Gender lens investing is growing fast, and asset managers, whether they manage gender funds or not, are increasingly recognizing gender diversity as an important consideration in managing any fund. As of mid-2017, according to Veris Wealth Partners, gender lens investment strategies had reached nearly a billion dollars, and were growing at a compound annual growth rate of 80-100%.1 Asset managers and owners are increasingly aware of research showing that greater gender diversity in company leadership ranks—boards and executive suites—are associated with higher return on equity, and lower price and earnings risks.2 That powerful finding is part of the reason why in 2014 we launched the Pax Global Women’s Leadership Index, first index of the highest rated companies in the world for women’s leadership, and Pax Ellevate launched the first mutual fund to invest in the constituents of that index.
Many of the existing gender lens funds, including our own Pax Ellevate Global Women’s Leadership Fund, as well as publicly available funds from a growing number of firms,3 focus on women’s leadership. That is one of the hallmarks of women’s equality: shattering the corporate glass ceiling has long been seen as one of the keys to closing the gender pay gap. It is also information that is almost always available for publicly traded companies: almost all of them make public the names and biographies of board members, and most report on their executive teams as well. This information is one part of a larger landscape of data and information that enables investors to compare companies with their peers on gender diversity.
Of course, leadership is not the only indicator of women’s equality. International agencies like the Organisation for Economic Co-operation and Development (OECD), the World Bank, and the United Nations include many measures of economic participation and opportunity, political empowerment, educational attainment, health and maternal health, and sometimes pay and benefits. Some of these indicators are things that companies can make significant contributions to as well, including equal pay and family-friendly benefits, occupational health and safety, and access to education and training.
The issue, often, for investors is simply information. It is not yet routine or common for companies to report on many of the indicators of women’s equality, and few of these indicators are required reporting. Last year, the UK began to require companies with more than 250 employees in the UK to report on pay by gender, and Iceland passed a law this year requiring companies to show that they pay men and women equally. Elsewhere, however, such reporting is voluntary—and rare.
Better gender diversity in company decisionmaking ranks, happily, can be an indicator of progress in other areas as well. In particular, studies show that companies with more women in leadership tend to do well in several other areas related to human capital: employee benefits, employee retention, women’s recruitment, developing and motivating other employees, fair pay, and job satisfaction.
Changes in gender diversity in corporations, according to Thomson Reuters, “tend to happen from the top down.” Some research has shown that female leaders tend to implement more favorable human resource policies emphasizing diversity, fairness and communal values, including family-friendly policies and more LGBT-friendly HR policies. Women-owned businesses have also been less likely to lay off workers compared with similar male-owned firms.4 While firms with one owner are typically small and many are not investable on public markets, it is possible that the difference in outlook that makes women less likely to lay off workers also characterizes women leaders at larger firms. That may reduce short-term profits, of course, but it also helps foster loyalty in the workforce, particularly as job tenure continues to fall and layoffs become more routine.
Another area where having more women leaders was beneficial (specifically, in this case, on boards) was in regards to parental leave. The Peterson Institute reported that while higher proportions of women on the board was not correlated with more generous terms of maternity leave, paternity leave was found to be strongly correlated with higher shares of women on boards. While this may seem paradoxical at first blush, there may be a good reason why there was no correlation with maternity leave: in most developed and many developing nations, paid maternity leave is mandatory. Paternity leave, however, generally is not.
The effect of parenthood on pay is starkly different for men and women, in part because of cultural attitudes about parenthood. Fathers, according to research, are seen as more valuable perhaps due to “greater work commitment, stability, deservingness.” Mothers, on the other hand, are seen as working less hard and being more distractible. Having more paternity leave is not going to overcome these cultural biases all by itself, but it may be a way to lessen differences in the way employers see men and women, which can contribute to the gender pay gap. Moreover, research shows that workplaces supporting working parents also have higher employee retention and job satisfaction.
While there are only a few studies examining the effects of women in leadership on the gender pay gap, what there is shows that women may be better at recognizing leadership potential in other women, and that can be reflected in pay. A 2018 research paper5 showed that “in [Federal Government] offices where all supervisors are men, male wages are on average 10.5% higher than female wages. In contrast, in offices where all supervisors are women, the wage gap in favor of men disappears and becomes 3.2% in favor of women”. Results are more mixed in the private sector; one recent paper, focused on Italian firms, noted that having more female executives has a positive impact on the pay of women at the top of the corporate wage distribution, and a negative effect on pay at the bottom, something that the authors interpret as female executives being “better equipped at interpreting signals of productivity from female workers.”
Employee recruitment and development are expansive topics that include many specific programs. While there are not a lot of available statistics that link individual programs with diverse leadership, overall, companies with more women in senior leadership tend to rate better in areas that reflect more gender-balanced recruitment and development.
HR programs often start with recruitment. McKinsey notes that HR programs can inadvertently hold women back, or they can empower women, and gives the example of JPMorgan Chase, which organized recruiter training on the importance of diversity and recognition of biases that might affect choices. That training, together with the company’s commitment to diversity, produced results, with women making up nearly half the company’s managers, compared with only 19 percent 9 years earlier.6 Another paper that looked more broadly at the impact of women’s leadership on recruitment showed that, over a 13-year period, the proportion of newly-created jobs filled by women increased as the proportion of female managers increased among New York ad agencies. The Peterson Institute’s study of the impacts of gender diversity also noted that having more women on the board was positively correlated with women among the ranks of executives.
Recruitment isn’t the whole story, of course: more important, perhaps, is how women fare once they have joined a company. A recent survey by the Pew Research Center noted that people rated women higher than men in providing fair pay and benefits, as well as in providing guidance or mentorship to young employees.
Chart 1: What Men and Women Bring to Business Leadership
% Saying, in general, women/men in top executive positions are better…
That comports with earlier work showing that women, in a survey of 7,280 leaders, were ranked higher than men on several competencies, including developing others. It is also consistent with work on leadership styles, which found that women tend to be better at transformational leadership, which is based on leaders’ establishing themselves as role models through fostering trust and confidence. One of the qualities of transformational leadership is mentoring and empowering subordinates, and encouraging them to develop their potential. In contrast, men tended to be better at transactional leadership, which focuses more on establishing exchange relationships with others (clarifying responsibilities, and providing rewards and corrections for success and failure). Both can be effective, depending on circumstances. However, a meta-analysis of 87 individual studies showed that transformational leadership was associated with greater effectiveness.7
One hallmark of women leaders is that they tend to bring other women up the organizational ladder with them. Credit Suisse noted that female CEOs are 50% more likely to have female CFOs and 55% more likely to have women running business units than male CEOs.8 Again, while leadership isn’t the only fingerprint of women’s empowerment, it is a key part of it, and should help to diminish the gender pay gap. As Credit Suisse puts it, “women are more aware of the barriers to female progression within an organization and are therefore more active in addressing this.”
Another interesting study comes from MSCI, which looked at whether women’s board membership was reflected in human capital management. MSCI noted that firms that were leaders in talent management were 4.6 times more likely to have a critical mass of female directors, and that firms that were found to be laggards in talent management were 3.5 times more likely than the leaders to have mostly-male boards. Talent management encompassed several variables, including the use of annual engagement surveys, comprehensive succession planning and development programs, diversity targets in recruitment, annual reporting on training per employee, and company support for employees pursuing degrees and certifications.
Chart 2: This chart shows the percentage of each group (Talent Leaders, Talent Laggards, and all companies analyzed) made up of companies with 3+ WOB boards and 1-WOB boards from 2014-2016. (3+ WOB: firms that had three or more women on the board (WOB) for all three years 1-WOB: firms with one or zero women on the board for all three years)
Source: Meggin Thwing Eastman and Panos Seretis, “Women on Boards and the Human Capital Connection,” MSCI, March 2018.
McKinsey estimates that advancing women’s equality could add $12 trillion to $28 trillion to global economic growth by 2025. Women’s leadership is a critical input to achieving that potential. Women and men bring different strengths to corporations, just as other forms of diversity do. Companies that can use that diversity to improve decision-making are, all else equal, more likely to outcompete and outperform their peers. When it comes to women’s empowerment and equality, one of the key factors in harnessing that diversity is having women in leadership. Leadership is certainly not the only measure of women’s equality, but it is both a key metric and an important enabler of it.
1 Veris Wealth Partners, “Gender Lens Investing: Investment Options in the Public Markets,” Fall 2017.
2 Savita Subramanian, Jill Carey Hall and James Yeo, “Women: The X-Factor,” Bank of America Merrill Lynch, 07 March 2018.
3 Veris Wealth Partners, “Gender Lens Investing: Investment Options in the Public Markets,” Fall 2017.
4 See, for example, David A. Matsa and Amalia R. Miller, “A Female Style in Corporate Leadership? Evidence from Quotas,” American Economic Journal: Applied Economics, July 2013; and David A. Matsa and Amalia R. Miller, “Workforce Reductions at Women-Owned Businesses in the United States,” Social Science Research Network, 17 December 2011.
5 Maria Droganova, “Women Working for Women: Career Advancement and the Gender Wage Gap in the U.S. Federal Government,” Social Science Research Network, January 12, 2018.
6 Georges Desvaux, Sandrine Devillard-Hoellinger, and Mary C. Meaney, “A business case for women,” McKinsey Quarterly, September 2008.
7 Alice H. Eagly, “Female Leadership Advantage and Disadvantage: Resolving the Contradictions,” Psychology of Women Quarterly, 090 February 2007.
8 Credit Suisse Research Institute, “The CS Gender 3000: The Reward for Change,” September 1, 2016.
The statements and opinions expressed are those of the author of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security.