Risk & Compliance

Women Directors Boost Profits

Companies with women on their board have higher net income growth, according to a Credit Suisse research report.
Caroline McDonaldDecember 14, 2012

Companies slow to appoint women to their board may want to rethink their strategies in light of a study finding that companies with women directors outperform those with none.

A Credit Suisse Research Institute report, “Gender Diversity and Corporate Performance,” found that net income growth over the past six years averaged 14% for companies with women directors, compared with 10% for those with none. The study analyzed the performance of 2,400 companies globally, with and without women board members from 2005 onward.

To be sure, more women are joining boards, according to a new report by Ernst & Young, which hosted a panel discussion in New York City on the issue with the Forté Foundation, a nonprofit organization formed to advance women in business. Of the more than 1,800 directorships currently held by women, nearly 40% of the women joined their respective boards in the past five years, E&Y said in its report. The firm found that women filled 17% of the board seats at S&P 500 companies in 2012, compared to 14% in 2006.

But there is more work to be done, the report said, as less than 6% of independent board leadership roles are held by women, and women hold less than 16% of all positions on such key committees as audit, compensation, and nominating.

Factors in board makeup are stifling growth and may continue to for some time. The top barrier to change is a lack of turnover because of a high retirement age set for board members, says Julie Hambrock Daum, a director of Spencer Stuart, a global executive-search firm.

Nearly three-quarters of S&P 500 boards have a mandatory retirement age for directors, according to a 2012 Spencer Stuart report. Twenty-two percent set the limit at 75 or older, and most others put it at 72 or 70. “To say that every single person in your boardroom can stay until they are 75 is an issue, for women and in terms of governance,” Daum says, observing that last year there were fewer new board members in the U.S. S&P 500 than there have been in 10 years. What’s more, the number of directors over age 68 is almost 40%.

In the United Kingdom, boards deal with the issue by establishing term limits — either two three-year terms or three three-year terms, she says. Daum explains that the ability to periodically change board members gives a company an advantage — helping it keep up with new technologies and other changing conditions outside the company.

Panelists at the discussion stressed that boards need diversity to be globally competitive. In fact, the European Commission recently adopted a European Union law proposed by Viviane Reding, vice president of the EC and EU commissioner for Justice, Fundamental Rights and Citizenship, calling for women to hold 40% of nonexecutive board positions by 2020.

Reding, who participated in the panel remotely, observed that non-U.S. companies with more aggressive targets for board diversity may start to tap board-ready women based in the United States, hurting efforts by U.S. companies to boost board diversity and company profits.

Donna Hamlin, chief executive officer of Intrabond Capital, a board strategy consulting firm, pointed out that Malaysia has taken a bold step by creating a law requiring that by the end of 2013, 30% of directors of public companies must be women. In addition, she said the law “has teeth”: companies that do not meet the requirement will be “automatically delisted.” Said Hamlin: “It’s the only country we know of that has taken it that far in terms of enforcement.”

In the EU, although targets are set, no action is taken against companies that don’t comply, she noted.

Glenn Hubbard, dean of the Columbia Business School and an economist, said that setting targets provides “gentle persuasion” to companies. Another tactic is to insist that whenever a search for a board member or new executive takes place, the best résumé submitted must be included in the discussion of candidates.

He also pointed out that research at Columbia by both economics and management faculty has shown that firms with women in senior-management positions “enjoy economically superior performance.” Women seem to be most effective at firms that have a strong emphasis on research and development: generating ideas and connecting them to products, said Hubbard.

In its census of Fortune 500 companies, Catalyst reported there are 56 companies with no women board members at all, and 81 companies with 25% or more women directors. Avon Products leads with half of its board seats held by women, and Estée Lauder is in second place with 42.9% held by women.

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