Women in Charge

In honour of International Women's Day today, I thought I would take the opportunity to talk a bit about what happens when women lead companies.  Women are still underrepresented in leadership roles at major companies for reasons that are beyond the scope of this blog post, but when they do reach the top echelons, we see two overarching trends:

The Glass Cliff and Saviour Effect

For many companies, their first experience with a female CEO is during times of crisis.  Brought in to right a sinking ship, these women are under intense scrutiny from the start, and are given little leeway to make mistakes.  This creates what has been called a "Glass Cliff" by researchers, a situation in which it can seem like the new female CEO has been set up to fail by being handed a failing company.  A corollary to this is the "Saviour Effect", when these same women do not remain in their roles for as long as their white male counterparts, regardless of whether they managed to turn the company around.  A full 38% of women CEOs ultimately get pushed out of their roles by the board, compared to 27% of men CEOs.  Furthermore, when they are pushed out, women overwhelmingly tend to be replaced by white men.

The causes of these two phenomena lies in the hiring process employed by many of the world's largest companies.  Being a CEO of a company is usually a prestigious job, but much of that prestige is stripped away when a company is in trouble.  Often, CEOs tend to move horizontally, from CEO position at one company to another.  However, when a company is in crisis, many of the white men who would be traditional candidates for the CEO position self-select out, while women and minorities (and especially minority women!) who are just as qualified yet have previously been overlooked see a company in distress as possibly their only opportunity to prove themselves in a CEO role.  Women who come into these crisis roles know they are facing an uphill battle, with greater roadblocks to success and less time to prove themselves, but nevertheless are determined to take on the challenge.

CEO Marissa Mayer not only brought Yahoo! back from the verge of extinction, but saw its share price triple under her leadership.

CEO Marissa Mayer not only brought Yahoo! back from the verge of extinction, but saw its share price triple under her leadership.

The glass cliff and saviour effect trends have been widely documented in both business and politics.  In business, women who were brought in during crisis and have managed to hang onto their roles include Mary Barra of GM, and Irene Rosenfeld of Mondelēz.  Until recently, this also included Marisa Mayer of Yahoo, as well as Meg Whitman of Hewlett Packard, who is currently in the middle of the even rarer horizontal transition, and is moving to a CEO position at a new firm.  Other women who were brought in during crisis but ultimately slipped off the glass cliff include Ellen Pao at Reddit, Jill Abramson at the New York Times, Patricia Russo at Alcatel-Lucent Technologies, Carly Fiorina at HP, and Andrea Jung at Avon.  In the world of politics, the phenomenon is even more pronounced, because often, the leadership change does not take place until polls are showing near-certain defeat.  In many parliamentary systems, which allow for changes in leadership between elections, female leaders of government have frequently come to power following major crises of leadership, when it was difficult to find male candidates for the position.  This includes Prime Minister Kim Campbell in Canada, Prime Minister Julia Gillard in Australia, current Prime Minister of the UK Theresa May, and dozens of others at the sub-national level.

The Over-Achievers

When women are hired to leadership positions, however, their companies tend to out-perform male-headed companies by a significant margin.  This includes companies where the female leader was brought in during a glass cliff situation, tasked with turning around a failing company on top of regular CEO duties, as well as companies where the female CEO was brought in during regular operations.  Numerous studies have found that women-headed companies outperform male-led companies during periods of both market calm and turbulence.  A 2015 study of Fortune 1000 companies found that firms with women CEOs out-earned male-headed companies on the S&P 500 by a ratio of about 3 to 1.

Below the top tier, having more women in executive roles is still correlated to better company performance.  A 2014 study by Credit Suisse of 28,000 executives at 3,000 companies in 40 countries found that having as little as 10% of executive positions held by women led to a 27% boost in stock performance and 42% increase in dividends.

What does it mean for investors?

While the causal mechanisms at work here are still unclear, the takeaway for investors is pretty clear: women-headed firms are nothing to fear, and can mean big gains for shareholders.  Even though women remain underrepresented in top executive roles, companies would be wise to make an effort to diversify their leadership.