Business & Economics March-April 2009 Miller-McCune Research Essay

February 27, 2009

Profit, Thy Name Is … Woman?

The consistent correlation between women executives and high profitability.

By Roy D. Adler

Any action that shows a consistent correlation to high profits would probably be of interest to companies struggling to swim against the tide of these perilous economic times. But one corporate policy seems to address both diversity and profitability issues in a single blow: Over the past several years, my colleagues and I at Pepperdine University have tracked the performance of Fortune 500 companies with a strong record of promoting women to the executive suite and compared their performance to that of other firms in the same industries. The correlation between high-level female executives and business success has been consistent and revealing.

The comparison was first made in 2001, as an outcome of a massive study of the glass ceiling. For that study, an average of 200 Fortune 500 firms supplied data about their executives for every year since 1980; that meant we were able to access some 15,000 pieces of data about women on the top management teams of Fortune 500 companies over a 22-year period. We then identified the firms that were most aggressive in promoting women to high levels and compared their profit performance to the median performance of Fortune 500 firms in the same industries. Separate comparisons were made of profits as a percentage of sales, of revenues and of assets.

The results were rather astonishing. For 2001, the 25 best firms for women outperformed the industry medians, with overall profits 34 percent higher when calculated for revenue, 18 percent higher in terms of assets and 69 percent higher in regard to equity. Furthermore, the 10 firms with the very best records of promoting women showed greater profit results than the firms that were merely very good. These results were reported in the Harvard Business Review, presented in a keynote address for the European Project on Equal Pay and later incorporated into the labor law in the European Union.

The results were confirmed in subsequent studies in 2004, 2005, 2006 and 2007. In every one of those years, the companies identified as being the best at promoting women outperformed the industry median on all three profitability measures. During these years, the set of women-friendly companies remained largely the same. Critics began to wonder whether the consistent results could be attributed to using the same criteria for selecting women-friendly companies year after year.

In an effort to address this concern, we changed the selection criteria for 2008. For this study, we used the list of the “100 Most Desirable MBA Employers” for women reported by Fortune magazine. This list seemed reasonable because it focused on women with master of business administration degrees, meaning they could be presumed to be on an executive fast track. The original Fortune list of 100 employers of women MBAs included some non-U.S. firms, some government agencies, some firms not in the Fortune 500 and some firms for which there were no Fortune 500 median profit performance figures. A total of 56 Fortune 500 firms remained, and we proceeded to make comparisons for each, using data from the Fortune 500 list for 2008.

The results were very much the same as in previous studies. The firms that were identified as being ideal for women MBAs outperformed the industry medians on every measure. For profits as a percent of revenue, the results showed 55 percent of the companies were higher than the median, 36 percent were lower and 11 percent were tied. For profits as a percent of assets, the results showed 50 percent were higher than the median, 28 percent were lower and 23 percent were tied. For profits as a percent of equity, the results showed 59 percent were higher than the median, 30 percent were lower and 11 percent were tied.

As with any study showing a correlation, it is dangerous to assume a causal relationship. And with just 56 subject firms for 2008, the study was not very large. On the other hand, when three measures per year for six different years all show the same positive results for firms with a solid track record of promoting women, something other than coincidence seems to be in play.

In fact, the odds of all 18 measures coming out on the side favoring women on a random basis are 262,114 to 1.

There are several possible interpretations of the woman-executive-and-profits correlation. It could be concluded that a firm’s long-term record of promoting women to high positions results in higher-than-normal profitability. It could also be argued that firms with higher profitability may feel freer to experiment with the promotion of women to high levels. And of course, the correlation between female executives and high profits could actually be a result of a third factor that correlates to both.

We offer one additional possible explanation for the women-profits correlation: Firms exhibit higher profitability when their top executives make smart decisions. One of the smart decisions those executives have consistently made at successful Fortune 500 firms is to include women in the executive suite — so that regardless of gender, the best brains are available to continue making smart, and profitable, decisions.

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