Bottom Line: The number of women presiding over large companies still lags far behind men, yet the firms they lead tend to be more risk averse and more profitable over the long term.
How do female CEOs at large firms differ from their male counterparts? We certainly know they’re heavily outnumbered. Although the number of female CEOs at Fortune 500 companies reached a record high in 2014, there were still only 24 — just 4.8 percent. And the much-discussed gender gap in the upper echelons of corporations isn’t a phenomenon unique to the United States: In the same year, the Wall Street Journal reported that only 3 percent of the 145 largest companies in Scandinavia had a woman at the helm, in a business landscape otherwise renowned for its diversity-oriented policies.
The relative scarcity of female CEOs means not much data is available to help us examine their decision making and performance. Do they tend to take risks or play it safe? Do they allocate capital any more or less effectively than their male peers? And how do the companies they lead fare over the long term?
To answer these questions, the authors of a new study made use of a pair of databases that contain information on the CEOs, ownership structure, and accounting performance of every large privately held and publicly traded firm in 18 major European nations, including France, Germany, Italy, Spain, and the United Kingdom.
The authors focused on European countries because of the stringent disclosure regulations on that continent, which require both private and public firms to publish annual information about their operations. This meant the authors had a bigger pool of data to work with (132,590 firms in all) and could compare the influence of female and male CEOs across a wide range of leading companies and industries.
About 9.4 percent of the CEOs in the study’s sample were women. This relatively robust number can be attributed to the fact that private, as well as public, firms were included in the analysis; the proportion of female CEOs at private companies (10.3 percent) was higher than that at public firms (7.2 percent).
The authors used data from several external sources to create a set of pairs: A firm led by a male CEO was matched with each company run by a female CEO in characteristics such as country of origin, industry, years of operation, public or private status, and size. As the authors write, the pairs of firms were “virtually indistinguishable” in their core characteristics but for the fact that one was run by a woman and the other by a man. They also controlled for a range of factors that could influence CEO behavior, including a firm’s annual return on assets, yearly sales growth, and ownership structure.
Overall, the companies overseen by women tended to be older and more profitable, the authors found; those run by men were typically larger and had a faster rate of sales growth.
In comparison with their male counterparts, female CEOs tend to oversee much less risky companies. The firms run by women carry less debt against equity, post more stable returns on assets, and are more likely to remain in operation than those led by men. Indeed, the likelihood of survival over five years was 61.4 percent for the firms with a female CEO and 50.5 percent for companies with a male CEO. Interestingly, when men took over from female CEOs, their companies tended to take on much more risk, whereas when women accepted the leadership baton from a man, the opposite was true: Firms decreased debt and earnings volatility.
The likelihood of company survival over five years: 61.4% for firms with a female CEO, 50.5% for companies with a male CEO.
But being risk averse can also mean not making the aggressive bets on investments that can fuel growth. To determine whether the conservatism displayed by the female CEOs carries over to their allotment of capital, the authors compared the investment decisions made by CEOs of both sexes. They found that male CEOs invest more in industries that have high growth potential, whereas the investments made by female CEOs are not as sensitive to whether a particular sector is declining or thriving.
How to explain the gender-based differences in CEO behavior? The authors offer a few ideas. In general, women are more risk averse and less overconfident than men. It could be that when a woman takes the reins, she already has an inclination to dial back risk taking, eschew costly acquisitions, and avoid taking on debt. Differences in incentive structures could also play a part, as could the employment landscape. Taking gambles at the helm is inherently risky — increasing the likelihood that a CEO could lose his or her post — and female CEOs have a tougher time finding a new job than their male counterparts because of the limited opportunities available to them. Female CEOs, thus wary of doing anything that could get them fired, might self-select into low-risk companies, or might drastically scale back on risk once they’re installed.
And age-old societal expectations, even as they’re evolving, could also be a factor. Female CEOs might deliberately choose to work at low-risk firms because they often offer a better shot at achieving a work–life balance (pdf). Working at volatile, high-risk companies presumably involves longer hours, more stress, and less flexible schedules, which can impede (pdf) an executive’s ability to juggle home and work.
Source: “CEO Gender, Corporate Risk-Taking, and the Efficiency of Capital Allocation,” by Mara Faccio (Purdue University), Maria-Teresa Marchica (University of Manchester), and Roberto Mura (University of Manchester), Journal of Corporate Finance, Aug. 2016, vol. 39