On Purpose: The Business Value of Female Leadership

In an earlier Headspring post, bestselling author and founder of consultancy Conspiracy of Love, Afdhel Aziz, in ‘Purpose is the New Digital’, presented the business case for ‘purpose’: the massive business benefits accrued by purposeful brands and companies. In another, writer on business, society and the environment, Sarah Murray, in ‘On Purpose: The Basics of Measuring ESG Impact’, discussed measuring the impact of environmentally and socially responsible business practices.

Here I’ll continue this conversation by addressing the business value of one of the components that constitute purpose: a gender-diverse leadership – that is the presence of women in the CEO position, in the top management team or in the board of directors. I’ll emphasise the challenges associated with defining ‘value’ and the difficulties of measuring it. Instead of focusing on practitioner white papers that readers may be more familiar with, I’ll prioritise the conclusions from large-scale academic papers.

Business value of female leadership: the large-scale academic evidence

What is the value of gender-diverse leadership? For many, value is expressed in economic or financial terms. Accordingly, most of the academic attention has focused on the relationship between female leadership and financial performance of organisations. There are over a hundred empirical papers that have looked at this issue. It would be impossible to review them all, so I’m referring to the results of three meta-analyses: papers that combine the results of several other studies.

The evidence provided by academic empirical research is sobering. It shows that although gender diversity at the top of organisations has a positive impact on financial performance, the impact is very weak. Specifically, Jenny Hoobler and colleagues, in ‘The Business Case for Women Leaders: Meta-Analysis, Research Critique, and Path Forward’, have aggregated the results of 78 previous studies on the relationship between gender diversity at the top and financial performance. They find that adding a woman to the leadership team results in a mere 0.02 percent increase in organisational financial performance.

Seung-Hwan Jeong and David Harrison, in ‘Glass Breaking, Strategy Making, and Value Creating: Meta-Analytic Outcomes of Women as CEOs and TMT members’, summarise the results of 146 studies and find the same very weak influence of female CEOs and female top management team members on long-term financial performance. The authors talk about “small but dependably positive associations” between female leaders and company performance.

There is one very intriguing result in Jeong and Harrison’s meta-analysis: while their results show that there is a very small, but definitively positive, relationship between the presence of female top executives and long-term financial performance, interestingly they find that the short-term market reaction to appointing female leaders is negative. That is, shareholders seem to be more pessimistic about the performance prospects of female leaders than implied by these leaders’ long-term performance record.

Thirdly, Corinne Post and Kris Byron, in their November 2014 published study, ‘Women on Boards and Firm Financial Performance: A Meta-Analysis’, aggregate the results from 140 studies and find the same very low association between board gender diversity and financial performance.

Disappointing and contrasting evidence

The above evidence is not only disappointing but also presents a contrast to reports by consulting firms that demonstrate significant gains for companies with gender diverse leadership. McKinsey’s 2020 report, ‘Diversity wins: How inclusion matters’, reveals that the business case for inclusion and diversity is “stronger than ever”. It shows that gender diverse companies were 25 percent more likely to financially outperform their peers (that is, having profitability above the national industry median) in 2019, a figure that increased from 15 percent in 2014.

What is the reason for the discrepancy between practitioner and academic accounts? Part of the differences may be related to the scope of the data collection. The academic papers cover a longer time frame (some studies even use data that goes back to the 1990s) and sample a broader set of countries. Yet as we move ahead in time, the value of female leadership increases, which is also shown by McKinsey’s ‘Diversity wins’ report. In addition, the value of female leadership is greater in countries with more gender parity.

Another part of the differences may be due to how data was collected. The financial performance data in Jeong and Harrison’s study was collected one year after data on gender diversity had been recorded. This way, the researchers ensured that it was gender diversity that impacted financial performance, and not the other way around.

Consultant reports, however, often look at the correlation between organisations’ financial performance and the presence of female leaders by using performance and leadership data that was collected at the same time. In these white papers the high correlation between gender diverse leadership and financial performance implies, on the one hand, that gender-diverse companies may perform better. However, it may also be the case that high-performing organisations are more inclined to launch socially desirable initiatives (because they have the resources to do so) and are therefore more likely to appoint women to leadership positions.

While the conclusions of academic papers on the impact of gender-diverse leadership on financial performance are disappointing, a set of academic articles show that women leaders add value to corporations in more significant ways than just better financial performance.

Gender diversity and social performance

To start, the effect of board gender diversity on the social performance of organisations is five to six times larger than the effect of gender diversity on financial performance. Byron and Post, in their March 2016 published study, ‘Women on Boards of Directors and Corporate Social Performance: A Meta-Analysis’, summarise the results of 87 academic papers. They conclude that companies with more women board directors engage in more corporate social responsibility practices (tracked by the number of workforce diversity, environmental responsibility and philanthropy measures, or the extensiveness of a firm’s code of ethics).

These companies also enjoy more favourable social reputations (measured by the company’s presence on ‘most admired companies’ or ‘most ethical companies’ lists). The evidence on the influence of female leadership is strongest for the community-related aspects of CSR (that include charitable giving, volunteer programmes or community activities) and for corporate governance-related aspects (such as a positive corporate culture, leadership on public policy issues, or social and environmental reporting measures). Influence is weakest for product-related (such as quality, R&D or innovation) and environmental aspects (that include pollution prevention programmes, use of clean energy, recycling).

What drives the strong influence of women on social performance? First, it is much easier to shape social performance by board actions than financial performance. In addition, differences in male and female directors’ concerns about social performance issues, and differences in their professional experiences, also explain the important impact of board gender diversity on social performance.

A related study by Alison Cook and Christy Glass, ‘Women on corporate boards: Do they advance corporate social responsibility?’, finds that the CSR records of companies with more female board members are stronger than those with all-male boards and boards with few women. Nevertheless, even one or two women – as compared with all-male boards – help improve an organisation’s CSR record. Board gender diversity has a beneficial effect on male CEOs too: they are more likely to champion corporate governance, community engagement and diversity issues as the representation of women on the board increases.

Female leaders also add a significant amount of value to corporations because their presence acts as a constraint on intra-organisational gender inequality. Summarising the results of over 90 studies, Aparna Joshi, Jooyeon Son and Hyuntak Roh in ‘When Can Women Close the Gap? A Meta-Analytic Test of Sex Differences in Performance and Rewards’, show that the differences between male and female employees in salary, bonuses and promotions are 14 times larger than the differences in their performance evaluation results. In companies where women are present in senior leadership, however, both the pay and the promotion gender gaps are smaller, and there is a higher proportion of women at lower managerial levels.

Women leaders reduce gender pay and promotion gaps partly because they signal that career advancement is feasible for lower-ranking women; they provide mentoring and role modelling to others and are more likely to scrutinise and monitor organisational pay allocation and promotion practices.