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The Effectiveness and Efficiency of Female Chief Executive Officers by Robin Crauthers Honors College Thesis Director: Dr. Michael Fountain 6 March 2009
Crauthers Page 2 Abstract Female Chief Executive Officers lead 2.4% of the top 1000 companie s in the United States (Fortune). Why does such a large gender gap exist? There are many possible reasons. However, since a public companys goal is to increase its value and maximize its profits, the only acceptable excuse for the continued gender gap is if women CEOs are not as efficient and effective as male CEOs. Financial ratios provide a comparison measurement of efficiency and effectiveness when compared to industry standard ratios commonly computed. This study uses current and quick ratios, i nventory turnover ratios, debt to equity ratio return on assets, asset turnover, net profit margin ratios and price per earning ratios. Data was collected from the financial statements of 118 female -led public companies and ratios were computed and compa red to industry averages obtained through Risk Management Association as well as Dunn and Bradstreet and Thompson/Reuter. To account for economic trends, three years of data were collected. The results of this study indicate that female CEOs companies v ary from the industry median. The largest variance occurred in liquidity and leverage related ratios. Some correlation between these variances and a negative net profit margin variance was identified.
Crauthers Page 3 Introduction According to Fortune Magazine, female Chief Executive Officers (CEOs) lead 24 of the top 1000 companies in the United States. This means 2.4% of the top companies are run by women; the rest are run by men. Why does such a large gender gap exist? There are many possible reasons for the gender gap such as the existence of an old boys network, a lack of a strong business mentors for women, educational differences and family commitment differences. However, the primary goal of a public company is to increase its value and maximize its pr ofits. Therefore, the only acceptable excuse for the large gender gap is that women CEOs are unable to increase the value of the company and maximize profits. Th is study is an analysis of the female CEOs effectiveness in managing a company. Using finan cial ratios and industrial average benchmarks, the study compares the ratios of companies run by women CEOs to the corresponding industry averages. If female CEOs are meeting or exceeding their respective industry averages for effective and profitable man agement, then the gender gap should be reduced. Literature Review There is little literature on female leadership in corporations pertaining to management effectiveness and profitability. Most studies available are from Denmark and Finland. Some of the literature focuses on female executives and some discusses females participating on companies boards. There is also little consensus regarding the e ffect that females have when holding a management or board position. In 2007, a study conducted in Finl and showed that female CEOs ran a more profitable business than male CEOs. The Finnish study researched the equivalent of public businesses in Finland. Similar to companies in the United States, a large gender gap exists for the CEO. In 2003, 7.6% of companies in Finland were run by women (Kotiranta). Despite the small percentage of female CEOs, the study produced significant results regarding the difference in profits. The results of the study indicated that a
Crauthers Page 4 female CEO is on average slightly more t han a percentage point in practice about ten percent more profitable than a correspo nding company led by a male CEO (Kotiranta) In the Finnish study, the largest concentration of female CEOs was in the education, health, and social work fields, foll owed by a large number in wholesale and retail trade. It is this study that formed the model for this report. In 2006, a Danish study assessed the effect of female management or a combination of female management and board diversification When looking only at those companies with female CEOs, the study indicates we find that there is a positive performance effect of female CEOs for Danish firms (Smith). The researchers accounted for firm size and education in an effort to reduce skewing the data. However, when observing board diversity or female management below the level of CEO, the authors were unable to prove an impact to profit. In 2007, a different Danish study was unable to prove a connection between board diversity and increased profitabilit y. The study used several measurements pertaining to payments, growth and ownership but concluded none of these measures were proven to indicate statistically significant differences in profits for those companies with gender diverse boards (Rose). Methods/Procedures Fortune Magazines Top 1000 Companies in the United States from years 2005, 2006 and 2007 produced too few female CEOs for a viable study of female-led companies Therefore, the research for this current study was conducted on the femal e CEOs of all publicly traded companies with ten or more employees There are over 6,000 publicly traded companies in the United States. The names of the companies led by women were obtained through the ReferenceUSA database. The study identifies 118 female leaders, meaning 1.97% of all publicly traded companies have female CEOs. This study identifies th e types of industries represente d as well as the CEOs length of service within her company.
Crauthers Page 5 The 118 companies offer a wide range of products and servi ces. Food and beverage, retail and cosmetics are a few of the traditionally female -associated bus inesses that are run by women CEOs. However, the list also includes utilities, oil, telecommunications, outdoor equipment, and entertainment businesses that are usually associated with male s, but are currently run by female CEOs. The two largest industry sectors run by female CEOs in this study are financial (bankin g) and pharmaceutical/chemistry -related businesses. There are 17 pharmacy or chemistry -related corporations and 18 financial corporations in this study. Figure 1: Breakdown of U.S. Companies with Female CEOs by Industry
Crauthers Page 6 The experience levels of the women in this study range from zero to 29 years. More than half of the women held their CEO positions for five or more years within their respective companies It was not within the scope of this study to identify if any of these women CEOs had held an executive position prior to their position in the companies currently studied. Figure 2: Le ngth of Time in CEO Position The firms within this study range from firms with small assets and profits to large conglomerations with many assets and large p rofits. To account for the varied sizes of the firms in the study, th is research utilizes financi al ratios commonly computed by various professional firms as a means of comparing different sized companies of the same industry. For example, the current ratio (a companys current assets divided by a companys current liabilities), facilitates the compa rison of companies within the same industry but with different sized assets or liabilities. This study has established that less than 2% of the companies are managed by females, therefore, it can be assumed that 98% of the industry ratios are calculated u sing male -led compan ies financial data To show the financial strength of the companies led by women the study uses the following ratios: 1. Current Ratio
Crauthers Page 7 The current ratio divides the current assets of a company by the current liabilities. This ratio p rovides a gauge of the liquidity of the firm. 2. Quick Ratio The quick ratio is similar to the current ratio except that the quick ratio removes inventory from the current assets. This is done because inventories are less liquid than most current assets. Therefore, the quick ratio provides a gauge of the liquidity of the firm not including inventory. 3. Debt to Equity Ratio The debt to equity ratio divides the total liabilities by the total assets. This ratio indicates the amount of debt a company carri es in respect to the companys assets. Companies with a high debt to equity ratio may have difficulty meeting their debt obligations in a weakened state of business. To show the management effectiveness and efficiency the study uses the following ratios: 1. Return on Assets Ratio The return on assets ratio divides the net income by the total assets. This ratio indicates the firms effective use of its assets in generating income. 2. Asset Turnover Ratio The asset turnover ratio divides the sales by t he net fixed assets. This ratio indicates the efficiency of the use of assets to generate income. Firms that have low asset turnover ratios are not using their assets to the full capacity. 3. Inventory Turnover Ratio The inventory turnover ratio divides the sales by the inventory This ratio indicates the amount of inventory turnover occurrences A high inventory turnover ratio indicates that the company is selling products quickly. Finally, t o show the value of the firm, a price per earnings was calc ulated for each firm. The price per earnings indicates the market price per share divided by the earnings per share. This figure indicates if the firm is a growth stock or if it is a value stock. Firms
Crauthers Page 8 with low price per earnings (P/E) are generally und ervalued while firms with high price P/E ratio s are considered growth or established firms. Industry benchmarks are readily available through an annual publication from Risk Management Association and also available through a variety of financial websites such as Yahoo Finance and Google Finance. For the purposes of this study the majority of the ratios were obtained through Risk Management Association. Risk Management Association uses more than 190,000 financial statements to compile their annual report (9). Risk Management Association requires at least 30 statements for analysis in order for an industry to be listed (9). For those industries which were not available through Risk Management Association, the ratios were obtained through Dunn and Bradstr eet s and Thompson/Reuters finance websites. These websites did not publish the number of statements used to compile the ratios. To gather the necessary data, financial statements for years 2005, 2006, and 2007 were pulled for each of the 118 companies. The figures from the financial statements were entered into Excel and the ratios were calculated for each of the companies and for each of the years in this study. Then, financial ratios were gathered from the above sources for each respective year. Ratios were recorded by industry and by year. Therefore, the final data provided the companys three years of financial data with the corresponding annual ratio benchmark to be used for comparison. Additionally the company data was compared to its cor responding annual ratio and a variance from that ratio was computed. This variance was computed for each ratio and for each year for every company in the study. The variance for any given ratio is either positive or negative. Variances that are positive indicate that the companys respective ratio is above that of the industry. Any variance that is negative indicates that the companys respective ratio is below that of the industry. For most ratios, a positive variance indicates a more effective, effic ient or profitable company than the industry
Crauthers Page 9 average. However, in the case of the debt ratio, a negative variance would indicate that a company is not over leveraged which would, in most cases, indicate effective and efficient management. Additionally, a negative price per earning ratio might indicate a company is undervalued by the investors. Then, variances were averaged by benchmark and by year for the entire data set and also for financial and pharmaceutical/chemistry industries individually. The average variances indicate the difference that the group of female CEOs had from the ir respective industry standard benchmark on average These average variances were compiled by year to show the trends over the three years of the study. By taking the companys annual data, and the corresponding annual ratio benchmark, the study accounts for any economic trends that would have affected any given industry. Recording three years worth of data, the study reveals trends over time rather than a snapshot of one year. Findings The data trends reveal that female CEOs have a positive variance in the areas of financial strengths of the firms they run. Over the three years of the study, the current ratio and quick ratios variances were consistently higher than the respective industrys ratio. 2005 2006 2007 Current Ratio 1.611465 1.458176 0.597214 Quick Ratio 0.952415 1.213956 0.445779 Figure 3 : Current and Quick Ratio Average Variances from Industry Benchmarks by Year The trends do indicate that fema le CEOs are reducing their variance from the respective industrys current ratio each year. The variances in year 2007 were lower than the variances in 2005.
Crauthers Page 10 The average variances for debt ratios indicate that female CEOs are maintaining lower debt level s than males in the respective industry. The figures indicate that females are consistently and significantly under leveraging their firms. 2005 2006 2007 Debt Ratio 1.91482 1.64452 N/A Figure 4 : Debt Ratio Average Variance from Industry Benchmarks by Year Inventory turnover ratio variances are extreme ly high in female -led companies. The average variance from the respective industrys ratio climbed annually. This indicates that females leading companies turn over the inventory quickly or female companies are keeping low inventory which would also result in a high inventory turnover ratio. 2005 2006 2007 Inventory Turnover 12.33494 16.14145 24.63097 Figure 5 : Inventory Turnover Ratio Average Variance from Industry Benchmarks by Year The av erage variances fixed asset turnover and total asset turnover were mixed. This indicates that female CEOs efficiency is inconsistent In some cases female CEOs are very efficient at managing their assets and in other cases female CEOs are significantly under managing their assets. 2005 2006 2007 Fixed Asset Turnover 31.71821 16.4815 Total Asset Turnover 0.77664 0.10441 0.812509 Figure 6 : Fixed and Total Asset Turnover Ratio Average Variances from Industry Benchmarks by Year
Crauthers Page 11 The variances of th e return on assets ratios indicate a consistently inefficient management of the companies led by women. The return on assets variances from the respective industry ratio is significant. This indicates that female CEOs are not managing their assets as well as others in the industry. 2005 2006 2007 Return on Assets 6.49544 6.88143 6.22604 Figure 7 : Return on Asset Ratio Average Variance from Industry Benchmarks by Year Lastly the price per earnings ratios differed significantly from the respectiv e industry ratio s. This indicates that the female -led companies stock price is undervalued when compared to other stock prices within the same industry. 2005 2006 2007 P/E 4.71235 18.6479 5.63101 Figure 8 : P/E Ratio Average Variance from Industry Benchmark by year.
Crauthers Page 12 Figure 9 : Chart with Ratio Variance Trends for All Female Led Companies For pharmaceutical and chemistry -related companies the average variances that indicate financial strength of a company become larger. This industry does not have inventory turnover, therefore the current and quick ratios are used to determine the financial strength of the companies in this industry. Like the entire data set, the trend over the three years that the study encompasses indicates that female CEOs are reducing the variance annually. 2005 2006 2007 Current R atio 5.082979 4.224379 1.512443 Quick R atio 2.585616 4.577958 1.582822 Figure 10 : Pharmaceutical/Chemistry Industrys Current and Quick Ratio Average Variances from Industry Benchmark by Year
Crauthers Page 13 For pharmaceutical and chemistry -related industries, female CEOs average variance from the industrys debt ratio was slightly less than the average variance of the entire data set. The trend over the period of the study indicates that female CEOs ar e moving towards reducing the variance from the industry average. 2005 2006 2007 Debt Ratio 1.39602 0.79967 N/A Figure 11 : Pharmaceutical/Chemistry Industrys Debt Ratio Average Variance from Industry Benchmark by Year Similar to the whole data se ts average variance for fixed and total asset turnover, pharmaceutical and chemistry companies ratio variances are mixed. However, the average ratio variances for pharmaceutical and chemistry companies are closer to their respective industry ratios than for the entire data set.
Crauthers Page 14 2005 2006 2007 Fixed Asset Turnover 1.23725 2.9262 N/A Total A sset Turnover 0.85245 2.988676 0.294528 Figure 12 : Pharmaceutical/Chemistry Industrys Fixed and Total Asset Turnover Average Variance from Industry Benchma rk by Year Similar to the entire data sets average variance f or return on assets, the female -led pharmaceutical and chemistry -related industries variance is considerable. However, unlike the entire datasets varianc e, the pharmaceutical/chemistry -relat ed industries are increasing the variance over the years included in the study. 2005 2006 2007 Return on Assets 4.95537 7.15523 N/A Figure 13 : Pharmaceutical/Chemistry Industrys Return on Assets Average Variance from Industry Benchmark by Year Lastly, the P/E ratio average variance for the pharmaceutical/chemistry i ndustry is significant. However, unlike the entire datasets variance, the trend f or the pharmaceutical/chemistry -related industry indicates that the average variance from the industrys median is shrinking, even swinging into a positive variance for the last year of the study. 2005 2006 2007 P/E 7.90362 4.03952 6.369596 Figure 14 : Pharmaceutical/Chemistry Industrys P/E Ratio Average Variance from Industry Benchmark by Year
Crauthers Page 15 Figure 15: Pharmaceutical/Chemistry Industry Average Variance For Each Ratio by Year Many of the ratios used in this study do not apply to the financial companies led by females. Financial industries do not have current liabilities or current assets. Sa les and costs associated with sales are not relevant. Therefore, within the scope of this study, the measurements used to indicate the strength of female leadership are limited to return on assets and price per earning ratio. The return on asset industry ratio benchmark was unavailable through Risk Management Associates therefore Thompson/R euters finance website was used to obtain the benchmark. This benchmark is an average over 5 years. To arrive at a comparable number, the three year average was comp uted for the data obtained. Here, the data shows that female CEOs are varying from the industry ratio for Return on Assets by a small amount. The female CEOs P/E ratio differs significantly from the industry average P/E Ratio.
Crauthers Page 16 2005 2006 2007 P/E Rati o 2.82835 3.26882 14.14934 3 Year Average R eturn on A sset Variance 0.57052 Figure 16 : Average Variance from Industry Benchmarks for Financial Industry for Price Per Earnings and Return on Asset Overall, the data indicates that female CEOs are effe ctive financial managers. The compan ies managed by women consistently have higher current and quick ratios and lower debt ratios when compared to their respective industry ratios. The fact that womens companies are more liquid and less leveraged than th e industry average introduces the possibility that women are not taking as many risks as male CEOs in the industry. The data also suggest that female CEOs are managing their inventories differently than those managed by male CEOs There are two possibi lities to account for the large variance from the industry standard: the companies run by females are holding fewer inventories or the companies run by females are turning over inventory more quickly than the industry standard. The results regarding ass et turnover and return on assets indicate that women are possibly less efficient at managing the assets of their respective firm s. Female CEOs are consistently below their respective industries return on assets ratio s. These findings lead to the quest ion of whether female CEOs variances from industry standards are affecting their respective profits. Since the data indicates that female CEOs are managing their companies different ly than others in the industry, are those differences causing a variance in profit margin? This research indicates that there are differences in the profits of female-led companies. The difference, however, varies for different industry sectors. To observe net profit margin variances, this study breaks down the data into thr ee categories: entire dataset, data not including pharmaceutical/chemistry related industries, and data for only pharmaceutical/chemistry related industries. For the entire
Crauthers Page 17 data set, there is an overwhelmingly negative variance in female CEOs net margin profits. However, for only pharmaceutical/chemistry -related industries, the variances of net profit margin s of female CEOs from the net profit margin of the industries become positive. The three year average variance remains negative in all three scenar ios. 2005 2006 3 Yr Avg Net Profit Margin (with Pharmaceutical/Chemistry Industry) 895.627 105.506 658.774 Net Profit Margin (without Pharmaceutical/Chemistry Industry) 4.657601 6.448601 6.05963 Net Profit Margin (Pharmaceutical/Chemistry Indust ries Only) 5380.98 541.265 1589.58 Figure 17 : Net Profit Margin Variances from Industry Standard Ratio Figure 18: Net Profit Variances Including Pharmaceutical/Chemistry Industry Standard Ratio
Crauthers Page 18 Figure 19 : Net Profit Margin Variances from Indust ry Standard Ratio (without Pharmaceutical/Chemistry Industry ) Figure 20 : Net Profit Margin Variances These differences indicate the possibility that t he female CEOs variances in the respective industry ratios are affecting the profitability of the com pany, even when the variances from industry ratios are positive in nature. Less than a third of the femalemanaged companies had positive net profit margins variances indicating that female CEOs are not meeting or exceeding, their respective industrys net profit margins.
Crauthers Page 19 Figure 21 : Percentage of Women Managed Companies Having Positive Net Profit Margin Ratio Variance from Industry Standard To study the relationship between the female CEOs ratio variance and the industry standard ratio a regression analysis was conducted between the current ratio variance (x variable) and the net profit margin variance (y variable). This analysis indicates that there is a statistically significant inverse relationship between the current ratio variance and the net profit margin variance. As the current ratio variance increases the net profit margin variance decreases. Therefore, as a female CEO increases her current ratio away from the industry standard, her respective net profit margin decreases from the indust ry standard. Eventually, the female CEO can over increase her current ratio causing the net profit margin to decrease below the industry standard. It is important to note that regression analysis was conducted on the variances of all benchmark ratios inc luded in this study and only the current ratio variance was found to be statistically significant when regressed with the net profit margin variance
ANOVA df SS MS F Significance F Regression 1 2.18E+08 2.18E+08 5.507141 0.023113602 Residual 48 1.9E+09 39652632 Total 49 2.12E+09 Coefficients Standard Error t Stat P value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 283.599 1038.159 0.273175 0.785891 1803.758828 2370.957 1803.758828 2370.956741 X Vari able 1 642.299 273.6996 2.34673 0.023114 1192.609047 91.9891 1192.609047 91.98909073 Figure 22 : Regression Analysis of Current Ratio Variance and Net Profit Margin Variance (2005)
Conclusions To summarize, female CEOs ratios vary from their res pective industries. These variances consist of positive variances for financial strength related ratios and negative variances for asset management related ratios. For the bottom line, female CEOs net profit margins ratios show mixed results. Some prof it margins are positive, some are negative, and a fairly small percentage of female -managed companies show a positive net profit margin variance. Furthermore, many of the financial strength related ratios variance possibly relate to risk and risk aversion behavior For example, this study revealed that female -led companies are, on average, exceeding the industry standards for current and quick rati os. This indicates that female -led companies have stronger cash or liquid assets than male -led companies in their respective industry. Additionally, female CEOs are running companies with lower debt ratios than the industry standard, indicating that female CEO companies are conservatively leveraging their companies. Lastly, the inventory turnover ratio for female managed companies, on average, indicates that female CEOs might be carrying fewer inventories than the industry standard. In combination, these ratio variances point to company that is more liquid than the industry standard. One possibility for this is that female CEOs are more risk averse than their industry peers. In an attempt to verify the assumptions that this studys findings indicate risk aversion as a cause for the variances in female -managed compan ies, further literature was reviewed. Current literature on the topic of the risk aversion behavior of women is mixed. Johnson and Powell found that in the non-managerial population  men appear to risk more of their resources for the prospect of a future uncertain gain than women, and are less inclined to choose risk -hedging strategies (133). However, Johnson and Powell also found that when females and males had formal management training there was not a significant difference in their risk aversion behavior (134). Additionally, Shube rt, Brown, et al. found that women differ in risky decisions on an abstract level but that when faced with a contextual risky decision no gender differences in risk attitudes are found (385).
Crauthers Page 22 Therefore, further study is needed to explore the underly ing reasons for the differences in the female manager s ratios when compared industry benchmarks noted by this study Information on the CEOs education level, training level, confidence level, and risk aversion level may provide insight as to why female CEOs are managing their respective companies differently. Additionally, it would be interesting to study women -run businesses during times of recession. Typically in a recession environment, many of the variances discovered in this s tudy could present an advantage particularly as in the current recession where a cash heavy and underleveraged firm may prove to be more economically viable. This study has identified the management areas in which the female manager differs from her male peers. The differences appear related to risk aversion. Furthermore, these differences indicate that the CEOs different management techniques might be affecting the profit of their companies thereby fueling the existing gender gap In order to lessen the gender gap, th e causes for these management differences need to be identified and proven to be nonthreatening to profits, or women managers should take action to correct these differences.
Crauthers Page 23 Works Cited Fortune 500. Women CEOs of the Fortune 1000 5 May 2008. < http://money.cnn.com/ magazines/fortune/fortune500/2008/womenceos/ >. 20 Sep 2008. Johnson, J.E.V and Powell, P.L., Decision Making, Risk and Gender: Are Managers Different? 8 Sept 1992. British Journal of Management. Vol 5, 123 -138. 27 Feb 2009. Kotiranta A., Kovalainen A. and Rouvinen, P. Female Leadership and Firm Profitability. 24 Sep 2007.
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The effectiveness and efficiency of female chief executive officers
h [electronic resource] /
by Robin Crauthers.
[Tampa, Fla. :
b University of South Florida Libraries,
1 online resource (23 p.) :
"6 March 2009."
Thesis (Honors)--University of South Florida, 2009.
Includes bibliographical references (p. 23).
A winning thesis in the Grace Allen Honors College/Library Scholar program.
Women chief executive officers
z United States.
t Grace Allen Scholars Theses Collection.