A financial jolt for gender inequality

A groundbreaking Italian study has found that a female chief executive will improve the profitability of family businesses with female directors. The study could be a significant trigger for change here in Australia, with an MGI survey last year finding that only 10 per cent of Australian family businesses had a female CEO.

The study, Gender interactions within the family firm, found that replacing a male CEO with a woman improves a company’s profitability. The more women the company had in the boardroom, the bigger the increase.

Mind you, installing a female CEO without the shift at board level didn’t achieve the same positive results. Similarly, adding female directors to the board did not lead to a performance lift on its own.

The magic happened when the two occurred simultaneously -- when a female CEO was in place, firms with increased numbers of female board members experienced an 18 per cent increase over the average firm's profitability, making them more profitable than companies led by men with all-male boards.

The study’s authors, Mario Amore and Alessandro Minichilli from Bocconi University’s department of management and technology in Milan, and Orsola Garofalo from the University of Barcelona, say it is the interaction between female directors and the female CEO that produces the alchemy.

“Female directors may enhance the self-esteem of a female CEO in an environment, such as corporate leadership, that is typically viewed as male-oriented,” they write.

“Secondly, a female-friendly corporate culture arising from the presence of female directors can encourage co-operation and information exchange at the top and thereby improve the quality of board advice, which in turn improves the task performance of female CEOs.”

The researchers looked at companies in Italy with a turnover exceeding €50 million, typically medium to large-sized Italian family businesses. These were an easier model to examine than smaller firms, which often have simple and mainly informal governance structures.

However, the researchers found that the alchemy effect was 10 per cent stronger in smaller companies within the sample group, perhaps because in smaller firms it’s easier to leave a personal imprint. There was still interaction between female directors and a female CEO in the larger companies, but it was less pronounced. This could be because larger companies tend to be built much more around a corporate model.

The study also found there was increased profitability when the female directors were from outside the controlling family and did not necessarily share the family’s values.

The results were more pronounced in those parts of Italy that were less conservative about women’s role in society. In the case of the study, the interactions between the female CEO and directors were stronger in northern Italy.

Another finding was that the profitability of the firm increases when there is a transition from a male CEO to a female CEO. This becomes statistically significant as the number of female directors increases.

The researchers focused on family firms because they represent the most common ownership form worldwide. Even among large publicly traded US companies, which are typically thought to have dispersed ownership, families hold large equity stakes in about a third of S&P 500 firms and half of the largest 2000 industrial firms. Family firms, the authors say, offer a unique opportunity to examine organic forces and family characteristics have a strong influence on the way the company is organised.

They contend that while lone female CEOs might underperform because of the “psychic costs induced by a company’s pervasive male oriented context”, they come into their own when they work with female directors.

“In particular, female CEOs may feel less inhibited when operating with female peers in governance positions,” the researchers write. “Such interactions between female CEOs and female directors may also serve to reduce the risk of communication breakdowns, improve cooperation, and facilitate information exchange -- effects that should result in higher-quality board performance and thus in more efficient managerial decision making.”

The study has significant implications for issues surrounding glass ceilings, gender stereotypes and policies regarding the appointment and compensation of women in leadership positions.

But it also tells us that installing a female CEO is only one step in a bigger equation -- it has to be part of an overall governance overhaul, creating the perfect environment for the CEO to work more effectively with directors.

And while the study’s findings are particularly pertinent for family businesses, the broader market could learn something from it.