Women at the Top a Competitive Advantage for Companies?

By Alex Dumortier, CFA – Feb 10, 2016 at 12:37PM

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A new paper shows that more women in the C-suites relates positively with increased profitability.

U.S. stocks are higher in early afternoon trading on Wednesday, with the Dow Jones Industrial Average (^DJI -1.62%) and the S&P 500 (^GSPC -1.72%) up 0.41% and 1.07%, respectively, at 1:15 p.m. EST.

Yahoo! CEO Marissa Mayer. Image source: Magnus Holj.

Monday's press release from the Peterson Institute for International Economics was unequivocal: "New Peterson Institute Research on Over 21,000 Companies Globally Finds Women Can Significantly Increase Profitability." The study looked at nearly 22,000 publicly traded companies across 91 countries in late 2014.

For companies (and investors), it's worth digging beneath the headline to understand just what that statement means and how to get the most out of the paper's findings.

First, here's what the study did not show:

There was no evidence of a relationship between having a female CEO and higher profitability.

There was "some evidence" that having women on a company's board of directors is related to increased profitability... but the evidence was not statistically significant.

But here is where things become more interesting. The study found "robust evidence" that the proportion of women in "C-level" positions is positively related to increased profitability, and notes: "[T]he estimated magnitudes of these correlations is not small: For profitable firms, a move from no female leaders to 30 percent representation is associated with a 15 percent increase in the net revenue margin."

(We have to assume that C-level positions comprise chief executive officer (CEO), chief financial officer (CFO) and chief operating officer (COO) and, presumably, chief technology officer (CTO) – the paper does not contain an explicit description of the qualifier.)

That result isn't entirely surprising. I'm currently reading Philip Tetlock's Superforecasting: The Art and Science of Prediction. Tetlock is a political science professor who holds appointments at the Wharton School at the University of Pennsylvania and the university's psychology department. In Superforecasting, Tetlock emphasizes the value of diversity in decision-making, at the individual and group level.

How does this apply to C-level executives who are paid to demonstrate leadership and come up with their own decisions? My sense -- and this is only conjecture -- is that women are more likely to seek out and listen to the views of the people around them than men, particularly the "alpha male" types that dominate executive suites.

How does any of this help investors? It's just another element that contributes to the qualitative assessment of the companies you're interested in. For example, you could ask yourself the following two questions:

  • Are any of the C-level executives at this company women?
  • Does the company have an awareness of and commitment to gender diversity?

One of the companies that scores well on both counts is Google's parent, Alphabet Inc, which recruited Ruth Porat from Morgan Stanley for its CFO position in March 2015.

Porat is a recent hire, yes, but as far back as 2011, Google openly published a Diversity and Inclusion Annual Report. In 2014, Google noted that 30% of its workforce is women, despite the fact that women earn approximately 18% of the computer science degrees in the US.

Is Google's commitment to gender (and racial) diversity the key to its dominant position in digital advertising and the fabulous profits it generates? No. But that doesn't mean it doesn't contribute to making the company incrementally better – and continually seeking out incremental improvements is the hallmark of a great company.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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