What is the relationship between gender and risk-taking when it comes to board decision-making? New evidence suggests that organizations with a critical mass of women board members approach risk more holistically and in a way that squeezes a little more value out of decisions.
The evidence is massing from a variety of disciplines.
First, female investors outperformed male investors in 2016 by 0.3 percent while taking on less risk, according to a Fidelity survey. That may not sound like much, but 0.3% consistently achieved over a decade—which female investors accomplished—goes a long way to alleviating some shareholder objections.
Research from The International Monetary Fund determined that incrementing a board by just one women board member, while keeping the board size unchanged, is associated with a higher return on assets. These results were reported at a 2016 Harvard Law School Forum on Corporate Governance and Financial Regulation titled “Gender Diversity on Boards: The Future is Almost Here.”
“There is a strong body of data that shows the relationship between diversity and superior financial performance, including studies that highlight the different skill sets female directors bring to the table such as a focus on the long-term business strategy and expertise in risk and compliance.”
One clear reason, according to Prof. Terrance Odean, at The University of California Berkeley’s Haas School of Business, is that, on average, men traded 45 percent more often than women. Prof. Odean pointed to male overconfidence and an emphasis on gains, but he could have just as accurately pointed to female conservatism that “buy and hold” is generally a superior investing strategy.
These traits extend to the boardroom where the stakes and the risks have never been as extreme.
The wealth managers who control trillions of dollars in institutional money certainly have been paying attention. Before they invest, they count the number of women in the boardroom. Many wealth managers have noticed that companies with women directors simply have better outcomes in terms of invested capital, returns on equity, and year-to-year yield.
Many of these institutional wealth managers understand that when boards have gender diversity, it is more likely that important questions are raised that otherwise might not get on the agenda. Diverse boardrooms become a bit less inward-looking, a little more transparent, somewhat more accountable, and a lot less “clubby.” Research from McKinsey, Credit Suisse, and MSCI all support the link between board diversity and financial performance.
Retirement funds in New York, California, Connecticut and Rhode Island now include gender equity as they make investment decisions. In 2016, Rhode Island State Employees’ Pension Fund rejected investments in nearly 200 proposed corporations because of lack of diversity, independence or expertise among the boards. Investments in companies that had all-male boards, such as Continental Resources and NuStar Energy Corp., were specifically vetoed. “As policy, the Rhode Island State Employees’ Pension Fund will vote against all director nominees sitting on boards with less than 30% diversity,” says State Treasurer Seth Magaziner.
Good governance, in addition to financial performance, is associated with gender diversity at the board level, according to Charlotte Laurent-Ottomane, executive director of the Thirty Percent Coalition, a national organization that advocates for board diversity. It has an institutional member base representing more than $3.2 trillion in assets under management, including the United Auto Workers Retiree Medical Benefits Trust based in Detroit.
Meredith Miller, chief corporate governance officer at the trust, said the organization joins with other shareholders to promote strong diversity practices at companies in which they invest.
“There is a strong body of data that shows the relationship between diversity and superior financial performance, including studies that highlight the different skill sets female directors bring to the table such as a focus on the long-term business strategy and expertise in risk and compliance,” says Miller.
It’s all about return on investment. “It’s got absolutely nothing to do with political philosophy,” says Steve Silberstein, who serves on the board of the Marin County Employees’ Retirement Association, which has $2.3 billion in assets under management.
“Pension board members have a fiduciary responsibility to get the maximum possible return on investment, period,” Silberstein says. “Having women on corporate boards substantially reduces the risk of fraud. Whether there’s a correlation or it’s causal, I’m not sure. But corporations with substantial numbers of women on their boards have less fraud.”