Anton Kasster writes:

I recently came across a study which I think is
quite questionable, even ridiculous. This study is unfortunately quite old (2012), but its conclusions are so ludicrous that the study is perhaps still interesting.

The study claims that companies with women in their supervisory boards perform better than companies without a woman in such high positions (especially in western countries). So far so good, but of course causation does not mean correlation. There are many more female members of supervisory boards in the service industry than in the manufacturing industriy, but manufacturing is a weakening branch of industry (especially in the west) and the sevice industry is gaining more and more. Japan and Korea have very few female supervisory board members and are currently (in 2012 also) in a bad economic constitution. All this would decrease the (already weak) numbers in intercession for “gender diversity”, but the authors of the study did not seem to considered the obvious. One might also wonder how big the influence of the supervisory board on the profits of an company is. In many companies this council plays only a subordinate role or none at all.

All media organs have propagated the study without criticism. Even the Australian government refers to it.

What is your opinion on the whole story?

The study in question is called “Gender diversity and corporate performance” and is published by Credit Suisse Research. I can’t figure out who wrote it. It says, “For more information contact Richard Kersley, Head of Global Research Product, Credit Suisse Investment Banking, and Michael O’Sullivan, Head of Portfolio Strategy & Thematic Research, Credit Suisse Private Banking,” but I have no idea if they’re the authors of the report.

I took a look and the paper does indeed make some causal claims:

What evidence is there to support the theory that stock-market performance is enhanced by having a greater number of women on the board? . . . Our key finding is that, in a like-for-like com- parison, companies with at least one woman on the board would have outperformed in terms of share price performance, those with no women on the board over the course of the past six years.

Setting aside casual inference concerns for a moment, I see some forking paths:

However, there is a clear split between relative performance in the 2005–07 period and performance post-2008. In the middle of the decade when economic growth was relatively robust, there was little difference in share price performance between companies with or without women on the board. almost all of the outperformance in our backtest was delivered post-2008, since the macro environment deteriorated and volatility increased. In other words, stocks with greater gender diversity on their boards generally look defensive: they tend to perform best when markets are falling, deliver higher average ROes through the cycle, exhibit less volatility in earnings and typically have lower gearing ratios.

Other aspects of the report are purely descriptive and I have less problem with that; for example when they ask, “Is there any difference in the financial characteristics of companies with a greater number of women on the board?”

They do refer to dissenting views, and that’s good:

There is a significant body of literature on this issue; articles on the subject span several decades. Some suggest corporate performance benefits from greater gender diversity at board level, while others suggest not.

In the positive camp are the likes of McKinsey and Catalyst. Catalyst has shown that Fortune 500 companies with more women on their boards tend to be more profitable. McKinsey showed that companies with a higher proportion of women at board level typically exhibited a higher degree of organization, above-average operating margins and higher valuations.

Other studies, such as those conducted by Adams and Ferreira or Farrell and Hersch, have shown that there is no causation between greater gender diversity and improved profitability and stock price performance. Instead, the appointment of more women to the board may be a signal that the company is already doing well, rather than being a sign of better things to come.

They follow up later in their report and seem to think highly of the reports by Adams and Ferreira and by Farrell and Hersch. So if you actually read the entire document, their claims don’t seem so strong.

Regarding the main causal claim, the report does address potential confounding:

Our headline result is that, over the past six years, companies with at least some female board representation outperformed those with no women on the board in terms of share price performance.

Getting to this result was not straightforward. There is a bias from the skew in female representation towards certain sectors (consumer-related), certain markets (Europe) and towards large-cap stocks. Take the sector issue by way of example. The consumer staples sector ranks higher than average in terms of female board representation, but arguably the considerable share price outperformance the sector has delivered over the past few years has little to do with board composition and much more to do with the very stable and defensive nature of its earnings in a world of considerable earnings uncertainty.

Hence, in calculating the returns generated by companies with (a) one or more women on the board compared with those with (b) no women on the board, we have made three adjustments:

1. We look at performance from a sector-neutral stance. In other words, we have allocated the same sector weights in the calculations of both (a) and (b) in order to mitigate the impact of overall sector performance;

2. We split the sample universe into two baskets: one containing companies with market capitalization greater than USD 10 billion and one containing companies with market capitalization less than USD 10 billion. Hence, in broad terms, we are aiming to compare women versus no women on the board of large caps and separately, women versus no women on the board of mid-to-small caps. In this way, we can partially mitigate the survivor bias of small cap stocks in the construction of our sample universe; and

3. We look at the returns generated (on a sector-neutral basis) within each region as well as at the aggregate global level.

This all sounds reasonable; that said, it’s not clear to me what analysis they actually did—it seems they used some sort of weighted averaging, which is limited as a technique for addressing differences in pre-treatment variables in causal inference. It’s tough when the problem is not formally set up causally: what’s the “treatment” or “instrument”? In particular, it’s not clear how to give a casual interpretation to a descriptive statement such as “the results demonstrate superior share price performance for the companies with one or more women on the board.”

So, overall, yes, I think Kasster’s criticisms are reasonable, and many of the conclusions of the report could be artifacts of the data. At the same time, the report itself is moderate in tone. The topic is difficult to study because the effect of adding more men or women to a corporate board has to depend on context, and stock price is a noisy outcome measure.