A lack of boardroom diversity is risky business

In the mid-1950s, economist Harry M. Markowitz first described how investors could reduce their overall risk by filling their portfolio with securities that do not usually move in the same direction. As with all significant economic research, Markowitz (who was later awarded a Nobel prize in economics for his work in portfolio theory) proved mathematically what every good grandmother has known for centuries — don’t put all your eggs in one basket. Or, if you prefer to listen to your Sunday school teacher, take a look at what King Solomon, one of the richest men of his time, wrote in the book of Ecclesiastes, “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”

Now what does this have to do with your boardroom? Plenty, if you read the new report by the Credit Suisse Research Institute. The study analyzed 2,360 companies and found that firms with at least one woman on the board outperformed stocks with no women on the board by 26 percent. In the aftermath of the market crash of 2008, companies with women on their boards did even better comparatively. According to the study, these companies delivered, “higher average ROEs through the cycle, exhibit[ed] less volatility in earnings and typically [had] lower gearing ratios [measurement of financial leverage].”

As Yilmaz Arguden explains in his Harvard Business Review blog post, there are a number of explanations for these statistics: women help ensure better corporate governance; women expand the knowledge base of the market; and, opening the pool of board candidates to include women ensures a wider pool of applicants from which to select the best. There is probably truth to all of these reasons, but one need look no farther than Solomon and Markowitz — diversification minimizes risk.

When all the opinions given around a boardroom are highly correlated, potential risks and opportunities might be missed. It is no longer controversial (if it really ever was) to suggest that women and men often see the world differently — or at least they focus on and prioritize different aspects of the same event. Consequently, whether it is how to differentiate one’s product in an oversaturated technology market, how best to allocate a limited pool of research and development funds for potential future product lines, or how to create a public engagement strategy around a particular corporate action, adding the views of women to the board can produce a larger possible solution set.

Just as no rational investor would purposely include the stock of a failed company in their portfolio simply to diversify their holdings, board selections must be made on merit. Unfortunately, the corporate pipeline has not typically been filled with women. In the technology world, the shortage is even more acute. According to a survey by the tech recruitment group Harvey Nash, only 9 percent of chief information officers in the U.S. are women. This is bad enough, but it’s even worse when one considers that this number has gone down from 11 percent in 2011 and 12 percent in 2010. Perhaps that is one reason why more than 50 percent of IT companies do not have any women on their boards (see Credit Suisse Research Institute report cited above), making technology companies among the worst in board diversification.

Tech companies consider themselves ground breaking, innovative and disruptive. Good attributes to be sure, but most board members and all stock holders want those characteristics to yield higher sales, higher return on invested capital and higher return on equity.

Technology companies would be wise to apply their nontraditional mindsets to looking for potential female board members. They should look beyond the traditional venues, such as colleagues of existing board members, other similar boards and the traditional executive search firms. Do the extra legwork — reach out to non-traditional networks, including the growing number of professional associations for women who work in science, technology, engineering and mathematics, and get in contact with corporate directors associations for women. Firms should also consider often overlooked but potentially valuable disciplines that have a higher percentage of women, including business and strategy (to understand challenges from evolving markets) and behavioral sciences (to understand human behavior).

After all, what successful company willfully overlooks the opportunity to outperform its competitors by 26 percent?

Samantha F. Ravich served as deputy national security advisor to former Vice President Dick Cheney. She currently is the co-chair of the National Commission for the Review of R&D Programs in the Intelligence Community and a senior advisor to The Chertoff Group. The opinions expressed here are entirely her own. 

Image courtesy of Flickr user photogramma1.