In the Classroom, Jean-Paul Louis Martin des Amoignes, 1886 (Courtesy: Bonhams)
Ideas for Leaders #711

CEOs’ Gender-biased Formative Years Has a Negative Economic Impact

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Key Concept

New research using extensive hand-collected data confirms a gender gap in resource allocation (female division leaders receive less resources from their CEOs). This research also reveals the familial origins of gender bias in CEOs, and the negative economic impact of such bias.

Idea Summary

New research into the personal history and decisions of division managers, CEOs and directors of nearly 360 S&P 1500 industrial conglomerates reveals the extent of the gender bias that exists in large corporations, and highlights some of the surprising origins of the bias.

Specifically, the in-depth study led to the following findings:

1. CEOs are biased in favour of male division leaders when allocating resources. The researchers found that CEOs allocate less capital to female division leaders than to male division leaders. On average, divisions headed by female leaders received $14 million to $20 million less per year than divisions headed by male leaders. Male executives were also more likely to be appointed to divisions that received greater financial resources.

2. Factors related to the familial, environmental and educational backgrounds of CEOs’ formative years (from childhood to early adulthood) influence their gender attitudes in later life. Past research has shown that childhood backgrounds will significantly influence views of gender issues — people base their ideas on gender roles, for example, by observing their parents. The data collected for the CEOs in this study confirmed that three categories of childhood background factors influenced the CEOs’ gender-related decisions:

  • Familial background (whether the father worked and the mother stayed home, for example, or whether the father had significantly higher income or significantly more education than the mother) had the most influence.
  • Educational factors (for example, whether the CEO attended all-male schools and/or colleges) also had a significant impact
  • Environmental factors (whether the CEOs grew up in communities in which men had significantly larger incomes than women, for example) also correlated with gender bias, although the impact was not as great as for the other two factors.

Taken together, the researchers found that the familial, educational and environmental factors from CEOs’ formative years explained more than 70% of the gender gap in capital allocations.

 3. The gender bias of CEOs has a negative impact on the results of their firms. The researchers found that the operating performance of firms with gender-biased CEOs was weaker than firms with more egalitarian gender attitudes. For example, according to their data, the more male-dominated the background of a CEO, the lower the firm’s Return on Assets and Tobin’s Q.

4. Female monitoring attenuates gender bias. The collected data and information also showed that the negative impact on gender attitudes of a CEO’s personal background was reduced when the CEO had a female chairperson of the board.

For their study, the researchers hand-collected — from a wide variety of sources ranging including census data and other official governmental and industry sources to newspaper obituaries and local records — data related to: 

  • the gender of division managers, CEOs and directors of 358 industrial conglomerates included in the S&P 1500 index between 2000 and 2008;
  • capital allocation decisions within those firms as well general firm performance;
  • geographic and demographic data to construct the personal history of each CEO.

Business Application

This paper confirms the existence of a gender gap in resource allocation, reveals personal history sources of gender bias in CEOs, and demonstrates that this bias can hurt the performance of the firm. As with all new insights into CEO behaviour and decision-making, the challenge for practitioners is translating knowledge into positive action. 

Awareness is a first step. CEOs, and the directors who hire and monitor them, need to be aware of the impact of family background on important decisions that affect corporate results. Although self-regulation is an imperfect process, CEOs with male-dominated childhoods should consider the results of this study and examine with an open mind whether they are making gender-biased decisions that might be adversely impacting results. While directors will not have the same intimate knowledge of a CEOs personal background, this knowledge gap is compensated by the directors’ less subjective perspective on the CEOs decisions. 

In short, this study will help self-aware CEOs recognize the dangerous potential for gender-biased decisions, and alert directors to their important role in monitoring CEO behaviour thus preventing gender-biased decisions — whatever the root causes.

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Authors

Institutions

Source

Idea conceived

  • June 2016

Idea posted

  • June 2018

DOI number

10.13007/711

Subject

Real Time Analytics