June 13, 2008

When Women Rank High, Firms Profit

New research from David Gaddis Ross finds that firms benefit when they add women to their senior management teams.


Last year, Professor David Gaddis Ross began investigating a phenomenon that has long puzzled both economists and politicians: women have been very successful at entering the professional business workforce, but not at senior management levels. According to the Standard & Poor’s ExecuComp database, less than one-third of the largest 1,500 U.S. firms in 2006 could count at least one woman on their senior management teams.

When it comes to chief executives, the numbers are even more discouraging: only 2.5 percent of these 1,500 firms had a woman CEO. In 2006, 12 women were running Fortune 500 companies — and that was a record, up from just 1 in 1996. (The leader in this elite group is Angela Brady, the CEO of health-benefits firm WellPoint, ranked 35th on the Fortune 500 and the largest U.S. company headed by a woman.)

These statistics seem stark, yet few studies have focused on the relationship between the percentage of women in a firm’s senior management and the firm’s economic success. “We’re not trying to explain why there might or might not be a glass ceiling,” explains Ross, who worked with Cristian Dezsö of the University of Maryland. “Rather, we’re looking at whether companies with a higher level of female participation do better and, if so, why.”

Many studies contend that there is a so-called female management style — and that it is, in fact, more effective than the management style associated with men. Women tend to manage in a more participatory manner, compared with a more hierarchical approach used by men. Research has also shown that including women on a senior management team adds to the diversity of perspectives, life experiences and problem-solving skills, all of which can contribute to a firm’s financial success.

Other studies have argued that a female management style isn’t necessarily welcome at the CEO level, where an autocratic approach is often expected. Perception, accurate or not, is also an issue; a woman may be seen as not aggressive enough to hold a firm’s top position. And some experts say diversity hinders decision making because it can lead to internal strife.

Another problem is that men tend to be judged more favorably in jobs that are typically held by men. With CEO positions overwhelmingly filled by men, a woman executive may start out at a disadvantage. These factors make it difficult to assess whether the female participation rate, as the researchers put it, is related to a firm’s bottom line.

To investigate the connection between women senior managers and firm performance, Ross and Dezsö examined such performance metrics as the market-to-book ratio, return on assets, return on equity and annual sales growth from 1992 to 2006 for the largest 1,500 U.S. firms. The researchers analyzed the relationship between these measures and the percentage of women in senior management positions up to, but not including, the CEO level. Separately, they studied these performance measures in firms that had female CEOs.

Their findings showed that having a higher percentage of women in senior management positions up to the CEO level — in most cases, just having a single female — is positively associated with better firm performance. For companies with a female CEO, however, the association with firm performance is neutral or negative. This suggests that female senior managers do add value to their firms but that whatever special qualities female managers may have are neutralized by the unique attributes of the CEO position.

Investigating further, the researchers examined what types of firms benefit from the female participation effect, or the percentage of women in senior management positions below the CEO level. Their study showed that female managers are most effective at firms with a strong emphasis on research and development. “The positive impact is found in firms that are involved with innovation, where a democratic and participatory approach to management is known to be important,” Ross says. “And that’s consistent with the notion of a female management style.”

Overall, the data suggest that firms that promote women to senior management positions enjoy economically superior performance because of the complementary set of interpersonal management skills related to inclusiveness and the encouragement of employee voices that women bring to the table. As Ross says, “That’s precisely what many feminists and others have argued for years.”

David Gaddis Ross is assistant professor of management at Columbia Business School.

Read the Research

Cristian Dezso, David Ross

"Does Female Representation in Top Management Improve Firm Performance? A Panel Data Investigation"

View abstract/citation  Download PDF  

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