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women make companies more profitable

Why women make companies more profitable

Research has shown that firms with more women in senior positions are more profitable, more socially responsible, and provide safer, higher-quality customer experiences — among many other benefits. But why? New research describes the reasons for these positive effects of increased diversity in top management teams (TMTs).

”To advance to the highest corporate levels, many women need to walk a difficult tightrope”, Corinne Post, professor of management in Lehigh University’s College of Business (USA), writes in the Harvard Business Review.

”They often learn to stand out by promoting novel strategies in an effort to overcome stereotypes of timidness, but at the same time, the hyper-visibility that comes with being the only one of an underrepresented group drastically increases the professional costs of making mistakes, and so they learn to carefully weigh the benefits of their innovative proposals with the risks of potential failure.”

Challenging status quo

”Prior research suggests that female executives are likely to care less about tradition and are more open to challenging the status quo than their male counterparts. Behavioral psychology has found that these sorts of attitudes fundamentally increase others’ receptiveness to change, and so it would make sense that as more women are appointed to executive teams, it could trigger more open-mindedness in existing TMT members.”

Post also notes that women in TMT on average are more risk-averse which can affect the whole group to be less open to risk.

”It’s also possible that these changes are simply the direct result of increasing diversity in the TMT. Research suggests that having more diverse perspectives to weigh in on key decisions can make a group more open to change, and more likely to see change as feasible. At the same time, having a wider range of opinions to consider often slows down decision-making, decreasing the chances that the group will make rash or risky decisions.”

Less risk-seeking

Post´s research focused on leading companies in Europe and covered how firms changed their strategic approach to innovation after appointing female executives. Researchers tracked appointments of male and female executives and analyzed R&D expenses, merger and acquisition (M&A) rates, and the content of letters to shareholders for 163 multinational companies over 13 years to determine how these firms’ long-term strategies shifted after women joined their TMTs.

The researchers first found that after women joined the C-suite, firms became both more open to change and less risk-seeking. The research included studying words in company documents with terms like “bold,” “venture,” and “chance” as likely reflecting a greater propensity for risk-taking, while terms such as “create,” “transform,” and “launch” indicated more openness to change.

After appointing women to the C-suite, the frequency of terms in company communications that indicated a propensity for risk-taking decreased by 14%, while the frequency of terms suggesting openness to change increased by 10%.

Open to change

”This suggests that adding women to the C-suite does not simply bring new perspectives to the top management team — it shifts how the TMT thinks. Our research indicates that female executives don’t just offer specific new ideas to the team; their presence actually makes the TMT collectively more open to change and less comfortable with risk-taking.”

When TMTs added female executives, they gradually shifted from a knowledge-buying strategy focused on M&As —a more traditionally masculine, proactive approach — towards a knowledge-building strategy focused on internal R&D — a more traditionally feminine, collaborative approach.

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