Making a faulty case for women in corporate boards

Here is an undeniable fact – considering ~50% of the population is women and 50% of the board of directors are not women, we can safely say women are underrepresented in corporate boards.Now let us return to the reported study in question that makes a faulty case for adding women board members. My arguments are only with errors in the research methods and its application of faulty logic. Nothing more.

Here are the major highlights of the study

  1. The study analyses the performance of close to 2,400 companies with and without board members from 2005 onwards.
  2. Over the past six years, companies with at least some female board representation outperformed those with no women on the board in terms of share price performance
  3. We can now see a much clearer inverse correlation (–0.65 and –0.76 for Europe and the USA respectively) between the relative share price performance of companies with one or more women on the board compared with those with no women on the board and the overall market.
  4. The report identifies seven key reasons why greater gender diversity could be correlated with stronger corporate performance

I see several issues with this type of analysis and subsequent argument attributing causation.

  1. Does the board matter? We are not talking company executives who actively set strategy and make operational decisions everyday. We are talking about the board that meets for a day or two, four to six times a year and in most situations are not the experts in the vertical the company operates in. Do boards really have a role to play in a company’s stock performance? Some of the previous works on this topic found no contribution by the boards in a company’s strategy or stock growth. I am yet to see a report that looked at percentage of changes in stock price that can be attributed to the board.
  2. Leap from Correlation to Causation First the report found a correlation in stock performance then it goes on to provide seven reasons on why the gender diversity is helping stock performance. The implied statement here is, women board members were the reason for stock performance, let us tell you why they made the difference. That is an untenable leap from correlation to causation. It buries us with plausible narratives on how women board members would have made the difference without telling us how it can draw the causation argument.
  3. Flaw of averages  The study compared average stock performance of the two groups. Not pairwise comparison and not frequency comparison. Averages hide lots of detail. Take for instance Apple and S&P 500. While S&P 500 is down 13% from its 2007 highs, without Apple it would have been down addition 2%. What about such big movers in the two groups that disproportionately affect the averages? If we take them out, what would the performance difference look like?
  4. Not asking why some corporations seek diversity in boards  Isn’t the question here, what type of corporations would seek to strengthen its board and seek to add  diversity (not just demographics but ideas too) to help it perform better? Such a corporation is likely already doing many things right that is contributing to its performance. Attributing its performance to appointing women directors is confusing the cause.

For those interested, there is indeed one women member, Andrea Jung (ex-AVON chief) in Apple board. Can one attribute any part of Apple’s stock performance to Andrea Jung?

Since Sheryl Sandberg was appointed to Facebook board their stock has taken a turn for the worse, can one attribute causation to the appointment?

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