Thursday, 23 June 2011

Sheconomics: Why more women on boards boosts company performance

‘Diversity prediction theorem’ is now one of the most cutting-edge of all business improvement strategies around. In simple terms, it means adding more women to the mix, a simple strategy that can significantly improve a company’s profitability.

Women currently make up just 12.5% of the board members of FTSE 100 companies. Yet research by McKinsey found a strong link between gender diversity and above-average returns on equity. Data from Gavurin Intelligence revealed that 30% of women on the board tripled a company’s profitability. A study from Pepperdine University showed that companies with at least three women on their boards outperformed competitors by at least 40%. The researchers also found that Fortune 500 companies with three or more women in senior management positions scored higher on measures of organisational excellence.

Three, it seems, is the magic number. In Norway one in every three board members is female, following legislative changes made in 2003. Subsequently Norway enjoyed 3% economic growth in 2009 and a budget surplus, while many of its EU neighbours were experiencing economic recession. The data may only be correlational but Norway is now the only country that can be said to have thrived during the economic downturn.

In the UK all FTSE 100 companies have to aim for at least 25% female representation by 2015. If this isn’t achieved quotas will be introduced. I recently gave a talk to company secretaries from twelve of the UK’s FTSE 100 companies. All were in favour of diversity but none wanted quotas. Government recommendations and accountability would alone bring about change, they felt. I wish I could share their optimism. According to a report by the Equality and Human Rights Commission, at the current rate of change it will take more than 70 years to achieve gender-balanced boardrooms in the UK’s largest 100 companies.

As a psychologist I am interested in the dynamics behind groups that make financial decisions. Homogeneous groups are very similar in their values, beliefs, styles of communication, race and gender. Heterogeneous groups, characterised by wide diversity in these factors, make better decisions and are less at risk of group-think. By adding women to the board, heterogeneity is virtually guaranteed. Balancing male and female attributes and creating a more diverse mix may be the solution to many challenges facing organisations today.

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