Women directors 'hounding' CEOs into falling profitability

2009

Fired up by the need to make an impact at board level, newly appointed women directors at firms with existing good governance structures are excessively monitoring chief executive officers (CEOs) to the detriment of providing guidance, leading to falls in profitability, according to a leading UK academic.

Dr Daniel Ferreira, from the London School of Economics' Department of Management, told Management Issues that women directors feel themselves to be judged by a higher standard than their male counterparts, leading to CEOs feeling hounded.

"The main role of boards is two-fold: to advise and to monitor. It appears that in companies where the board profile has shifted to include more women, the new female directors are monitoring CEOs excessively. They are also more likely to remove underperforming CEOs.

"The effect is that CEOs feel hounded and are less likely to trust the board. It also means that there is less focus on strategic advice for CEOs. The result is a fall in profits in companies that are engaging with diversity.

"Our data tell us that we are only going to see a rise in the number of women sitting on boards, so this correlation between the rise in women directors and a fall in profitability needs to be addressed," he said.

His comments follow research released by Ferreira and co-author Professor Renée Adams from the University of Queensland looking at how the behaviour of boards change when there are more women on them.

The Women in the boardroom and their impact on governance and performance research also suggests that in companies with poor governance structures, financial performance improves when the board becomes more diverse, suggesting that the closer scrutiny women bring to the board can be a benefit in poorly governed organizations.

"The results are not to do with women in general but how women feel they need to act as board members. This approach appears to work in companies with poor governance.

"We are in a transition period, and when women become established in boardrooms they may feel they don't have to be so ruthless. However, until then we need to see that there will be a cost to making some boardrooms more diverse," he told Management Issues.

He points out that the findings show simply a correlation between a growth in women directors and falling profits, not a causal link. In fact, a four-year study by New York-based consultancy Catalyst last year suggested US corporations with the highest proportion of women on their boards delivered equity returns that were 53% higher than those with the lowest representation of women.

Along with return on equity, theThe Bottom Line: Corporate Performance and Women's Representation on Boards report suggested, on average, companies with the most women board directors outperformed those with the least by 66% for return on invested capital and by 42% for return on sales.