How to Beat the Benchmark: Invest in Women-Led Companies

A new study shows that female leadership is good for the bottom line of privately held companies, not just public ones.

Illustration by II

Illustration by II

A decade of research shows that public companies show better financial results when they have a significant number of women in leadership positions and on the board. Now a first-of-its-kind study shows that women give privately-held companies a financial boost as well.

Companies in the top quartile for gender diversity in senior management had an average return on sales of 18.1 percent, according to the study, published on Tuesday by Calvert Impact Capital, a non-profit founded in 1988 to invest in companies with environmental, social, and governance goals. Those in the bottom quartile had a -1.9 percent return on sales — a 20 percentage point gap.

The findings come as the investment management business and other industries are trying to address the #MeToo movement, which has inspired women to go public with stories of sexual harassment and abuse. But some male executives at financial services firms are handling it by avoiding many interactions with women altogether, according to a Bloomberg report published Monday.

Some men at investment banks, asset management firms, and financial advisors are now so paranoid about being accused of harassment that they’re refusing to have dinner with women, sit next to them on flights, or mentor them, the report found. The report called this the “Pence Effect,” after remarks made by Vice President Mike Pence, who reportedly said he won’t dine alone with a woman other than his wife.

That paranoia could potentially thwart the high-profile efforts of some financial services firms, such as State Street, to recruit women to boards and reduce barriers that keep women from rising into senior positions.

[II Deep Dive: State Street to Turn Up the Heat on All-Male Boards]

Companies where women represented more than 57 percent of senior management teams landed in the top quartile of Calvert’s study; those with senior management teams with 20 percent or less women were in the bottom quartile. The results are broadly in line with findings on public companies.

“People think of investing through a gender lens as a niche, part of impact investing,” said Leigh Moran, director on the strategy team at Calvert Impact Capital. “But it’s just a part of good investing. This study says if you want to maximize returns, seek out companies with gender diversity.”

The quantitative results are significant, particularly given the number of companies focused on getting more women into senior management and a growing group of institutions looking to invest in gender-diverse companies. The study by Calvert included 11 years of data on 160 global companies that it holds in its portfolio and represents $23 billion in assets.

Unlike with public companies, research on privately-held businesses is more difficult to complete, as they have few requirements to disclose information, including financial, customer, and other data. Calvert looked at the effect of gender diversity in senior management as well as on boards.

Calvert also found that the top quartile of companies with gender diversity in senior management had an average 3.9 percent return on assets, while the bottom had a 0.3 percent return. Top performers had an 8.6 percent return on equity; the ROE for the bottom quartile was 4.4 percent.

Even though the connection between gender diversity on boards with financial results wasn’t as strong, it was still significant. Private companies in the top quartile when it came to gender diversity on their boards of directors (defined as 46 percent of the board) had an 18 percent return on sales; the bottom quartile (those with 20 percent women or less) had a 0.9 percent return on sales.

Top companies with diverse boards had a 3.7 percent return on assets and an 8.5 percent return on equity. The bottom quartile had a 1.5 percent return on assets and a 6.8 percent return on equity.

Gender-diverse boards were more influential with public companies than privates.

“There is a difference in the roles that boards play in public companies versus private companies,” said Moran. “With private companies, boards have a less hands-on role. Still the connection is strong.”

Moran pointed out that the results pertain to gender diversity, and the ultimate goal is not to have an all-female led company. Company managers who collectively have diversity of thought and education, for example, see opportunities and risks that a homogenous leadership team may miss, she said.

The Calvert study found that once women represented 33 percent of leadership teams in companies, the increase in financial performance was more significant.

“The data suggests that it’s not just the numbers of women in leadership and board positions, but the ratio of women to men in those positions that matters,” wrote the authors of the report.