Why Does Gender Diversity Improve Financial Performance?

SUMMING UP Why does having more women in leadership positions make for more successful companies? James Heskett's readers offer a variety of theories.
by James Heskett

Does Gender Diversity in Management Enhance Performance? Why?

A variety of explanations for the positive correlation between gender diversity and better business performance found in a recent McKinsey study were advanced in responses to this month’s column.

Possible explanations for the findings included those that “women have greater analytical skills and coordinate activities with much (greater) ease than men while upholding company values and strategy” (Mathews Daniel Kapito); “Having senior female leaders should lead to higher engagement and better retention of a more diverse workforce” (Danielle); “Winning in this age requires more cross-disciplinary thinking... Women, in my experience, are better thought integrators.” (Allison S. A. Graves); “Many studies suggest that women tend to score higher on tests of social sensitivity than men do ... great team performance is connected to the social sensitivity factor within the team” (Julia); and “Emotional intelligence could be a factor... Women tend to have more of it than men, through nurturing, but it seems that men can learn it.” (Paul B).

Lest we became too involved in the complexities of human nature, Amy reminded us that the answer is obvious. "Women executives have to be at least twice as good as their male counterparts to get to that level.” And Hugh Quick asked the possibly rhetorical question, “Could it be that some women are good at running things?”

Guy Higgins opined that diversity, more broadly defined, might have produced the same results as the McKinsey study. He commented that improved performance is not about gender diversity, but rather about cognitive diversity--"differences in the way that we see and categorize the world, the way we solve problems and the way that we make predictions.” A comment from “The Real Deal” echoes this belief: “If you want real diversity, surround yourself with people from different backgrounds who do not think like you. You could hire 50% women, and if they are clones of your existing leaders, in terms of how they think … then you in reality have diversity only on paper.”

There were several criticisms of the fact that the research identified correlations, not causes.

Norman Toy made the point by stressing the especially mischievous nature of the use of correlation in this case. In his words, “One interpretation is that … Gender Diversity = Financial Performance. An alternative explanation might go the other way: Financial Performance = Gender Diversity. Well off firms have much more flexibility to experiment, meet diversity goals and so forth.” Patrick Schild, while disagreeing with the premise, noted that such research could even be used to support the opinion of a European consultant that “those companies with female executives on top level are … (hold your breath) ... only those who can afford having women on the board.” The research clearly did not meet the standards of these respondents.

For them, we’re still left with the question, does gender diversity in management enhance performance? What do you think?

Original Column

Gender equality in leadership is a topic appearing with increasing frequency among the research reports, books, and opinion pieces crossing my desk. Perhaps one reason is the candidacy of women for the Presidency of the United States in both parties.

Whatever the reason, research is shedding interesting insights on the issue. Findings of a recent McKinsey Global Institute study include: (1) lack of gender diversity is associated with a greater likelihood of below par performance in a sample of 366 companies in Canada, Latin America, United Kingdom, and the US, and (2) when companies commit themselves to diverse leadership, they are more successful.

One response to the research is to disagree with the premise and methodology. Studies like these can be easy targets. Three hundred sixty-six companies spread across a number of countries is a small sample. Although gender and financial data are straightforward, they are not always easy to obtain with complete accuracy. And, like many studies, these correlate gender diversity with financial performance. That is, they are found together. But that doesn’t mean that gender diversity necessarily accounts for much if any of the performance.

On the other hand, a number of studies have compared the management styles of women and men. Even though there is a wide overlap on most dimensions among most leaders, there are differences on some dimensions among some members of each of the samples that have been studied. But these studies raise as many questions as they answer.

Is there, for example, a tendency for some women leaders to excel in such things as relating to others, questioning themselves at important junctures in the decision-making process, being sensitive to others’ needs and interactions, and weighing various sides in an argument? Does the fact that women influence 70 percent of consumer purchase decisions favor gender-diverse companies?

Whatever the reason, an earlier McKinsey study, in 2007, of more than 58,000 employees of 101 organizations worldwide found significant differences in economic performance between those with at least 30 percent women in senior leadership versus those with no female representation.

In gender diverse organizations, surveyed employees gave higher marks to their organizations in areas that are linked to better performance results including the work environment and values, direction, coordination and control, and of leadership. One the other hand, in organizations lacking gender diversity, employees gave lower marks to their companies for such factors as motivation, capability, accountability, and innovation. There was little or no effect until women held 30 percent of the leadership positions in an organization.

This is a complex topic with much research remaining to be done. We’re still relying on personal experience for too many of our conclusions. What do your personal experiences and intuition tell you? Why does lack of gender diversity hurt corporate performance? What do you think?

Next Month: What Will It Take to Achieve Gender Equality in Leadership?

To Read More

Vivian Hunt, Dennis Layton, and Sara Prince, Why Diversity Matters McKinsey Insights & Publications, January 2015, accessed on www.mckinsey.com/insights.

Women Matter: Gender Diversity, a Corporate Performance Driver, a joint study by the Women’s Forum for the Economy and Society and McKinsey & Company, 2007.