Corporate boardrooms and C-suites are not exactly known for their diversity. For instance, in 2021, just six Fortune 500 chief executive officers were Black, while there were 40 Asian American and 20 Latinx/Hispanic CEOs. This means that nearly 87% of the leaders of 500 of the largest companies in America, which account for approximately two-thirds of the country’s gross domestic product, are white. Black CEOs account for just over 1%, while Asian Americans account for 8% and Latinx/Hispanic account for 4%.
These percentages stand in stark contrast to the demographics of the United States as a whole, where roughly 60% of the population is white, 12.6% is Black, 18.6% is Latinx/Hispanic, and about 6% are Asian American.
Meanwhile, women account for just under 15% of the Fortune 500 CEOs (74 out of 500 as of March 2022), while they of course make up around 50% of the population (50.52% in 2020, to be exact).
Despite this lack of representation of women as heads of the largest companies, studies have shown that “when women step into executive roles like CEO, CFO, Director, that is associated with an increase in profitability” according to the popular podcast The Indicator from Planet Money and NPR. “One study even found a 15% increase in profitability.”
And a 15% increase is anything but small. That can represent millions—or even billions—of dollars for large companies.
Professor of Management Corinne Post of the Villanova School of Business set out to discover what could be behind this demonstrated increase in profitability. What were women doing differently when they assumed leadership roles at a company?
One key difference Post noted was centered around risk: how much risk female executives were willing to take, what kind of risk, etc. Because studies have not just proven that women tend to increase the profitability of companies; they have also shown that, in times of crisis, men and women perform their jobs equally well.
In the press, however, women get blamed for crises much more often than men.
For instance, a study by The Rockefeller Foundation followed a number of companies through times of crises—or, more euphemistically, times of “transition”—and showed that in the press, male CEOs got blamed for those crises 30% of the time, while female CEOs got blamed for them 80% of the time.
This means that women CEOs have had to be more conscious of taking enough risk to drive profits and growth, but not so much risk that, should too much go wrong, it would plunge the company into crisis. Men, on the other hand, can play more fast and loose with risk and still be reasonably certain that they won’t take the brunt of the blame if things go south.
Or, as Post puts it, “So [women] have had to, on the one hand, . . . pay attention to . . . challenges that they picked up, not take too risky ones. And at the same time, they've had to do things to make them stand out as competent, as innovative, as visionary, right?”
Post wanted to see if, by entering the top ranks, women had the effect of moderating the amount of risk a company took. She did this by using software to go through thousands of pages of corporate documents and analyze the language, hunting for specific words that indicate levels of risk. In fact, “risk” was one of these keywords, along with “venture” and “betting.” These are all words that indicate risk-taking propensity.
Post and her team went through more than a decades-worth of letters to shareholders from 163 multinational companies. She chose shareholder letters because they are produced collectively by top executives, so they can show how top management teams are thinking as a whole.
What Post found was that, when women were in, the riskier language was out.
And this effect wasn’t just limited to words on paper; it translated to real-world behavior as well. When women were appointed to top executive positions, their management teams’ tendency to take risks dropped by between 13 to 14%, and their willingness to become more innovative—in other words, their openness to new ideas—increased by about 10%.
Essentially, what women leaders appeared to be doing was finding ways to innovate while taking less risk—and, in the years that followed, their entire management teams became more open to innovation and less inclined to take risks.
Interestingly, this effect seems to be consistent across countries and cultures, regardless of how they regard gender, as Post studied 163 multinational companies representing around 20 OECD (Organisation for Economic Co-operation and Development) countries.
Of course, there are some caveats to Post’s findings; the major one being that the increased profitability, increased innovation, and decreased risk taking does not typically come from just having one female executive. “You can't just pop one woman into top management and expect to see higher profits . . . The change in top management team thought happens after the second or third woman is hired. One of the reasons is because the men in these circles do not necessarily have a lot of experience working with other female executives. It can take some adjustment.”
Post also found that when women leave management teams, and the teams revert to being almost all or completely male, the positive changes reverted back as well.
It’s clear from Post’s study that an increase in the number of women in executive roles at major companies would be a boon to corporate performance. In fact, most companies would likely benefit from an increase in their leadership’s diversity in all its forms: cultural, racial, religious, age, sex/gender, sexual orientation, and disability.
A 2017 study by McKinsey & Company titled “Delivering through diversity” found that companies in the top quartile for gender diversity on their executive teams were 21% more likely to experience above-average profitability than companies in the fourth quartile. And companies with the most ethnically diverse executive teams—not only with respect to absolute representation but also with respect to variety or mix of ethnicities—were 33% more likely to outperform their peers on profitability.
The bad news is that change has been slow. According to Deloitte, the average growth for minority representation on boards of directors of Fortune 500 companies (rather than just the CEO position alone) since 2004 was less than 0.5% per year. Combined, women and minorities accounted for 34% (1,929 board seats) in 2018 and 38.3% (2,253 board seats) in 2020, and there are still no companies in the Fortune 500 that are representative of the aforementioned demographics of the United States as a whole.
The good news, however, is that there is a lot of room to grow. Every Fortune 500 company—and by extension, every company in general—has the ability to tap into this as yet underutilized driver of growth and potentially boost their profitability and innovation while decreasing risk.
Naturally, making these changes may not always be easy, particularly for companies that have found success with the status quo. But those that are able to are likely to find themselves with a significant competitive advantage.