Are female directors good for stocks?

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Many people believe that women are better than men at investing. Now, there is some evidence to suggest that they make better corporate leaders, too.

A report by the Credit Suisse Research Institute drew data from 2,360 companies worldwide with market capitalizations of at least $10-billion (U.S.) and examined their boards of directors.

Turns out, companies with women on their boards outperformed companies with all-male boards over the six-year period between 2005 and 2011.

Indeed, the numbers are dazzling. For companies with women on their boards, share prices outperformed companies with all-male boards by 26 per cent over the past six years. Net income among companies with women on their boards has grown an average of 14 per cent a year, versus 10 per cent income growth for all-male boards.

Coincidence? The report, highlighted by Bloomberg News, suggests not.

"Multiple academic studies have concluded that diverse corporate boards exercise more diligent oversight," said Michelle Lamb, the author of the study, according to Bloomberg. "They have better attendance records than homogeneous boards, and they invest more effort in auditing when the complexity of the business warrants heightened scrutiny."

The report also noted that women are more risk-averse – a characteristic that has paid off nicely during the turbulence that followed the financial crisis. Companies with female board directors have slightly lower net-debt-to-equity ratios.

The benefits of risk aversion have been expressed before. A number of studies – including one oft-cited by Terrance Odean, a professor at the Haas School of Business at the University of California, Berkeley – have shown that women tend to make better retail investors because they are not hobbled by mens' level of overconfidence. Through overconfidence, men tend to trade too much, to the detriment of their portfolios.

Rising board diversity is obviously a good development. The number of companies in the Credit Suisse report with at least one female board member rose to 59 per cent in 2011 from 41 per cent in 2005.

But it is unclear whether investors should now start weighing board gender composition in making their stock selections. Is Facebook Inc. a compelling "buy" because Sheryl Sandberg, apart from being the social media company's chief operating officer, is also a director? Or what about Yahoo Inc. after Marissa Mayer became that company's head honcho and director?

For one thing, it doesn't take many women on a board of directors to qualify as diverse under Credit Suisse's rules. One woman will do, and it is hard to see how a lone figure (or even two) can have a profound impact on a company's risk profile – let alone performance – if they are not the chairperson or chief executive.

And while risk aversion has tended to work well over the past six years given the tumultuous state of the global economy, do you really want to side with risk-averse companies when times are good?

Companies that take risks look like the better bet for most investors during normal economic times (okay, with the notable exception of accident-prone U.S. banks). That way, you can benefit from innovation, expansion into international markets, and mergers and acquisitions.

This is not to suggest that investors should stay clear of diverse boards of directors. But the long-term payoff in making them an important part of the investment process looks suspect.

If you want to avoid risk and give your portfolio a fighting chance during downturns, invest in companies with low debt, stable earnings and rising dividends. That says more about risk-aversion than whether a board member is a man or a woman.