Why Companies with Female Directors Perform Better

Written by Sandy Calhoun Rice | Published on 31 March 2013

Women have more than a good head for business. Researchers find they actually have a different cognitive approach to corporate decision making, which may help the bottom line.

Vive la diffrence, as the French are fond of saying. A new study published in the International Journal of Business Governance and Ethics builds on the established correlation between female board representation and better business performance. The study, Why women make better directors, was conducted by Chris Bart, professor of strategic management at the DeGroote School of Business at McMaster University in Ontario, and Gregory McQueen, a McMaster graduate and senior executive associate dean at the A.T. Still University School of Osteopathic Medicine in Arizona. Bart and McQueen began their moral reasoning psychological study in the aftermath of scandals at major companies such as Enron, Arthur Anderson, and ALO Time Warner. Bart says that people at the time were asking, Where were the directors and why did they allow this to happen? Over the course of nine years, they surveyed 624 directors using an established survey instrument called the Defined Issues Test (DIT). Approximately 75 percent of the survey participants were men and 25 percent were women. Nearly all of the companies represented in the study were Canadian, and included large publicly traded and nonprofit entities. According to the authors, theirs is the largest-known moral reasoning study of board directors.

Weve known for some time that companies with more women on their boards have better results, explained Bart in a press announcement. We set out to find out why. Unlike in the U.S., where boards must only protect shareholder interests, Canadian directors are compelled to act in the companys best interest while taking into account how their decisions will affect the interests of all stakeholders. DIT analysis was used to determine to what extent Canadian directors relied on three basic reasoning methods in deciding a series of hypothetical cases:

Personal Interest: Whats in it for me? The decision maker is motivated by ego, selfishness, and the desire to avoid trouble for self.

Normative: Dont rock the boat. The decision maker adheres to existing

group norms, rules, or the status quo.

Complex Moral Reasoning (CMR): What will be most fair to everyone

concerned? The decision maker considers all stakeholder perspectives, and uses cooperation and consensus building, consistently applied in a nonarbitrary manner. All those surveyed, both male and female, relied most heavily on complex moral reasoning. This bodes well for the leadership community as a whole. We would expect to find a high level of complex moral reasoning in elite groups such as boards of directors, says Bart. But on a second look at the data, the researchers found gender discrepancies. Statistical analysis revealed a 13.4 percent difference in the mean scores of men and women, and a 12.9 percent difference in the means of the CMR scores. These are significant differences, showing that men are more likely to take a normative approach, whereas women lean more on CMR, explains Bart. The Financial Case for Gender Equity at the Top Although women represent at least 50 percent of most geographic populations, they are sorely under-represented in boardrooms. According to a 2007 study by country, region, sector and market Index, Governance Metrics International found that women comprised only nine percent of board memberships worldwide.

However, there is a proven correlation between boards with female members and better business outcomes. A 2007 Catalyst study of Fortune 500 companies across five industry sectors quantified the impact of gender equity in the boardroom. This large study of 524 companies found that mixed-gender boards experience:

53% higher return on equity 66% higher return on invested capital 42% higher return on sales

According to Bart, boards may be considered derelict in their financial duty by limiting the number of female members, whose inclusion is now shown to increase the odds of organizational success. Companies with few female directors may actually be shortchanging their investors, he adds. Whats Next? The Bart and McQueen study concludes that women have genetically driven cognitive processes and thinking patterns that give them the ability to make better decisions than men. The study authors say that because women are naturally inquisitive, more willing to learn, and actively try to understand other peoples perspectives, they are better able to see new business options, opportunities, and outcomes. As women push through the glass ceiling, the authors encourage them to remain authentic and true to themselves, fully embracing their effective complex moral reasoning abilitiesrather than mimicking their male counterparts. Acknowledgment of the correlation between female directors and better business outcomes will be a step in the right direction, especially in the U.S. where by law shareholder interests trump all others.

Learn More:
Gender Inequality Are You and Your Boss Genetically Different? Not All Ladies Wear Pink Despite High-profile Gains, Women Still Have Less Power, Prestige, and Income than Men