Decoding the diversity premium

New data reveals stronger correlations between female executive participation and company performance/returns.

Investors could be overlooking gender diversity as a predictor of profitability and share market returns, a new study shows.

While correlations between corporate female participation and better investor outcomes have been highlighted before, Realindex Investments’ new study, ‘Beyond lip service: tracking the impact of the gender diversity gap’, looks beyond the easy to find board-level diversity data and into executive team composition for a clearer link.

More diverse executive teams create better performance outcomes, the study concludes, drawing on a global data set spanning more than 30 countries and over 2500 large cap companies covering a time period spanning more than a decade.

Read the full report here

Government-mandated quotas have led to higher participation of women on boards over the years, but these mandates have not extended to executive leadership teams, resulting in C-suite female participation lagging boards as a result.

It’s within companies with more gender diverse executive teams the study finds the strongest diversity/company performance correlation.

The study finds that companies with more diverse senior management teams have about 30% higher profit margins on average in the following 12 months than companies with lower gender diversity in any given year. It also finds that more diverse senior management teams can generate cumulative return on equity almost 30% higher than their lower-diversity counterparts over a 5 year period.

Further, the study finds investors in companies with more diverse leadership teams are rewarded with higher returns. The study measures the senior management team annual return premium to be around 4%.

While the study notes that quotas work when it comes to addressing gender imbalances, it also points to the potential for investor capital to play a greater role.

Australia more than doubled its female participation within senior management following Australian Stock Exchange disclosure requirements. With senior management numbers more visible in investors’ minds, it puts pressure on companies to do better beyond the board, the study notes.

The proportion of women in senior management roles in Australia increased from 12% when the disclosure requirements began in 2011 to around 26% by December 2021.

In other countries where disclosure mandates weren’t in play, senior management female participation remained low, while board participation climbed to match quota levels. In Italy and France, board representation reached 30% and 40% respectively but senior management diversity has remained at 20% or below.             

Gender diverse firms are typically higher quality due to their ability to achieve a better return on assets, return on equity and profit margins than companies with less female participation both at the senior management and board levels, the study highlights.

Further gains in profitability and returns could be unlocked if companies find ways to bring more female participation to leadership roles outside of HR and company secretary functions, the study alludes.

While the percentage of women in senior HR and Company Secretary roles has continued to rise to 52% and 35% respectively at the end of December 2021 based on the dataset, only 17% of companies globally have a female CFO and just 5.5% have a female CEO.