When social justice also makes good economic sense

When social justice also makes good economic sense

There’s a temptation when seeing that a successful company has broader representation on its board to think that the company’s success is what allows it to experiment with gender balance. A new La Trobe Business School study demonstrates that the reverse is true: gender diversity on the boards of large companies is positively affecting company performance.

Women in the workforce statistics

The Workplace Gender Equality Agency’s 2016 statistics show that women are 46% of the Australian workforce. They are more likely than men to have completed high school and attained a Bachelor’s degree, and are only slightly less likely to have completed postgraduate study (5.7% to 6.1%).

However, only 23.6% of company directorships are held by women, and of the ASX 200, as at January 2016 only 21.9% of the directors were women.  Twelve per cent of ASX 200 companies do not have a woman on their board at all.

Study findings on board diversity and financial success

Board Diversity and Financial Performance in the Top 500 Australian Firms, co-authored by Paul Mather, Alireza Vafaei and Kamran Ahmed, expands on earlier research that indicated board diversity ‘improves organisational value and performance by providing the board with new vision and perspectives’ and that diversity gives the board ‘a greater knowledge base, creativity and innovation and therefore provides higher competitive advantage to the firm.’

The La Trobe study examined 300 of Australia’s top 500 companies over six years, cross-checking four measurements of business performance to achieve more reliable results.

The results indicate that there is a trend toward the appointment of women on corporate boards in Australia since 2010, and that it is mainly the older, larger and better performing firms that have female representatives on their boards.

One of the most significant findings on the study was about the causal link between board diversity and strong financial performance: ‘tests for the causality between the proportion of women on boards of directors and financial performance suggest that it is board diversity that affects performance, not the opposite.’

This confirmation that diverse boards leads to stronger performance (rather than stronger performance allowing the possibility of greater diversity) is significant. It suggests that a push for more gender diversity in business is more than a conscientious decision to adopt quotas – it’s good business sense.

Diversity = success

What is it about a more diverse board that leads to improved economic performance? Paul Mather, one of the La Trobe academics who authored the paper, says that there are multiple factors influencing that outcome.

‘There are a couple of things, in no particular order of importance. One is that a more diverse group of people is likely to come to a better decision, whatever it is, than a homogenous group of people. So diversity in all its forms – age, ethnicity, life experiences, gender, whatever – the whole shebang is important.’

That is, a board that reflects more mixed experiences – perhaps in fields of expertise, in having lived overseas, or understanding a range of cultural contexts – has more ways of viewing and therefore solving problems.

Another factor, says Mather, is that ‘a lot of psychological research shows that women are more risk averse than men, which could potentially play out in some of the judgements and decisions.’

Lastly, says Mather:

‘One of the purposes of having a board of directors is that it’s really important to have a range of people who can bring contacts, influences, and knowledge with them – which again points to diversity, including gender diversity. So when you move away from the middle-aged, white Anglo Saxon male kind of boards, and bring in diversity, that’s potentially a positive thing.’

What next?

With the publication of the study, what might be the impact on board diversity in future?

The Australian Stock Exchange has begun to regulate to see more women appointed to listed companies. This is typically seen as being motivated by social justice issues, but as the report shows,  more women on boards translates generally to economic value for shareholders. As Mather points out:

‘Even without the social justice issues, there’s a sound economic case for going down this route.’

The study also focused on ASX 500 businesses – but will the results translate to smaller businesses? ‘The top 500 in Australia is a much broader church than the Fortune 500 in the US,’ says Mather.

‘In Australia, once you get past the top 200 or so, the businesses get small compared to the US. There’s nothing to suggest that this wouldn’t hold equally for a smaller environment.’

In fact, the La Trobe Business School is planning to do more research in the area of the impact of greater diversity on business. Plans and proposals are being formulated for work in this area.

‘We want to look at diversity in the broader sense, and understand some of the issues and challenges around getting more cultural and ethnic diversity into boards, as well as gender.’


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Image: Team by Hillyne