Gender-diverse leadership teams lead to 30% higher profit margins, new research shows

Boosting female representation in senior management teams results in higher profit margins and better company performance, a new study shows.

According to Realindex’s study on gender diversity in the private sector, companies with more women in senior management teams have about 30% higher profit margins than those with lower gender diversity.

Also, companies with more gender diverse senior management teams generated cumulative return-on-equity almost 30% higher than companies with less gender diversity over a five-year period.

The study, titled Beyond Lip Service: tracking the impact of the gender diversity gap, is based on global data of 2500 large cap companies in 30 countries, over a period of more than a decade.

Looking beyond board diversity data, the study examined executive and senior management team composition. It highlights that while government enforced quotas have led to higher participation of women on boards over the last decade, without these quotas for senior management teams, women are being left behind in C-suite representation.

Dr Joanna Nash, a co-author of the study, said the data clearly shows more gender diverse leadership teams deliver better performance outcomes.

“To understand the impact of gender diversity on company performance and investment returns, we cross-referenced the gender data with multiple company attributes such as return on equity and profit margins,” Nash said.

“The analysis showed a clear correlation between greater diversity and better company performance.

“There has been a long-held notion that improved diversity leads to better teams and decision-making. Realindex has interrogated a comprehensive global data set to test this notion, and it’s clear that female participation in leadership teams is good for companies, shareholders and investors.”

Globally, investors are missing out because they are not recognising the performance advantage of companies with more gender diversity in leadership.

Investing in “high diversity firms” relative to “low diversity firms” can potentially generate an annual return premium of 2. 5% for diverse boards and a 4% annual premium for diverse senior management, the data shows.

“The gender diversity premium has not yet been priced in by the market, meaning that investors who can identify companies with higher diversity, especially in senior management, may generate higher investor returns compared to the benchmark,” Nash said.

Study co-author Dr Ron Guido said without external pressure, promises to achieve gender diversity “are simply lip service”.

“Analysis shows that quotas are more effective than disclosure in boosting female representation — although both are important,” Guido said.

“This is evident in the higher proportion of women on boards in markets where minimum levels are mandated. The proportion of women in senior management lags in nearly all markets where there are no such requirements for gender balance.”

The report also describes the formation of “pink ghettos”, a phenomenon that sees women relegated to senior management and executive positions outside of the CEO role, often in HR, marketing and legal.

“Even when women do form part of the management team, they are concentrated in several functions outside of the CEO role which are less likely to be a launch-pad into the top job, such as human resources and company secretariat. To achieve equality, we need to fill the CEO pipeline with more women,” Guido said.

In Australia, according to the 2021 Chief Executive Women Senior Leadership Census, there were 18 female CEOs in the ASX 300, and out of the 23 new CEO appointments in 2021, only one was a woman.

Despite the slow progress on women being appointed to CEO positions, Australia was noted in the study for its improvements in board and senior management representation over the past 10 years.

Although still sitting at 30% of women in senior management roles, between 2010 and 2021, Australian companies have more than doubled the number of women in senior management. The report says this is likely due to Australia’s disclosure requirements, with large companies needing to report on the percentage of women at board and senior management levels.

“With these numbers more visible in investors’ minds, it puts pressure on these companies to do better beyond the board. It may also have become more apparent to the companies themselves, as they are forced to review these numbers each year and disclose them to staff,” the report states.

This article was first published by Women’s Agenda.