Many of the biggest companies have fully embraced the theory that more diversity means more profits. But the investors may be less convinced with this which includes adding women to boards.
An analysis of 14 years of market returns across 1,889 companies shares that when they appointed female directors, they saw two years of stock declines. The market value of a given company fell 2.3% by adding one additional woman as well. The research was published in the Informs journal Organization Science recently.
Shareholders then penalize all these companies, despite the fact which increased gender diversity doesn’t have a material effect on a company’s return on assets, told Kaisa Snellman, an assistant professor of organizational behavior at INSEAD business school.
‘Nothing happens to the actual value of the companies,’ she said. ‘It’s just the perceptions that change. If anyone is biased, it is the market,’ she said. In fact, Snellman said investors should consider organizations that add women and other under-represented groups to their boards ‘because there’s a good chance that company is being undervalued.’
Over the years, various non-academic reports have shared that diverse leadership results in corporate success. A McKinsey & Co. analysis told that board diversity correlates with positive financial performance as well. Credit Suisse Group AG said a ‘performance premium for board diversity’ in its 2019 report.
But most of these analyses don’t prove that increased diversity which leads to higher returns or profit margins. ‘It has become kind of a myth,’ Snellman said: ‘Add a woman on your board, and a company starts doing better.’
One analysis from September shared that share prices moved after companies released reports that showed better-than-average levels of gender diversity as well. Another published in October found that investors penalized all the companies without female directors after California passed a law which has mandated that all boards in the state need to have at least one woman by the end of this year.
‘Just to be very clear, I’m not saying that we should not promote female leaders into senior leader positions,’ Snellman said. ‘But is there a business case for gender diversity on boards? If you ask an academic, the answer is no