Studies have shown that companies adding females to their executive ranks are more profitable and socially responsible, among many other benefits. But why? A research team at hbr.org examined how firms changed their strategic approach to innovation after appointing women to the C-suite, and found that approaches to those initiatives varied significantly among more than 150 multinational companies. Three trends were identified that help explain how the appointment of female executives has catalyzed fundamental shifts in the top management team (TMT)'s risk tolerance, openness to change, and focus on M&As versus R&D:
1. Firms became more open to change and less open to risk: After women joined the C-suite, these organizations increasingly embraced change while reducing the risks associated with it. A linguistic analysis helped quantify these subtle cognitive shifts when company documents showed the frequency of terms in communications that indicated a propensity for risk-taking decreased by 14%, while the frequency of terms suggesting openness to change increased by 10%.
2. Firms shifted focus from M&A to R&D: After 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. This shift was seen in reporting that showed a substantial increase in R&D investments after women were appointed to senior positions and firms began to exhibit higher levels of openness to change and aversion to risk.
3. The impact of female appointments was greater when women were well-integrated into the TMT: The more effectively female executives integrated into the TMT, the greater the impact they were likely to have on its decision-making. Executive teams that already included at least one woman or that expanded with a smaller cohort of new appointees helped with their integration, possibly because of reduced obstacles for females, and a less threatening, more trusting and welcoming environment with the existing team.
Having women in the C-suite is impactful for several reasons. To advance to the highest corporate levels, many women walk a difficult tightrope of learning to stand out to overcome stereotypes of timidness, but at the same time carefully weighing the benefits of their innovative proposals against the risks of potential failure. This shared experience leads TMTs to become more focused on balancing innovation with risk mitigation as more women join their ranks. Female executives are also likely to care less about tradition and more about challenging the status quo than their male counterparts. These attitudes increase others’ receptiveness to change, triggering more open-mindedness in existing TMT members. Similarly, more risk-averse women entering the TMT could cause the entire team to become more cautious. This diversity in perspective can make a group more open to change and likely to see change as feasible.
There are a number of famous examples of women-led companies that prioritized M&A over R&D, and promoting women to the C-suite is no guarantee that a firm will invest more in R&D or avoid M&A opportunities. But in this analysis based on a comprehensive look at all TMT appointments (not just CEOs) across 163 multinational firms, patterns were identified that may not be obvious when thinking about singular, highly-visible female CEO appointments. Similar findings for members of other underrepresented groups such as racial and ethnic minority executives, whose career trajectories have much in common with women who also make it to the top, would be expected if this research was done in those areas.
While research has just begun to explore the mechanisms driving these changes, this study suggests that greater representation of women in the C-suite impacts firms' approaches to innovation and a link to positive firm outcomes, and at the very least, that including more women in executive decision-making may lead firms to consider a wider variety of value creation strategies.
Read the full article here.