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Invest in women

Picking shares based on the gender balance of companies’ directors is an unusual investment strategy. But if government claims are to be believed, greater equality in the boardroom could mean stronger returns
February 27, 2015

The boardrooms of the largest UK companies, like the Parliament proposing their overhaul, have always been dominated by men. In 2015, this is still the case: despite large increases, less than a quarter of the directors in the FTSE 100 are female. In 2011, a government report by Lord Davies decided the pace of change needed to speed up, and recommended FTSE 100 companies target a minimum 25 per cent female board representation by this year.

From a shareholder’s point of view, one key test of the argument for a more gender-diverse boardroom is the main one a company shareholder applies to any corporate change: does it improve company performance? Consultancy McKinsey & Co, which produces an annual report on the subject, says it will. McKinsey argues that companies with a ‘critical mass’ of female executives outperform companies with all-male boardrooms.

Using FTSE 100 companies’ share price, dividend yield and yield change as proxies for performance, we can test this hypothesis. In May 2013, a campaign group called ‘Women on Boards’ ranked the companies in the index by the proportion of directors, both executive and non-executive, on each board. With 37.5 per cent, fashion house Burberry had the highest proportion of women, closely followed by drinks giant Diageo, while Antofagasta, Glencore, Croda, Kazakhmys, Melrose and Vedanta propped up the table with no female directors.

 

In the spirit: Diageo has one of the highest proportions of women on its board

 

Excluding the companies that have since delisted or fallen out of the FTSE 100, 25 had already reached Davies’ ‘25 per cent female’ recommendation when the ‘Women on Boards’ ranking was published. The number of female board members within that group has inevitably changed in the 21 months since the report was published, but the 25 companies have outperformed the rest by some distance, notching up an average share price increase of 22 per cent, and an average 8 per cent dividend yield increase to 3.4 per cent.

Whitbread, BAE Systems, BT and Smith & Nephew were all standout performers in the group. By comparison, companies with less than an eighth of their boards made up of women grew by an average of 7.8 per cent, with dividend yield falling 4 per cent to 2.8 per cent. The companies with a lower proportion of women on their boards were also more likely to have posted a drop in their share price in the period.

The same trend is observable in the US. Using data provided by Boardex, we ranked the S&P 500 index based on boardroom gender diversity at the end of 2014, and found 90 per cent of companies in the upper (ie more diverse) half increased their share price in the past year, versus 78 per cent in the lower half. There was a similar pattern of lower share price volatility in the previous two years, although director changes mean the data is probably less reflective of the companies’ boards during those periods. More impressively, the 100 index constituents with the highest proportion of female board members also outperformed every other quintile in each of the past three years, increasing share prices by a three-year compound annual growth rate (CAGR) of 19 per cent, versus 16 per cent for the 100 ‘most male’ boards. The same trend is repeated if you exclude newly listed companies.

At this juncture it’s worth stating that this in no way amounts to a definitive statistical exercise. As with every market, sector and company, innumerable variables are at play, and it would be misleading to draw any firm conclusions about board performance from a very limited sample size. For one, it is clear that the all-male boards listed above in the FTSE 100 tilt towards mining and resources stocks, which have collectively taken a pummelling in the past year. Furthermore, the data used above covers a relatively short time frame, given the fairly recent interest the subject has garnered, which also hinders a fuller analysis.

Nonetheless, it is clear that some companies take the issue more seriously than others. It follows that companies that have sought greater cognitive diversity at senior level might have a more mixed boardroom. Given female board members are more likely to be non-executive directors, it also follows that boards with greater non-executive scrutiny are more female.

Some commentators have labelled any initiatives as symbolic. Given the explicit focus on the largest companies, this is partly true, but it is a charge the Davies report was at pains to avoid in its dismissal of calls for the kind of mandatory quotas seen in France and elsewhere. Others have suggested the issue means little to shareholders. Soon after the report was published, National Grid chief executive Steve Holliday, a supporter of the proposals, claimed “the money doesn’t follow” putting more women on boards. Royal Bank of Scotland chairman Sir Philip Hampton said: “I don’t see it as a big issue for investors.”

The academic research is also inconclusive. A 2012 survey by Stanford and Edinburgh universities found little evidence to support what researchers referred to as the “business case for diversity” or a direct link to company performance, concluding that appointments of female outsiders to the board were made for symbolic, rather than substantive reasons.

This literature is in question, however. “There’s a growing stream of evidence to support the business case for having more women on boards,” says Professor Susan Vinnicombe of Cranfield University School of Management, who sits on Lord Davies’ steering committee.

“These are major questions for companies. Women represent the majority of graduate entrants, but are just a tiny proportion of FTSE company leaders, so it’s clearly not just a question of having children. Talented women coming into the marketplace will also want to work at companies where there is a possibility that women can get on.”

Professor Vinnicombe cites the example of Mothercare, whose underperformance in recent years has been linked to a male-heavy legacy board, which was out of touch with its customer base. So if there is a business case for greater diversity, why has it so far escaped the attention of those with a stake in a company’s business?

“Investors are really the only set of key stakeholders not to have engaged in the whole push to increase female board numbers in the UK,” says Professor Vinnicombe. “They could speak up at AGMs and ask more questions of the companies with few female faces on boards. It’s the inverse of the case in the US, where there has been hardly any action by government or companies, and a vocal investor base.”

Leaving aside companies’ social obligations, the main challenge for investors is to establish whether a more gender-diverse board broadens the experience, opinion, risk-aversion, creativity and, ultimately, performance of a company.

The results above tentatively suggest companies with more female board members have performed better and more consistently in the past few years. As a starting point, investors should be wary of examples such as Mothercare – it is more complex to make the same business case argument for a large financial institution.