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How gender diversity brings greater corporate success

Conference meeting room

In writing about the debate amongst the Liberal Democrats over all-women shortlists and whether or not having a male-dominated Parliamentary Party matters, I’ve made reference a few times to Vince Cable’s work when in government to improve gender diversity in the boardroom, in which he frequently cited the evidence that a more diverse team in the workplace is also a more successful one.

But it’s been a while since I looked at the relevant academic evidence, so here is a new paper from the Peterson Institute for International Economics. As it documents, the senior levels of business are still massively dominated by the minority male part of the population:

This paper addresses the relative absence of women on corporate executive boards and at the upper levels of management globally. It is based on a 2014 sample of 21,980 firms headquartered in 91 countries. Nearly 60 percent of these firms have no female board members, just over half have no female “C-suite” executives (a firm’s most senior executives and members of corporate boards), and less than 5 percent have a female chief executive officer (CEO).

The evidence these researchers find suggests that greater diversity makes for greater business success, as does the predominance of the previous research they review, although the exact cause of the link is unclear as there are competing plausible explanations:

There is no statistically observable impact of having a female CEO, and the impact of women’s presence on the board is not statistically robust. However, the correlation between women at the C-suite level and firm profitability is demonstrated repeatedly, and the magnitude of the estimated effects is not small.

The detail in the paper also shows why the correlation indicates causation too, especially given the multiple different countries and types of business across which it occurs.

Given this evidence that gender diversity, but not having a female CEO per se, works, it follows that what is needed is a broad-based approach:

This pattern underscores the importance of creating a pipeline of female managers and not simply getting lone women to the top.

As for the reason why gender diversity and success go together, that is unclear although they still lead to the same conclusions for policy-makers as they are variations in why policy works rather than what policy works:

The positive correlation between the proportion of women in corporate leadership and firm profitability could reflect the existence of discrimination against women executives (which gives nondiscriminating firms an edge) or the fact that the presence of women contributes to skill diversity (to the benefit of the firm).

As for whether the specific tactic of introducing gender quotas for boards works, the paper does not have the necessary level of detail to provide strong evidence:

There is no evidence that the female board quotas enacted by some countries have had an impact, for good or ill, though the statistical analysis may be too crude to detect such effects.

Whether or not board quotas themselves work in terms of their direct impact on the composition of a board, they may have a wider indirect benefit in terms of helping diversity at other levels too:

These results [that gender diversity increases profitability], together with the finding that quotas do not appear to have a significant impact on firm performance, suggest that although the boards of publicly traded firms are an easy target for legislators, the payoffs for policies that facilitate women rising through the corporate ranks more broadly might be larger. More women on corporate boards might be a way of promoting that outcome: statistically, there is a correlation between the presence of women on boards and the presence of women in executive ranks. A more gender-balanced board might show greater interest in encouraging a more balanced executive team.

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