All Posts Tagged: The Business Roundtable

The Significant Other: Why Overlooking Women’s Economic Impact is Bad Business

Scott Anderson
Chief Economist

In August, the Business Roundtable said it was redefining the purpose of U.S. companies.

The manifesto signed by 181 CEOs declared that corporations should do more than line shareholders’ pockets: they should also invest in their employees and protect the environment.

The statement was admirable and lofty, and as part of a company with best-in-class environmental policies, I was pleased with that news. That said, there’s a critical piece of sustainability missing from that charter.

If Corporate America’s leaders really want to “commit to deliver value to all” stakeholders, they need to actively advance the role of women in all areas of economic activity.

This isn’t just an ethical nice-to-have: this is a business necessity, and one that’s systemically overlooked. Consider that among S&P 500 companies, there are just 27 (5.4%) women CEOs. Yet, results of a new comprehensive study of thousands of executive appointments over a 17-year period showed that compared to male CEOs, “female CEOs drove more value appreciation” and in their first two years of leadership oversaw a 20% increase in stock price momentum.

Gender Diversity = Improved Corporate Performance

Gender diversity on executive teams has also been found to be strongly correlated with profitability. According to recent research, companies with executive-level gender diversity in the top-quartile were 20 percent more likely to outperform companies with less diverse executive teams on EBIT margin – a measure of profitability.

Gender diversity also makes companies more productive, and has been linked to greater market value and revenue. Harvard Business School researchers found three main reasons for this:

  • Companies with a gender diverse workforce are an attractive work environment for talent.Our 3.7% unemployment rate means recruiting and retaining top talent is especially challenging.
  • Companies that value gender diversity, encourage the exchange of diverse ideas. As a result, they innovate more and create better products.
  • Companies with a diverse workforce signal competent management. Investors expect that commonly accepted “best practices” such as gender diverse hiring policies are in place.

In addition, greater workforce participation by women has a significant impact on the U.S. economyIt contributes to stronger economic growth, reduces poverty, and increases innovation.

Gender diversity can also boost labor force productivity and incomes for both men and women, because women bring new skills to the workplace. It also increases the size and competitiveness of the labor pool. In the U.S. a 10% increase in female labor force participation has been associated with a nearly 5% increase in real wages.

Women-led Firms Drive Economic Growth

Beyond workforce participation, women-owned businesses are a U.S. economic growth engine.

In the past five years, the number of women-owned businesses grew by 21% – more than double the growth rate for businesses overall. In addition, total employment by women-owned companies rose 8%, much higher than the 1.8% for all businesses.

The list of top U.S. cities where women-owned businesses have thrived the most between 2014 and 2019 has some unlikely suspects. Detroit, Charlotte, Atlanta, Austin, and San Antonio lead in economic clout ratings— a combination of growth rates for number of firms, employment, and revenue. These metros, rather than the coastal “elite” cities often associated with venture capital investment, speak to the broad impact that female business leadership is having across the country.

Shareholders Put a Premium on Having More Female Employees

Investors also see value in companies that hire more women. Stanford University Professor Margaret Neale studied shareholder reactions to the gender diversity announcements made by publicly traded companies between 2014 and 2018. Her research found that stock prices rose if a company revealed more gender diversity.

Neale explains: “Shareholders are saying, ‘If you’re not as diverse as we want you to be, there are going to be economic consequences.'”

There’s also evidence from the start-up world that gender has an impact on investment returns. Investment teams with more of a gender balance at private equity and venture capital firms have been shown to generate 10-20% higher returns. A study of 1,500 early stage companies revealed that businesses founded by women also delivered more than twice as much revenue per dollar invested.

With all that said, it’s time for some significant action in our business landscape. If CEOs and Boards want to deliver more value to customers and shareholders, then a good first step would be to ensure men and women are equally represented throughout their companies. That’s not just the responsible thing to do, it’s smart business.

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