New research from the Credit Suisse Research Institute indicates that female board representation goes hand in hand with corporate outperformance.

Ensuring female representation on boards is about more than equality quotas and can actually have a massive impact on corporate performance - and therefore investment picks - a new study by the Credit Suisse Research Institute has revealed.

The Swiss banking giant found that large-cap companies with at least one woman on the board have outperformed their peers with no women on the-board by 26 per cent over the last six years. Interestingly, the positive impact made by female board members only emerged after the financial crisis – before then, when economic growth was relatively robust, there was little difference in share price performance between companies with and companies without women on the board, Credit Suisse said. But following the crisis and the knock-on deterioration in the macro environment, those companies with female representation at board level “strongly outperformed” those without.

Key trends

In evaluating the effect of board diversity on companies’ success, Credit Suisse looked at the average financial metrics of both kinds of companies and found several very clear trends.

The first is that firms with female board representation tend to enjoy a higher return on equity: the average ROE of companies with at least one woman on the board over the past six years was 16 per cent, while the corresponding figure for those with no female board representation was 12 per cent.

The second key finding was that those firms with women on their boards tend to exhibit slightly lower gearing. The net debt to equity of companies with no women on the board averaged 50 per cent over the past six years, while those with one or more had a marginally lower average of 48 per cent.

Thirdly, those companies with females on the board showed higher price-to-book multiples, in line with higher average ROEs: the aggregate price-to-book for companies with women on the board was 2.4x, versus 1.8x for those without.

Lastly, Credit Suisse found that companies with at least one female board member showed better growth over the six-year study period. These firms showed an average net income growth of 14 per cent, against an average of 10 per cent for those with no female board representation.

Having identified clear outperformance among those firms with females on their boards, Credit Suisse tried to unpick the reasons why this might be the case, and came up with seven reasons why greater gender diversity could be correlated with stronger corporate performance:

1. A signal of a better company: the trend may be attributable to reverse-causation, whereby big, successful, high-profile companies are more likely to appoint females to their boards. However, Credit Suisse notes that even in an isolated comparison of the large cap companies the outperformance of companies with women in the board held up.

2. Greater effort across the board: academic research has shown that majority groups improve their own performance in response to minority involvement - producing better average outcomes in more diverse environments.

3. A better mix of leadership skills: studies suggest that companies with female board members tend to have a better balance in leadership skills within the company, women being deemed better at mentoring and clearly defining responsibilities, for example.

4. Access to a wider talent pool: the average proportion of female graduates was 54 per cent in 2010, up from 51 per cent in 2000 - therefore any company that achieves greater gender diversity is more likely to be able to tap into the widest possible pool of talent, Credit Suisse said.

5. A better reflection of the consumer decision-maker: women tending to be in charge of household spending decisions means that female representation may enhance a board’s understanding of customer preferences.

6. Improved corporate governance: academic research indicates that a greater number of women on the board improves performance on corporate and social governance metrics.

7. Risk aversion: Credit Suisse’s research showed that stocks of companies with women on the board are more likely to have lower levels of gearing than their peer group where there are no women on the board. Lower relative debt levels have been a useful determinant of equity market outperformance, delivering average outperformance of 2.5 percent per annum over the last 20 years and 6.5 percent per annum over the last four years, the firm said.

“This in-depth study provides investors with striking evidence that greater gender diversity is a valuable additional metric to consider when evaluating investments. The results of our analysis are irrefutable and for the first time offer a global view of this topic and a compelling explanation of why gender diversity adds value,” said Stefano Natella, co-head of securities research and analytics.

The issue of female board representation is a complex one which has at times sparked controversy, such as when various politicians suggested that more female board representation at banks would have averted the financial crisis by reining them in from riskier activities. Another controversial issue is whether firms should use female board quotas as a way to kick-start diversity or whether things should be allowed to develop organically and on merit alone. (To view a recent article on female representation within wealth management, click here).