Companies want to appoint female chief executive officers (CEOs) today, not only because they realize women are a hugely untapped source of top executive talent, but because it sends out a positive signal to the markets that they are doing something new and different.
Research around appointing female leaders is divided. Some researchers have documented several advantages associated with female leadership, such as a more collaborative work environment and more innovation. But other research shows that when a company announces it is appointing a female CEO, many investors react unfavourably. That could result, for example, in a stock price decline on the day the CEO appointment is announced.
Piqued by this contradiction, Edward (Ned) Smith, an associate professor of management and organizations at the Kellogg School of Management, along with Kevin Gaughan, a Kellogg PhD student, and Jason Pierce, assistant professor at Universidad Adolfo Ibáñez, made this the basis of their research. Smith could not fathom why, if female leadership is significantly beneficial, investors should respond negatively. Were those investors simply unaware of the benefits of female CEOs or biased against women in leadership positions, or both? Smith also conjectured that investor reactions may be triggered by female leaders getting too much attention in the press. In order to test their ideas, the researchers conducted an extensive analysis.
They measured the amount of media attention garnered by 8,179 CEO appointments made by publicly traded American firms between 2000 and 2014, collecting information such as stock price and market capitalization, and media coverage on the same day as the CEO announcement was made.
Of the 8,179 appointments, only 84 were women appointees. However, Smith clarifies that those 84 women represented more than three times as many female CEO appointments as had been examined in any previous research.
On analysing the data, Smith and his co-authors made four important discoveries:
—When companies appointed female CEOs and received a lot of media attention for it, they were likelier to experience negative market reactions.
—Companies that appointed male CEOs and received similarly large amounts of media attention were likelier to attract positive market reactions.
—Companies whose female CEO announcements got less media attention were likelier to experience positive market reactions.
—There were no major differences in the tone or sentiment of media coverage associated with male versus female CEO appointments. This ruled out the possibility that the media was directly responsible for any bias through differences in its reportage on executives of different genders.
—Given the data, Smith and his co-authors theorize that these market reactions hinge not just on investors’ beliefs about a particular CEO, but also on their beliefs about other investors’ beliefs.
—So when the appointment of a female CEO receives a lot of attention, even investors who are not biased against women in leadership positions may base their responses on the expectation that other investors will be biased. Increased attention, according to Smith, triggers what he refers to as “second-order sensemaking” whereby investors interpret not only the meaning of the executive appointment, but also the meaning of the increased attention surrounding the appointment. Conversely, when a female CEO appointment does not get much attention, these same investors are more likely to respond positively.
“If it’s just that investors themselves are biased, that problem’s ideally going to go away over time, as there are more women in CEO positions, and with more education,” he points out. “Whereas if the problem is that we have pessimistic views about what other people think, we may be inclined to act as if we are biased ourselves, so this becomes a much more thorny problem to deal with, and it will stick around for a much longer time than it otherwise would.”
Given their findings, the researchers recommend that companies that are planning to appoint female CEOs would be better off hiring them quietly, without any fanfare in the media. “It’s one of those things that makes you realize just how depressing some of your findings can be,” says Smith.