Many institutional investors are increasingly focused on the gender composition of company boards, according to our research. Some studies show significant outperformance by companies with women on boards, though no one can show a direct link between the two. Our latest research shows that companies in the MSCI World Index with strong female leadership (as defined in our paper) generated a Return on Equity of 10.1% per year versus 7.4% for those without (as of September 9, 2015, measured on an equal-weighted basis). We did not find a direct causal link between women directors and better outcomes.
Academic research in management and psychology has long shown that groups with more diverse compositions tended to be more innovative and make better decisions (some researchers believe that women are more risk averse). In our research, we found that companies lacking board diversity suffered more governance-related controversies than average. We did not, however, find strong evidence that having more women in board positions indicates greater risk aversion.
The possibility of performance benefits coupled with non-financial studies suggesting diversity could improve decision-making have been cited by both global asset owners and advocacy groups in support of efforts to promote a 30% global female director goal. MSCI ESG Research estimates that, based on current "business as usual" trends, women are unlikely to comprise 30% of directorships in publicly held companies until 2027. Based on two alternative approaches, it may be possible to achieve the 30% target at a faster pace:
- The Accelerated Conversion approach would double the proportion of new board seats taken by women reducing the 30% estimate by five years, and;
- The Accelerated Turnover approach would keep the current rate of women taking new board seats at the historical rate, but turnover of existing board seats could increase resulting in a less disruptive “refresh” achieving the 30% target by 2020.
Projections for Reaching 30% Women on Boards
Focusing exclusively on this 30% top-line number, however, can mask other dimensions of female leadership. U.S. companies generally lag their European counterparts when it comes to the percentage of women on their boards, but U.S. companies are far more likely to appoint a female CEO or CFO. As of August 15, 2015, one-sixth (16.9%) of the MSCI USA Index had at least one woman serving as CEO or CFO; outside the U.S., this figure is 11.4%.
Some observers claim there is a dearth of qualified women to take board seats. However, when we take into account the number of women with top executive experience, the universe is significantly expanded, especially in U.S. companies which are far more likely to appoint a female CEO or FO than their European counterparts. In addition, while female directors typically lagged their male counterparts in C-Suite experience, they outpaced men in achieving advanced educational degrees. Thus, the gap between men and women qualified to serve on boards may be much smaller than is generally perceived.